How To Create a Canadian Couch Potato Portfolio

Canadian Couch Potato is a model portfolio that is published on a blog (developed by Dan Bortolotti) and designed for Canadians who want to learn more about investing using index mutual funds and exchange-traded funds. The Couch Potato investment strategy emphasizes a low-cost, passive approach to long-term investing that requires minimal effort from the investor. In this article, we will outline how to create your own Canadian Couch Potato portfolio with easy-to-follow steps.

Determine Your Investment Goals and Risk Tolerance

Before you start creating your Canadian Couch Potato portfolio, it’s essential to determine your investment goals and risk tolerance. Consider factors such as your age, income, financial responsibilities, and desired retirement age to establish a suitable investment horizon. Be honest with yourself about how much risk you’re willing to take on, as this will influence the asset allocation of your portfolio.

Choose an Account Type

Decide whether you want to invest in a tax-advantaged account, such as a Registered Retirement Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), or a non-registered account. Each account type has its benefits and drawbacks, so be sure to research and understand the tax implications and contribution limits associated with each option.

Select Your Asset Allocation

The Canadian Couch Potato strategy relies on a simple, diversified mix of assets, typically comprised of equities (stocks) and fixed income (bonds). The exact one will depend on your risk tolerance and investment goals. As a general rule, younger investors with a longer investment horizon and higher risk tolerance may opt for a higher allocation of equities, while older investors nearing retirement may prefer a higher rate of bonds to reduce risk. A common starting point is a 60% equities and 40% bonds allocation, which can be adjusted according to your preferences.

Choose the Right Investment Products

The next step is to select the investment products that align with your chosen asset allocation. The Canadian Couch Potato model portfolio includes low-cost index mutual funds and exchange-traded funds that track major market indices. These products offer broad diversification, minimal fees, and the potential for long-term growth. When choosing exchange-traded funds or index funds, look for the following characteristics:

• Low management expense ratio (MER)
• Broad diversification across industries and geographies
• Liquidity and ease of trading (particularly for exchange-traded funds)

Some popular Canadian Couch Potato exchange-traded funds and index mutual funds include:

• Vanguard FTSE Canada All Cap Index ETF (VCN)
• iShares Core S&P/TSX Capped Composite Index ETF (XIC)
• BMO Aggregate Bond Index ETF (ZAG)
• TD Canadian Index Fund – e-Series (TDB900)

Implement Your Portfolio and Stick to Your Plan

Once you’ve chosen your investment products, it’s time to purchase them and implement your portfolio. Allocate your funds according to your chosen asset allocation, and make sure to rebalance your portfolio periodically (e.g., annually or semi-annually) to maintain the desired distribution. The key to the Canadian Couch Potato strategy’s success is its simplicity and long-term focus. Resist the urge to tinker with your portfolio or try to time the market, as this can lead to higher costs and lower returns. Instead, stick to your plan, and let the power of compound interest and passive investing work for you. Overall, creating a Canadian Couch Potato portfolio is a simple and effective way to reach your long-term financial goals with little effort. By evaluating your risk tolerance, selecting the appropriate account type, determining the best asset distribution, and investing in low-cost, diverse index funds, you can construct a portfolio that is aligned with your financial aspirations and risk tolerance, making it easier to achieve your financial goals. Furthermore, by following a passive investment strategy and avoiding frequent trading, you can minimize costs and potentially achieve higher returns over the long term.