My Own Advisor

Tired of reading technical and academic “how to” investing books?  Scratching your head to figure out the financial  jargon that goes with investing these days?  Too many financial acronyms that sound like some foreign language?

Let Dan Bortolotti’s MoneySense Guide to the Perfect Portfolio be your helper. 

In a visual, straightforward and simple format, Dan will breakdown the components of sound investing, explain the basics of index investing and why it works, and add some humour along the way.

At a lean, crisp 128 pages and for the bargin book price of $9.95, you’ve got an easy, enjoyable and educational read.  For the seasoned investor, I am confident you will learn some things as well.

In my previous post, I walked you through my favourite takeways from chapters 1-4.  This post will wrap up the remaining chapters and what I liked about them as part of Dan’s quality read.

Chapter 5 – Select Your Funds

Index mutual funds or exchange-traded funds (ETFs) – is that the question?   Actually, it’s a pretty good question. 

Dan suggests unless your portfolio is >$50,000, you’re probably best to select index mutual funds like TD e-Series funds; which have some of the lowest fees in Canada.  With this family, you can own all “core four” asset classes such as Canadian stocks, U.S. stocks, international stocks and Canadian bonds Dan wrote about in Chapter 4.  If you’re not a customer of TD, Dan has some other good suggestions in his book.

If your portfolio is near the mid-five figures, Dan recommends going the ETF route.  This is because your portfolio size will now be able to take advantage of low discount brokerage transaction fees.  I totally agree with him and this is a strategy I employ with my RRSP.  The advantages of ETFs go beyond low management fees, they have great transparency and tend to be tax-efficient. 

There are many considerations when you buy ETFs, currency-hedging or not, cap-weighted or not, but when you read MoneySense Guide to the Perfect Portfolio, Dan will demystify all this in plain language.

Chapter 6 – Open Your Account

“Some investors worry about having all of their accounts with the same brokerage and feel they should “diversify”.  This shouldn’t be a concern:  using just one brokerage is convenient and safe” writes Dan. 

In this Chapter, Dan helps you get past insecurities you might have about online investing.  He also explains RRSPs, RESPs and TFSAs for those that may be unfamiliar with these accounts, providing a tidy overview of each.  He compares many online discount brokerages and gives you the low-down on one of my favourite ways to invest – using dividend reinvestment plans (DRIPs).

Chapter 7 – Build Your Portfolio

“The first step in making any trade is ensuring you have enough cash in your account to fund your purchase” writes Dan.  For sure, that’s the easy part but like everything new, including building your portfolio, you’re bound to need some help and Dan’s book certainly gives you that in spades.  From entering the fund code or stock symbol, entering the amount you want to buy to reviewing your order, this guide offers the support you need to get going with your portfolio, with confidence.

Chapter 8 – Keep It In Balance

If you’ve been investing for some time, you’ve probably heard or read about portfolio rebalancing. 

What is it and why does it matter?

Rebalancing is getting back to your risk and comfort-zone.  Dan says it nicely:  “Just like you take your car to the service centre for oil changes and tire rotations, you should rebalance your portfolio regularly to keep it properly aligned and running smoothly.”  You need to do this as an investor because asset allocations do not stay static.  As markets move, so will your portfolio.

“More often than not, rebalancing will mean trimming back stocks and moving that money to the fixed-income side.”  In today’s markets, a low equity climate, it could mean the other way.  In this regard, when you rebalance, it can yield another benefit.  It can help you control bad behaviour:  “Whenever you add money to your account, you need to make a decision about where to allocate those new dollars.  If you’re like most investors who simply follow their emotions, you’ll likely add the money to whatever asset class is hot.  That’s called performance chasing, and over the long term, it’s disastrous.”  Great information for any investor Dan.

In Dan’s book, there are a host of options, when to rebalance.  Annual rebalancing has the benefit of being simple but not overly timely.  Rebalancing when asset classes drift requires active monitoring.  Personally, I like Dan’s other suggestion, rebalancing using new cash flows.  As new money comes in and is available, I buy my lagging index.  Dan advocates this is an excellent strategy for taxable accounts beyond registered accounts like RRSPs and TFSAs.   If you want more details about rebalancing, including a nice example how to build a rebalancing spreadsheet MoneySense Guide to the Perfect Portfolio won’t disappoint. 

Chapter 9 – Stay The Course

“Staying the course is the most difficult part of being an index investor, and it’s not hard to understand why.  In almost everything we do – excelling at our jobs, learning a new language, getting in shape, playing the guitar – it’s obvious that the more time we spend on the activity, the better we perform.  It goes against human intuition to accept that the opposite is usually true when it comes to investing.”  Well written Dan! 

I’ve read many investing books in recent years and all the experts echo what Dan has said – successful investing and successful investors don’t change their portfolio very much.  These investors “tune out the noise” Dan writes.  “The Couch Potato strategy is designed for the long term, not the next few weeks or months.”   This book will help you construct a portfolio for the long term and manage it accordingly with little effort.

As Dan suggests, successful investors understand that no one can forecast the economy or the future with any accuracy.  Furthermore, many investors second-guess themselves.  Don’t.  Don’t be a market timer.  Don’t chase performance.  Don’t get drawn into soaring sectors.   “The best long-term strategy is simply to invest new money whenever you have it, and stay invested at all times.”

Chapter 10 – Sample Portfolios

If you want a primer to develop your thick skin, patience and your new-found indexing approach, this Chapter is for you!  Within a few pages, the complete Couch Potato strategy and a few sample indexed portfolios are laid out for you.  Easy to read, easy to understand, easy to apply.

Overall, I found MoneySense Guide to the Perfect Portfolio a great book.  It took me just over an hour to read Dan’s book…these posts took me longer to write!     In addition to Dan’s crisp narrative through the ten chapters, he’s put a human face to the world of indexing by including real stories from real investors.  Those real stories come from many MoneySense and Canadian Couch Potato readers and it also includes a story from Millionaire Teacher Andrew Hallam.

For the price of an ETF commission or, as I like to compare things around my house, a budget-quality bottle of red wine, you can have Dan Bortolotti’s Guide to the Perfect Portfolio.  Even though a new edition is planned for later this year, I suggest you order the current version online here since copies at magazine stands in Shoppers Drug Mart, Walmart, Chapters, Loblaws or wherever MoneySense magazine are now hard to find due to its popularity.     

Readers, did you read Dan Bortolotti’s MoneySense Guide to the Perfect Portfolio and if so, what did you think?

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