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.
I 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 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!