Canadian Couch Potato Investing: A Guide To This Passive Investment Method

Canadian couch potato investing is a simple, passive investment strategy based on ETFs that can deliver long-term growth with minimal effort.

Forget picking stocks and paying money managers. Couch potato investing is a straightforward, low-fee way for the average Canadian to steadily grow their wealth by matching the market instead of trying to beat it.

This guide to Canadian couch potato investing covers model portfolios, the steps to becoming a couch potato investor, and how this strategy compares with alternative investment options in Canada.

Table Of Contents

• What is it?
• Portfolios
• Strategy steps
• Alternative strategies
• Does it work?
• FAQ

What is Canadian couch potato investing?

Canadian couch potato investing is a passive, low-maintenance investment strategy based on index funds. It was popularized in Canada by Dan Bortolotti based on American Scott Burns’ 1991 version.

The core principle of Canadian couch potato investing is that investors should stop tinkering and instead diversify with low-fee ETFs to earn passive, average long-term returns.

Is Canadian couch potato still relevant? Definitely yes, although a few tweaks have been made to the initial strategy.

This strategy was developed as a hands-off way for the average person to earn a return from the market without paying fees to a money manager to oversee their investments.

The benefits of Canadian couch potato ETF investing include:

• Easy set up
• Passive growth
• Low/no fees
• Long-term potential

A typical Canadian couch potato portfolio tracks three things:

• The Canadian stock market index
• The international/U.S. stock market index
• The Canadian bond market index

You won’t beat the market, but you won’t seriously underperform it either.

You can use any account (RRSP, TFSA, etc.) to get started with couch potato investing as long as your chosen account can hold investments.

To get significant returns in the long run, the couch potato investing strategy only requires that you annually rebalance your portfolio.

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What is a Canadian couch potato portfolio?

A Canadian couch potato portfolio contains three ETFs.

The thing that makes it a Canadian couch potato portfolio is that it has a home-country bias, though it still diversifies among global equities, market cap sizes, and sectors.

The original 1990s Canadian couch potato portfolio was based on three individual ETFs:

• XAW (a global ETF that excludes Canada)
• VCN (an all-cap ETF with Canadian companies of all sizes)
• ZAG (an aggregate Canadian bond investment)

In 2009, things changed when asset allocation ETFs hit the market. This changed the ideal portfolio for couch potato investing. Whereas individual ETFs focus on a single asset class, the new asset allocation ETFs could combine different asset classes (like stocks and bonds) into one fund for automatic diversification.

Now, you can buy an all-in-one ETF. Plus, purchasing and rebalancing individual ETFs is more costly to the investor.

So, here is the new, updated Canadian couch potato portfolio with three components:

• Canadian stock market index (a Canadian all-cap equity ETF)
• International/U.S. stock market index (a global ex-Canada all-cap equity ETF)
• Canadian bond market index (a Canadian aggregate bond ETF)

You get to decide how to split up your bond/stock asset allocation in the couch potato portfolio, based on your risk profile and investment horizon. 50/50 is a popular split for couch potatoes, so you could do 25% Canadian index, 25% global ex-Canada index, and 50% Canadian bonds.

There are Canadian couch potato model portfolios to help you get started.

Whatever you decide, your portfolio’s balance should be maintained year after year, or adjusted to your age, to allow for stable growth and protection against volatility.

Steps to becoming a couch potato investor

Here’s a brief overview of the steps for a beginner investor to get started with couch potato investing:

• Decide on a bond/stock balance
• Open a brokerage account
• Choose your account type (RRSP, TFSA, non-registered, etc.)
• Fund the account
• Purchase the assets
• Rebalance your portfolio annually

Step 1: Decide on a bond/stock asset allocation balance that fits your risk profile

The foundation of the couch potato portfolio is a balance of stocks and bonds. 50/50 is a popular choice, but you could also use the age rule and subtract your age from 100 to select the percentage of stocks in your portfolio.

For instance, if you’re 35 you could hold 65% stocks and 35% bonds.

Step 2: Open a brokerage account

Online brokerages like Wealthsimple and Questrade have very low rates, so your money actually goes into the investments and not the fees. Plus, their mobile and desktop apps are very convenient.

• Wealthsimple Self-Directed Investing: No charge for withdrawals, inactivity, maintenance, commissions
• Questrade: Buy ETFs at no cost, fees for selling and trading, $1,000 minimum balance

While Questrade has more account types, Wealthsimple doesn’t charge fees to buy stocks in self-directed accounts.

Finding the platform for you is worth a little research. For instance, does DIY vs. robo advisor work better for your lifestyle? Do you prefer keeping your investments separate from your day-to-day chequing and savings accounts?

Step 3: Select an account type to hold your investments

Choose an account type intended for long-term growth, such as an RRSP, RESP, or TFSA.

Consider each account’s contribution limits, tax implications, and withdrawal restrictions. For example, an RESP can only be used for education - or eventually transferred to an RRSP.

Step 4: Fund the account

The amount you choose to invest is a personal decision, based on your current budget and your future growth goals.

For now, transfer a lump sum to begin building your initial portfolio. In the future, you could opt for monthly automatic transfers and ETF purchases or continue with an annual lump sum investment when you rebalance.

Step 5: Purchase the assets

Use your stock/bond asset allocation balance from Step 1 to build your couch potato portfolio.

Here’s an example, based on a 50/50 asset allocation:

• Asset allocation: 50% stocks, 50% bonds
• Initial investment: $10,000
• Bank: BMO
• Investment: $5,000 in stocks, $5,000 in bonds

In this example, you would create a 50/50 portfolio based on the official Canadian couch potato model portfolio by purchasing these ETFs:

• $5,000 in stocks: BMO All-Equity ETF (ZEQT)
• $5,000 in bonds: BMO Aggregate Bond Index ETF (ZAG)

Step 6: Rebalance each year

Avoid touching your investments for a full year. Then, once per year, look at the new balance and sell or buy ETFs to keep your 50/50 split (or whatever asset allocation you choose).

Voila – long-term growth with minimum effort, on par with the fee-based money managers at the big banks. Welcome to life as a couch potato.

Couch potato investing vs. other kinds of investing

Investing offers many ways to grow your wealth, whether you’re saving for retirement or something else. Couch potato investing with broad index funds is an excellent choice for simplicity and cost-savings, but it’s not the only option.

Here are alternatives to couch potato investing and their key differences:

It’s true that certain investors may prefer active stock picking, mutual funds, or day trading.

However, the couch potato strategy stands out for its simplicity, low costs, and long-term reliability for growing wealth – regardless of your stock market knowledge or how much time you have available for investing.

Does the Canadian couch potato ETF portfolio work?

According to data from real portfolios, yes, the Canadian couch potato ETF portfolio works.

Historic analysis: From 1973 to 1990, your returns on a couch potato portfolio were 10.29% compared to 10.56% with stocks – nearly the same. From 2010 to 2019, the couch potato portfolio returned 8.48% compared to the S&P 500’s 12.97% – notably less, but pretty good for no active management.

Compared to big banks: 64% of money managers missed their benchmarks in the last two decades. From 2010 to 2017, fewer than 2% of actively managed funds outpaced the S&P 500.

Remember, couch potato portfolios are supposed to help you earn balanced, steady growth. Your portfolio will grow less in a bull market but fall less in a bear market.

If you want to "enjoy a return that will put you in the top half of all professional investors, but expend virtually no effort or thought," then Scott Burns’ couch potato ETF portfolio will work for you.

FAQ