My Favourite Takeaways – MoneySense Guide to the Perfect Portfolio – Part 1

According to Dan Bortolotti from Canadian Couch Potato, there is a perfect portfolio out there for investors.

Imagine a portfolio that is inexpensive to construct, has low ongoing, maintenance costs, efficient like the markets and in doing so, allows you to avoid the stock market noise.

Does this sound too good to be true?

Actually, this type of portfolio is well within everyone’s reach and Dan Bortolotti describes eloquently how to build it in the MoneySense Guide to the Perfect Portfolio.  For the rock-bottom price of $9.95, yup, that’s it, you can get Dan Bortolotti’s roadmap for the do-it-yourself investor.

This post will be the first in a two-part series that takes a detailed walk through the Guide to the Perfect Portfolio, informing you what’s so great about this book.  Let’s check it out!

Chapter 1 – Change The Way You Think

Like most endeavours in life if you’re not willing to think differently, you’re unlikely to act differently.  Same goes for investing, at least that’s my experience.  Right from the start of this book, Dan tells us to think differently so we can invest differently.

“The Couch Potato strategy, also called index investing or passive investing, is not new”  writes Dan.  It’s been around for many decades but if you’re new to index investing or investing in general, it might seem new.   This is because indexing in Canada is largely overshadowed by the massive actively managed machine called mutual funds.

While mutual funds are popular for many reasons; easy to buy and contribute to name a few, they have one major drawback – they can cost you lots of money.  Dan informs us “the median annual expense ratio of a Canadian equity fund is more than 2%, and the figure for Canadian bond funds is more than 1.14% – among the highest in the world.”  What do high mutual fund fees mean?  To you as an investor, they could mean plenty.  Over a 25-year period, $10,000 invested in a (typical) Canadian balanced fund with a management expense ratio (MER) of 2.68% would cost you over $15,000.

While Dan argues that some mutual funds beat the market, most, over a 10-year period don’t.  So, with the majority of actively managed mutual funds, not only is there a large opportunity cost with management fees you’re also not keeping up with market returns.  For whatever reason, if you don’t believe Dan, Millionaire Teacher Andrew Hallam made a cameo appearance in the book and backed up every claim.

Chapter 2 – Set Your Targets

Dan writes “any online savings calculator will show that you can save $1 million by tucking away just $500 a month if you have 40 years to do it (assuming a 6% return).  Unfortunately, life isn’t as simple as a savings calculator, which is why these kinds of projections make little sense in the real world.”

You know he’s right.  I know in my case in my late-30s now, we’ve got a big mortgage to pay down and that certainly wasn’t the case in my late-20s.  I also hope my finances in my late-40s will be much better than today.  How can I assure that?  For the most part I can’t but I can create a plan which is better than having no plan at all.  Dan is spot on when he says nobody can predict the future but you can at least form good habits, set reasonable targets and work towards them all in spirit of achieving those lofty savings calculator results.  What does Dan suggest for us?

Paying yourself first for starters, it has been a “mantra for decades for a simple reason:  it works.”  This is because Dan strongly believes that any flying-by-the-seat-of-your-pants-savings-plan is unlikely to lead to long-term success.   He reminds us to start slow, start steady and don’t expect to see immediate results. You won’t with the Couch Potato strategy.  This is because time and staying invested are investors’ greatest friends.

Dan also suggests making goals, setting targets and being realistic.  “If you’re 53 years old and you’ve been a spendthrift your whole life, will you really have the discipline to put aside 30% of your income for the next 12 years so you can retire at 65?”  You probably know that answer.  Instead of focusing on a goal that is so far into the future, Dan smartly recommends breaking down that goal into manageable chunks, creating milestones and making those milestones measurable.  “Think of your plan as a compass that will keep you pointed in the right direction, even if you never know exactly what lies ahead.”

Chapter 3 – Understand Your Risk Profile

“Risk and return are two sides of the same coin” writes Dan.  You might be aware that stocks have delivered outstanding returns over the long-run but it’s a very long-run.  “For example, since 1926, U.S. stocks have returned almost 10% annually.”  The great news – that’s some awesome returns!  The bad news – most of us don’t invest for 80+ years and even if we invest for half of that, every year is not going to be a winner.  Remember 2008-2009?  This is why I agree with Dan that your portfolio (and my own portfolio for that matter) needs to be aligned to a risk profile and investment goals.  Since there is no such thing as a risk-free investment, there are some things you can do to endure the volatility markets will always present.

For one, Dan says, “time is on your side”. The more years you have in front of you, the more you can afford to take in your portfolio, and the higher your expected returns should be.”  If your time horizon is not that far out, maybe only a few years, Dan says “any money you need in less than five years should not be in stocks.”  This is because even portfolios that have 50% stocks and 50% bonds have lost money over that timeframe.  Good to know!  Dan goes on to discuss equity risk when he quotes Warren Buffett in his book:

“unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market.” 

Dan is quick to remind us while panicking doesn’t make us a coward, it does make us human and our brains are wired to combat loss-aversion.  So if you don’t know how much portfolio loss you can stomach, work with a financial advisor.  If you do know, mix your stock and bond ingredients accordingly.  This way, fixed-income and bonds can be added in proportions that align, as Dan writes “with your investment goal, your time horizon, your target rate of return, and your comfort with risk.” 

Chapter 4 – Choose Your Asset Classes

Using the analogy of packing clothes for a vacation with unpredictable weather, Dan says the wise investor should be like the wise traveller – pack for every condition.  What asset classes should you own?

First of all, Dan suggests an asset class must be practical.  Rare coins might have their place in an investors’ portfolio, but they aren’t for everyone.  For most Canadians, Dan recommends looking at “the core four”:

  • Canadian equities
  • U.S. equities
  • International equities
  • Canadian investment-grade bonds

“While equities provide the most potential for growth, they can also experience gut-wrenching swings in value.”  The “core four” is a great start for many investors, new and experienced folks alike, but for investors with a portfolio >$50,000 there are some more options to consider:

  • Real Estate Investment Trusts (REITs)
  • Emerging equity markets (BRIC countries like Brazil, Russia, India, and China)
  • Real-return bonds

Further still, other asset classes for investors to consider are commodities, emerging market bonds and preferred shares to name a few.  Lots of choice, isn’t there?  Remember though, choices come with risk and Dan reminds us you don’t need to take risk to be a successful investor:  “no one ever when to the poorhouse because they didn’t invest in exotic asset classes.”

I thoroughly enjoyed Dan Bortolotti’s MoneySense Guide to the Perfect Portfolio.  It was factual, fun and very well written…and I’m only talking about the first few chapters!   Stay tuned for my next post, where I’ll wrap-up my favourite takeaways from his book.

Since its launch in late October last year, Guide to the Perfect Portfolio has been selling very well and consequently is in limited supply in stores.   Although it may be difficult to find in Shoppers Drug Mart, Walmart, Chapters and Loblaws to name a few (wherever MoneySense is sold).

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

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17 Responses to "My Favourite Takeaways – MoneySense Guide to the Perfect Portfolio – Part 1"

  1. Sounds like a great book for, especially investors starting out.

    I think one of the most important things is to know your risk profile. I have known people who panic when faced with decreases in their investment portfolio and sold. This is a way of losing a lot of money.

    My investing was basically over two periods. The first being before I got married when I could save money. There were years after that when I could not save, but I did not take anything from my portfolio. Then later on I could save again. I think to start early really helps as early investments can have time to grow.

    Susan

    Reply
    1. @SPBrunner It’s a good read Susan, but for someone like yourself, who has mentioned to me that your experiences with indexing or a bond mix in the past haven’t had much effect on your portfolio results, maybe this book is not aligned to your investing style.

      I’m certainly not advocating that you don’t read the book, on the contrary, there are nuggets in Dan’s book that I feel are helpful for all investors rather, you might not read anything that would make you run out and apply right away based on your experiences.

      About risk profile, I’m still learning mine. I know if my dividend-paying stocks go down about 20%, it signals a buy. If I started losing half my dividend portfolio, maybe I wouldn’t feel so bold. Time will tell.

      Thanks for sharing your thoughts!

      Reply
  2. I am in the process of reading this book. It was available at the Shoppers Drug Mart.

    I really love the magazine-like format of the “book” and the way the chapters are laid out. All the colourful graphics and the use of guests like Andrew Hallam makes the publication unique!

    Reply
    1. @Be en Yeah, that’s the problem with the book’s success – hard to find!

      I too, liked the format, had a great look as well. Kudos to the MoneySense team and Dan on that.

      How do you like the book so far? Any favourite takeaways yourself?

      I hope these posts don’t spoil everything for you?!

      Thanks for your comment.

      Reply
  3. A few observations:

    – Only 202 of the 500 biggest companies in the United States in 1980 were still in existence 20 years later.

    – On December 29, 1989, Tokyo’s Nikkei stock average reached its all-time peak of 38,915.87. Twenty years later, the Nikkei has never again reached that level — and, in 2009, reached a new low of 7,054.98.

    Risk does not always means high returns, otherwise it would not be there. Risk means that there is plausible chance to loose your money.

    Reply
    1. @Financial Independence

      Fair comments, risk can certainly mean high returns or bust.

      Would you take some risks in this environment?

      Thanks for your comment Financial Independence – glad to see you stop by!

      Reply
  4. Mark: Many thanks for the kind and detailed review. I really appreciate it.

    My apologies to people who have had difficulty finding the book. Unlike a conventional book, this title was published with the idea that it would be available on magazine stands for several months and then rotated with other titles in the MoneySense series. It should still be available in some stores, but it’s harder to find now—mostly due to brisk sales. We plan to issue a new edition in the fall.

    It is still available online here: http://bit.ly/yRgkCV

    Reply
    1. @canadiancouchpotato You’re most welcome Dan. I enjoyed the book and I appreciated the copy.

      Looks like your link is working now, and I’ve updated Part 1 and Part 2 to direct readers to it. Your book is good value for money, I hope folks pick up a copy and read it 🙂

      Cheers,
      Mark

      Reply
  5. Great review, Mark. I like that old saw about the consistent returns over 80 years. But there were some perfectly awful periods in between, and woe to the investor that was caught up in them.

    Reply
  6. Actually, I made piles of money from bonds. I was into bonds in the 1970’s when interest rates were high (19%) and falling. I sold my last bond in 2007, not really that long ago. From the 1970’s there was a fantastic bull market in bonds that lasted a long time.

    With bonds, interest rates and bond prices go in the opposite direction. When the interest rates were falling, the bonds prices were going up a lot. On my last bond, I made a lot in capital gain, but if I held it until maturity, the bond price would start to fall back to the bond face amount.

    I got out of bonds because at some point interest rates will have to rise and that would mean a fall in bond prices and we would be into a bond bear market. Sometimes you have to wait a long time for bear markets to occur, but it will come.

    It is true that I did not make much in Index Funds or foreign investments. The rise in the Canadian dollar really killed off US stock profits.

    How I deal with recessions, is that I stop looking at where my portfolio is. I, of course, deal with any stock that gets into difficulties.

    Reply
    1. @SPBrunner “Piles of money from bonds” – you were very fortunate! 🙂

      Folks heavy in bonds aren’t as fortunate now.

      I like your approach for dealing with recessions.

      In down markets, I’m trying to do the same, rather if anything, trying to see where I can save money and diversify into more dividend-paying stocks.

      Reply

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