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It sometimes feels like we introduced Couch Potato investing to Canada a century ago — perhaps because we did. The year was 1999. Back then, surrounded by the frothy euphoria of the dotcom era, we had only modest ambitions for our little spud. We hoped that Couch Potato investing might strike a few of our more thoughtful readers as a smart way to invest — smarter, at least, than simply buying a bucket of Nortel stock, which was what everybody else seemed to be doing at the time.
We weren’t prepared for the enthusiastic reception we received. Our Couch Potato article won a National Magazine Award. Letters from readers poured in, asking us for more information about how they, too, could put together a great portfolio in just 15 minutes a year. Over the next couple of years, as the dotcom mania crashed and burned, the Couch Potato emerged as one terrific tuber. And it’s continued to sprout success ever since. Each February we bring you up to date with how the Couch Potato portfolio is doing and each year we count on getting another thick sheaf of questions from would-be couch potatoes who want more information on our strategy.
This year, we thought we would try something new and ask for your questions first. We figured that after years of listening to us talk up the virtues of this strategy you should have your chance to grill the Couch Potato. So we posted a notice on our website and asked readers to send us their Couch Potato questions — the tougher and nastier, the better. Before we get to those questions, let us take a minute to introduce newbies to the Couch Potato way of life.
Couch Potato investing is based on the simple fact that beating the market is fiendishly difficult. Over periods of five years or more, 75% of actively managed mutual funds fail to keep up with their market index. (An index is simply a yardstick that measures the rise or fall of a specific market. The S&P 500 index tracks large U.S. stocks, for instance, while the S&P/TSX composite index tracks large Canadian stocks.)
Why can’t most mutual funds keep up with the index? Three words: High management fees. Most investors don’t realize it, but management fees gobble up about a third of your expected real return. A typical investor with a $200,000 portfolio pays enough in management fees to buy a new car every 10 years. Those fees drag the performance of most funds below the index.
So what do smart investors do? They become Couch Potatoes. Rather than spending huge amounts in a vain effort to beat the market, they take what the market has to offer — but they make sure they do so as cheaply as possible.
Couch Potato investing consists of buying a diversified basket of low-cost index funds. These funds passively track the stock and bond markets. By buying index funds, you ensure that you receive what the market delivers. You avoid paying big fees to money managers — and that, in turn, means more of the profits wind up in your own pocket.
Couch Potato investors do better than 80% of investors in actively managed funds over long periods. Since 1976, the Couch Potato has beaten the Canadian stock market by about a percentage point a year. Over the past 20 years (which is as far back as our mutual fund database extends), the Couch Potato has beaten the average Canadian balanced mutual fund by a percentage point and a half per year.
To find out more about the glorious history of Couch Potato investing, and to see how it’s performed over the past year, we invite you to visit our Couch Potato library. But right now, let’s get to your questions.
I’m confused. You publish the Top 200 ratings of individual stocks, but then you tout the Couch Potato strategy of buying index funds that track the overall market. Which is the right way to invest?
S. Riolino, Welland, ON
Good question. We don’t think there is one investing style that suits everyone. Your choice of strategy should reflect how much time you want to devote to the task of investing and also how much risk you want to take on.
Buying individual stocks makes a lot of sense for people who know their way around a balance sheet and who don’t mind taking on a bit more risk in pursuit of big payoffs.
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