Here's that couch potato investing strategy formula:
Dan Bortolotti
Diversify broadly, keep your costs low, and stick to your plan over the long term. Asset allocation ETFs tick all of these boxes.
If you consistently buy a single, broad market, ETF, you'll have a diverse portfolio (i.e. not all your eggs in one basket), and keep your costs low (not losing money to hidden fees). Without any financial advisor fees, or extensive knowledge of how the stock market works, you're on your way to a nice retirement.
Below, pick your risk level to discover what ETFs to buy from the largest ETF providers in Canada including Vanguard, iShares and BMO.
All of these ETFs include Canadian, US and international stocks, balanced by some allocation to bonds to reduce volatility and risk.
The rule of thumb for risk level is 100 minus your age. The result determines the percentage of your portfolio to allocate to stocks, with the rest invested in high-quality government bonds. So, if you're 20 years old, you'd pick a portfolio of 80% stocks and 20% bonds.
Pick your favourite couch potato portfolio ETF based on risk
Pick either Vanguard's All-Equity ETF Portfolio VEQT, iShares Core Equity ETF Portfolio (XEQT) or BMO's All-Equity ETF (ZEQT).
Here are the historical charts for each. Simply click their ticker symbol within the chart. Each one are built of similar stocks and so their performances will be similar.
If you're ever hanging out on Reddit's r/personalfinancecanada threads, you've undoubtedly seen VGRO mentioned.
For this growth portfolio, pick either Vanguard's Growth ETF Portfolio (VGRO), iShares Core Growth ETF Portfolio (XGRO) or BMO's Growth ETF (ZGRO).
Here are the historical charts for each. Simply click their ticker symbol within the chart. Each one are built of similar stocks and so their performances will be similar.
Buy either Vanguard's Balanced ETF Portfolio (VBAL), iShares' Core Balanced ETF Portfolio (XBAL) or BMO's Balanced ETF (ZBAL)
Here are the historical charts for each. Simply click their ticker symbol within the chart. Each one are built of similar stocks and so their performances will be similar.
Buy either Vanguard's Conservative ETF Portfolio (VCNS), IShares' Core Conservative Balanced ETF Portfolio (XCNS) or BMO's Conservative ETF (ZCON).
Here are the historical charts for each. Simply click their ticker symbol within the chart. Each one are built of similar stocks and so their performances will be similar.
Buy either Vanguard's Conservative Income ETF Portfolio (VCIP) or IShares' Core Income Balanced ETF Portfolio (XINC). This portfolio is meant to produce income for those in retirement. It removes much of the risk and volatility so your portfolio stays about the same size if you use a safe withdrawal rate (SWR) of 3% to 4%.
Here are the historical charts for each. Simply click their ticker symbol within the chart. Each one are built of similar stocks and so their performances will be similar.
A warning about fees (or the best part of a couch potato portfolio)
The management expense ratio (MER) for each of these ETFs is 0.24% for Vanguard, 0.20% for iShares and BMO. On $1,000, you're paying $2.40 for Vanguard or $2.00 for iShares or BMO per year. With a $100,000 portfolio, you're paying $240 or $200 annually.
The average cost of an Equity Mutual Fund in Canada ranges from 1.5% to 2.5%. A financial advisor might run you 1% annually, depending on assets under management (AUM) or how much money is in your portfolio. On the same $100,000 portfolio, it would cost you $3,000 annually.
How to invest like a couch potato
Step 1. Pick one of the best trading platforms in Canada.
| Wealthsimple | Questrade | Qtrade |
|---|---|---|
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Use Wealthsimple if:
◦ You want $0 trading fees on stocks and ETFs. ◦ You prefer a sleek, user-friendly interface. ◦ You’re new to investing and value simplicity. |
Use Questrade if:
◦ You want lower fees for larger portfolios. ◦ You’re looking for advanced trading tools. ◦ You want free ETF purchases (but don't mind paying when you sell). |
Use Qtrade if:
◦ You value detailed research tools and analysis. ◦ You’re seeking robust support for mutual funds. ◦ You prefer an award-winning customer service experience. |
| Wealthsimple review | Questrade review | Qtrade review |
| Visit Wealthsimple | Visit Questrade | Visit Qtrade |
How to choose the right couch potato ETF
In the video above, Shannon Bender, a Canadian Portfolio Manager at PWL Capital in Toronto, helps us better understand critical factors to risk: your willingness, ability and need.
To understand your risk tolerance, user a risk profile questionnaire, like the Canadian Investment Regulatory Organization's quiz, to asses your personal situation.
If you have less than 5 years before you need the money, consider safer options like bonds or GICs.
If you have over 15 years, while it carries significant risk, an all-equity ETF like VEQT (100% stocks) will help maximize growth.
However, know that VEQT underperformed VGRO in 61 out of 373 20-year periods.
In the end, prioritize your willingness to take risks over your ability to prevent emotional mistakes — focus on realistic financial planning rather than chasing aggressive returns.
Back in the 1990s, a financial columnist for The Dallas Morning News named Scott Burns used the concept of passive investing to create a super-simple way for investors to earn solid returns over time, with almost zero effort. So little effort, in fact, even a lazy couch potato could pull it off.
So, what’s passive investing? In a nutshell, it refers to a style of investing that eschews the pursuit of “winning” companies or assets intended to “beat” overall market returns, since very few individuals or advisors can successfully pick and choose investments that outperform the market consistently over time. (We’ll get into more detail on active fund managers’ success rates, or lack thereof, below.)
Instead, passive investors try to match total market performance by putting their money into low-fee funds, such as index funds and exchange-traded funds, which hold all (or nearly all) the stocks or bonds in a particular index.
Burns’ idea was to boil down a passive approach to its essence, creating a portfolio of just two (equally divided) investments:
- an index fund of U.S. stocks (one that tracks the S&P 500, which means the fund contains the 500 largest U.S. stocks); and
- an index fund of U.S. bonds (which similarly tracks the U.S. bond market).
By doing this, investors would have their money in a balanced array of U.S. stocks and bonds that’s diversified by industry, since each index is made up of all the companies in that market, not just a few supposed “winners.” Burns felt this portfolio would provide a close approximation to overall market performance, but also be relatively safe. If the stock market tanked, the bonds would still perform well and vice versa.
Once a year — and only once a year, he said — investors should check to see which of the two funds is worth more and sell some of it off to buy the other. If, for example, the bonds were worth more than 50% of the portfolio, investors should sell off some of the bond index fund (selling high) and use that money to buy more of the stock index fund (buying low) to get back to an even split.
What’s the “Canadian couch potato”?
About 10 years after Burns published his couch potato portfolio, MoneySense magazine introduced local investors to the Canadian couch potato, popularized by finance writer Dan Bortolotti.
It’s similar to the original couch potato portfolio but adds slightly more diversification by adding international equities to the mix. The Canadian couch potato portfolio is made up of low-fee index funds or ETFs that track the following markets:
- Canadian stock market index
- International/U.S. stock market index
- Canadian bond market index
How you divvy up your portfolio — say, a third in each fund, 25%/25%/50%, or any other allocation — depends on your comfort with risk and investment time horizon.
Since stocks are riskier than bonds but offer the potential of higher returns, those with lots of time to let their money grow (and lots of time to recover from short-term setbacks) can usually be more heavily invested in stocks. (For more advice on investing for the long run, check out Money.ca's best long-term investment strategies.) Short-term investments, on the other hand, should be weighted more heavily toward bonds to minimize risk.
Why is the couch potato the best approach for investing?
Canadians pay some of the highest fees in the world — 2% to 3% of their total portfolio annually — for actively managed mutual funds, betting that their fund manager will be some kind of “market whisperer” who can deliver high returns.
And maybe some do, some of the time. But the data is clear that most actively managed mutual funds in Canada don’t perform well over the long run.
For the 10 years ending in 2017, for example, less than one-quarter of the country’s actively managed Canadian equity funds outperformed their respective benchmarks; just 6% of Canada’s actively managed international equity funds delivered higher than market returns, and less than 2% outpaced the S&P 500. (The period ended with a thud in 2017 when not a single Canadian fund manager investing in U.S. stocks delivered higher returns than the S&P 500 index.1)
Even when actively managed mutual funds do match or have better market performance, investors may never receive those additional earnings because the fund manager takes such a sizable cut off the top.
So, you have a choice:
- Pay fees of 2% to 3% for actively managed mutual funds that will probably fall short of market performance over the long run; or
- Pay a fraction of a percent in fees for passive funds that are designed to match market returns.
It doesn’t take a genius to see that the second option — the couch potato portfolio — is the smarter choice. By paying less in fees, investors maximize their annual returns which compound over time.
DIY couch potato investing vs. robo advisors: How to choose
If you’re cool with making a few choices on your own and manually re-balancing once a year, but don’t want to make investing your hobby, a self-directed portfolio of index funds or the ETFs above can still be a good low-cost option.
However, if you'd rather deposit money on a regular basis and have a robot do the work for you (buying, rebalancing, selling, etc.) then a robo advisor may be your best bet. It's even lazier, produces great returns, but comes at a cost of around 0.20% to 0.50%
Here are some guidelines on how to choose the best couch potato investing option for you.
| Online brokerage (Questrade, Wealthsimple, Qtrade) | Robo advisors (Questwealth, Wealthsimple, JustWealth) |
|---|---|
| Want to pick your own customized portfolio of ETFs and asset allocation | Don’t want to choose ETFs or index funds on your own or determine asset allocation; would rather have a set portfolio that matches your risk tolerance |
| Can perform all the transactions manually | Want to set up automated transactions |
| Have a larger portfolio | Have a small or large portfolio (depending on the provider you choose) |
| Make lump-sum, infrequent transactions (as each stock trade or ETF sale charges a small commission) | Make smaller, more frequent contributions (no trade commissions) |
| Want the lowest management fees (around 0.15%) | Want low management fees (around 0.50% or lower) |
| Are willing and able to rebalance your portfolio once a year | Don’t want to worry about re-balancing once a year |
| Have nerves of steel when it comes to market fluctuations (i.e., you aren’t tempted to make emotional investment decisions when markets fall, which can negatively impact returns) | Need the structure of an automated account to keep you from making emotional investment decisions that can negatively impact returns |
Still on the fence?
Open an account with Questrade or Wealthsimple. Put half your money in their robo advisors and the other half in a self-directed account and check on your returns (and fees) at the end of the year.
| Wealthsimple robo | Questwealth | JustWealth |
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◦ 0.40% to 0.50% management fees
◦ $0 minimum |
◦ 0.25% management fee
◦ $1,000 minimum investment |
◦ 0.50% management fees (minimum $4.99 per month)
◦ $5,000 minimum investment for RRSP/TFSA ($0 for RESP, FHSA) |
| Go to Wealthsimple | Go to QuestWealth | Go to JustWealth |
What accounts can I invest in? (RRSP, TFSA, etc.)
You can do the couch potato strategy in pretty much any investment vehicle including registered retirement savings plans (RRSPs and spousal RRSPs), registered education savings plans (RESPs), registered retirement income funds (RRIFs), locked-in retirement accounts (LIRAs), non-registered accounts, corporate accounts, and, yes, tax-free savings accounts (TFSAs)!
TFSAs confuse many investors because (a) it’s a relatively new product that was introduced less than a decade ago; and (b) “savings account” is in the name, which makes it sound like a TFSA can only be a type of bank account. This couldn’t be farther from the truth.
While you certainly can keep your TFSA in a regular savings account earning about 1% interest, which might be a good strategy if you expect to make lots of withdrawals, it doesn’t make much sense as a medium- or long-term investment strategy. (Similarly, there are RRSP savings accounts, but few savvy investors will park their money there for any prolonged period of time.)
If you put your TFSA savings into a couch potato portfolio of index funds or ETFs and leave it to grow, you’ll really make the most of those tax-free, compound returns. And, unlike RRSPs, you pay no tax or penalties when you take the money out. We put together a more detailed look at how to invest in your TFSA.
Why you should build a strong couch potato portfolio
Can such a simple strategy really let me achieve my financial goals? The answer is: yes! If you are a conscientious saver and invest those savings in a balanced and diversified low-fee couch potato portfolio that matches your risk tolerance, you will see solid returns over time. It’s a no-brainer.
In the past 30 years, for example, even Burns’ basic 50% U.S. stock/50% U.S. bond couch potato portfolio would have delivered compound annual returns of 7.73%, beating the average U.S. annual inflation rate over the period (2.56%) by more than 5%.2
FAQ
Tamar Satov, an award-winning writer and editor, specializes in personal finance and parenting. Her work has appeared in Report on Business Magazine, Maclean’s, MoneySense, and other top Canadian publications, making complex topics relatable and actionable.
Tyler Wade has worked in personal finance for over 5 years writing for brands like Ratehub, Forbes, KOHO, and now Money.ca.
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