How to Bake a Potato (Ninja Style)

If you found this post because you don’t know how long to put a potato in the microwave for, then you are definitely on the wrong blog! I’m talking about the Couch Potato investment strategy, or basically “Passive Index Investing”, made popular by the Canadian Couch Potato.

Why Bother Baking a Potato?

Recently, Andrew Hallam (a well respected investment blogger) made a large scale move in his portfolio, selling some 700K of winning stocks to reinvest into Index ETF’s. Why? Good question. Basically he feels he cannot continue to beat the market year after year with an “Active” stock picking strategy. (You can read that post here). He certainly has a flair for picking the winners – better than most mutual fund managers. While certainly a skillful stock picker, as Andrew says, he was lucky! And he has a point, since 2009 we have seen phenomenal equity returns on North American markets. But how long that will last, is anyone’s guess.

Couch PotatoI also made some good stock picks last year for the equity part of my portfolio. I bought Pengrowth Energy, AGF Management and Shoppers Drug Mart, all near their 52 week lows. I also picked some other dividend paying stocks below their 52 week averages. So with the markets doing well last year it’s no surprise I could cherry-pick some winners by watching the business news and looking at charts.  As Andrew says, I was lucky!

But overconfidence bit me when I played George Weston for the special dividend – it went against all my screening criteria to buy. However my loss was small since I only went in with a small position. My point being “Active Investing” or stock screening and picking, while enjoyable, does not always turnout as expected and is also a lot of work!

Pondering the Potato

You might also be interested to know that Andrew Hallam, while an exceptional stock picker, is also a proponent of “Passive Index Investing”.  He says that right on his home page. I’ve been contemplating Index Investing for a while now, but I think the recent posts at the Canadian Couch Potato and WN were a good catalyst. I’m hardly ready to give up dividend investing, far from it!  I love dividend investing and the stream of dividend income that results from it – I think it’s a sound investment strategy that will continue with me for a long time.

But I also think there is merit to passive index investing. That’s why I’ve decided to create an additional TFSA just for Passive Index Investing – The Ninja Potato. I have to admit though, while the concept of re-balancing an index based portfolio is “Passive”, the process of setting it up is anything but! There are a lot of personal biases and choices to ponder.

How to Buy a Ninja PotatoCouch Potato

Since I’m with TD I can take advantage of the e-series funds with low MER’s and absolutely no cost for me to purchase. Theoretically since I am investing in an index, it is irrelevant what fund or ETF I would use to track that index. Let’s set aside the MER issue since compared to mutual funds, the MER’s are so low it’s virtually negligible. As well all my distributions can easily be reinvested into new fund units. This currently seems more cost effective for me than paying brokerage fees for ETF’s. The nice part is, once it is setup I can just walk away 🙂

How to Dress a Ninja Potato

I felt the most important consideration was asset allocation. We only have to look back recently to 2008 to see how a portfolio of 100% growth or dividend stocks fared! Many investors simply forgot about asset allocation – much to the fault of advisors and mutual-fund reps who allocated portfolios based on risk assessment instead of age!

I have no desire to invest my Ninja Potato in international equity or bond markets at the moment, so that leaves all my decision making to Canada and the US. And my age also helps me to determine my asset allocation (40% Bonds and Fixed Income). I also do not want to speculate on the trends of the Canadian or US dollar – after all it’s supposed to be “passive”.

So based on all my personal bias and potato criteria, I have allocated the following:

  • TD Canadian Bond Index – e series (40%)
  • TD Canadian Index – e series (40%)
  • TD US Index Currency Neutral – e series (20%)

And the Winner is:  Ninja Dividends or Potato?

It will be interesting to see which portfolio prevails in the years to come: dividends with fixed-income (active) or the couch potato (passive).

Stay tuned, more Ninja Potato to come!

15 Responses to “How to Bake a Potato (Ninja Style)”

  1. Well done.60% of my RRSP is in mutual fund through the office but I unfortunately don’t have an index as an option … I am going to see if they can add it though. Due to my lack of trust in their ability to manage those funds, I am mostly in fixed income … more than 60% of it. I invest in it because the company matches our contribution at a minimum of 50% depending on performance so I can’t really miss on that …

    Reply to this comment
  2. The Dividend Ninja

    Jan 23. 2011

    @PIE, Hi there! So what I am reading is your almost an Office Potato is feeling a little geriatric, and you want to spice it up with some sour-cream and bacon bits. But your afraid of typical mutual fund fees and sub-standard performance. Is that correct?

    Reply to this comment
  3. Canadian Couch Potato

    Jan 24. 2011

    Thanks for the mention, Ninja, and all the best with your hybrid strategy. I think using a combination of the two strategies (say, international equity and bond index funds in your RRSP and dividend stocks in a taxable account or TFSA) is great way to balance things. Cheers!

    Reply to this comment
  4. The Dividend Ninja

    Jan 24. 2011

    @Canadian Couch Potato
    Thanks for dropping by Dan!

    Reply to this comment
  5. The Dividend Pig

    Jan 24. 2011

    I think that’s a great Ninja move! I love dividend investing, but analyzing stocks is a hobby, not my full time job. Index investing allows me to be part of the market, but not spend all my free hours reading 10-k’s and watching Jim Cramer!

    Reply to this comment
  6. We swapped company once (they use the Life Insurance companies as providers) and the list of options is ALWAYS very limited. The fees aren’t usually high but the performance aren’t stellar either. To make things complicated, the options aren’t the standard funds that you can lookup on GlobeFund or Morningstar. As we were switching provider, we had to sell everything and transfer it to the new provider and I decided to start safe and evaluate the funds over time. Funny enough, my fixed income fund isn’t too far from all the other funds.

    Reply to this comment
  7. The Dividend Ninja

    Jan 24. 2011

    @PIE
    Please keep to the topic. But you have a good point here, how can people with these company RRSP and pension plans make the most of what they have? I think you should write a post on that.

    @Dividend Pig
    Thanks ! 🙂

    Reply to this comment
  8. My Own Advisor

    Jan 25. 2011

    Interesting (and funny) post.

    I too, love dividend paying stocks but I couldn’t for the life of me go “all-in” with stocks. I simply don’t have the stomach for it. Some folks might, I know I just can’t.

    That said, do I think dividend paying stocks are superior (to indexing)? No. But I DO think buying, owning and holding dividend payers are an EXCELLENT way to supplement other retirement strategies or be the primary retirement strategy, along with some fixed-income allocation.

    Ninja – I like your e-fund approach. Will you eventually move outta these into ETFs at some point? Curious.

    Reply to this comment
  9. The Dividend Ninja

    Jan 25. 2011

    @My Own Advisor
    Thanks for posting 🙂 Yes I too like the idea of combining both dividend and passive index investing. I don’t think I would sleep well at night with a 100% stock portfolio either.

    Yes at some point I will add ETF’s, when I require the diversification or specialization that I feel an ETF provides (that the e-series fund doesn’t).

    Reply to this comment
  10. Cowtown Realist

    Jan 30. 2011

    Hey, nice post. I guess it’s king of a mixed bag. I tend to advocate both dividends and index investing to my peers.

    I certainly wouldn’t count out international index funds. Brazil and India are a few emerging economies that are sure to out pace the US in the coming years.

    As a side note, you can get an perfect index allocation with the ING Streetwise funds. The MER (1%) is a little high, but it’s perfect for people who are investing smaller amounts (<10k) and you don't have to worry about re-balancing.

    (That being said…TD is by far the cheapest)

    I am definitely enjoying your blog, keep up the great posts!

    Reply to this comment
  11. The Dividend Ninja

    Jan 30. 2011

    @Cowtown
    Thanks for dropping by and the feedback, glad you are enjoying the posts 🙂

    The issue I have with the ING Funds is their lacklustre performance, which I think is the result of over-diversification. With TD (or an individual ETF for that matter) I can get the balance I need without being overbalanced.

    The Ninja Potato is a domestic potato, he isn’t into travelling too much 😉 True Canada is a small potato in the world’s economy, and the US is overbaked and underperforming, but keeping it simple is the key here. I feel Europe and emerging markets are more specualtive at this time, and don’t fit into the Ninja Potato Profile 🙂

    Cheers, and thanx for dropping by!

    Reply to this comment

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