MoneySense Guide to the Perfect Portfolio
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.
According to Dan this type of portfolio is well within everyone’s reach – and he describes it well in the MoneySense Guide to the Perfect Portfolio. For the rock-bottom price of $9.95, 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. 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 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 in Part 2 of 2.
Readers, what do you make of this book?