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Using a TFSA as an educational tool

Overview

Published: 06/11/2014

by Warren MacKenzie

A well-diversified couch potato portfolio can be expected to outperform many advisor-managed portfolios.

 

Many investors would have better results by using a ‘couch potato’ portfolio of exchange-traded funds (ETFs) instead of individual stocks or mutual funds bought through their financial advisor.

 

This is because with a couch potato portfolio (also called index investing or passive investing), you’re always going to do as well as the market (less a small management fee). Partly because of their higher fees, few financial advisors can consistently match this performance – unless they take higher risks. Unfortunately, most investors are unaware of how poorly they’re performing because they don’t receive a report showing their performance compared to proper benchmarks.

 

If a do-it-yourself couch potato portfolio delivers better results, why doesn’t everyone use it? The answer is simply that for many investors, doing it yourself is a scary proposition. It’s scary because they think investing is more complicated than it needs to be and they think that buying a couch potato portfolio is complicated, risky or both. In fact, it’s simpler to open up a tax-free savings account (TFSA) and invest the funds in a couch potato portfolio than it is to book a flight or pay bills on the Internet, or even follow a recipe to bake a cake.

 

Compared to any other diversified investment portfolio, you just can’t go very far wrong with a couch potato portfolio of ETFs. When we have the next market crash, a well-diversified couch potato portfolio can be expected to outperform many advisor-managed portfolios with similar exposure to the equity markets. Getting experience with ETFs by using a couch potato portfolio in your TFSA is the perfect way to get the confidence necessary to eventually manage your entire port-folio. Among other things, this procedure will demonstrate just how easy and simple it is to be a wise investor.

Here’s how you do it. Go to the Couch Potato website (http://canadiancouchpotato.com/model-portfolios/) and list the details of the model portfolio that seems right for you. Take this to your local bank branch, open a TFSA account and tell the bank advisor this is how you wish to invest your $5,500 (that’s how much you’re allowed to invest each year in a TFSA). The entire procedure should take about 30 minutes.

 

When you initially buy your securities, you will allocate funds according to the model you’ve chosen. Going forward, if one asset class rises or falls by 20% from the initial allocation, you then rebalance the entire portfolio back to the original allocation. You will probably need to rebalance once or twice over the next few years. It’s that easy, which is why it’s called a couch potato portfolio.

 

Now you’ll have a well-diversified investment portfolio and a benchmark. Over time, you can compare your advisor-managed portfolio with your TFSA portfolio.

 

It should be noted that investors with $500,000 or more could use the services of fully qualified investment counsellors. While I expect couch potato portfolios will do better than portfolios managed by most financial advisors, I also believe that investment counsellors who use a goals-based approach may design a more appropriate portfolio and, through active management, may deliver a better risk-adjusted return. 

 

Warren MacKenzie, CA, CFP, CHFS, is the founder of Weigh House Investor Services in Toronto. For more details, contact him at warren.mackenzie@weighhouse.com or 416-640-0550.

 

Photo: vitalytitov – Thinkstock.com

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