The Commander couch potato

The Commander Couch Potato

I would like to introduce the Commander couch potato strategy.  This strategy is for investors who seek to command their own investments while not having to think about them a whole lot.  It has all the benefits of the standard couch potato but takes charge where it counts to achieve lower risk and higher returns.  It does this by using the power of long term investing, where returns are compounded year after year and much more.  It offers a very low expense ratio so your returns grow faster!

This strategy is aimed at investors who have a long term horizon as well as a high risk tolerance.  This portfolio which I shall introduce is composed of 30% Bonds and 70% Equities.  It is also comprised 50% US ETFs and 50% Canadian ETFs.  This results in a lower expense ratio and a perfect balance between the US dollar and Canadian dollar.  What many investors may not know is that 70% equities or more is considered aggressive.  So it is highly recommended to have a timeframe of over 5+ years when considering a portfolio which such asset allocations.  The equity is further split into areas.  There is a Canadian equity portion, an equal American equity portion and a significant fixed income portion.  That is the standard couch potato and what follows is the addition of European and Pacific equity, emerging markets equity, real estate investment trusts and gold as well as a fixed system for bonds.  With this system you maintain 10% corporate bonds, 10% government bonds and 10% inflation protected bonds.

Asset Allocations

Canadian equity 15% iShares &P/TSX Capped Composite (XIC)

US equity 15% Vanguard Total Stock Market (VTI)

European/Pacific equity 20% Vanguard Europe Pacific (VEA)

Emerging markets equity 10% Vanguard Emerging Markets (VWO)

Inflation protected bonds 10% iShares DEX Real-Return Bond (XRB)

Corporate bonds 10% iShares DEX All Corporate Bond (XCB)

Government bonds 10% iShares DEX All Government Bond (XGB)

Real estate investment trusts 5%  iShares S&P TSX Capped REIT Index Fund (XRE)

Gold 5% iShares Gold Trust (IAU)

The advantages of this portfolio over the standard couch potato are increased diversity and complexity while maintaining a low 0.31% MER (Management Expense Ratio).

For the past 3 Years, this portfolio if rebalanced correctly would have had a better annual return in 2008, 2009 and 2010 compared to the SP 500 and S&P TSX composite.  You may be asking yourself what I mean by rebalancing.  And I’ll explain.  Rebalancing is done once or twice a year.  The strategy is to sell funds that have been doing really well and buying the funds that have not been doing well.  It really forces you to buy low and sell high.  With a more complex couch potato the results are more magnificent.  So once or twice a year you buy and sell your funds in order to modify your asset allocations back to what they were originally.

As with any investment there are risks and when investing in equities return is never guaranteed.  Past performance is not an indication of future performance however the couch potato strategy has a very good record of consistently beating the index.

As some keen investors can tell having the gold portion really boosted returns over the past few years.  But I’ll tell you now that’s only the tip of the barrel.  I personally think this is a really good strategy however it doesn’t make sense to some people.  If you don’t have a lot of money to start investing then the commissions will cut away at your returns so mutual funds would be preferable.  However that’s the whole point of the Commander.  It offers more diversity than mutual funds because ETFs have grown massively over the decade.

I’m not an expert at currency hedging but some may be considering adding a little currency hedge to this strategy and there’s nothing wrong to that.  However in my experience having that hedge seems to only increase fees.

As a final note, if you started this early 2010 and did not rebalance the return of this portfolio was over 16% whereas the SP/TSX returned 14% and the SP 500 returned 11%.  I think most investors would be happy with the results and I’m glad to share the Commander Couch Potato strategy to any investor.  Set up the right allocations and rebalancing once or twice a year, that’s all the work you need to do, so what are you waiting for?