Couch Potato Portfolio posts modest loss

Putting some perspective on the strategy’s performance

For many investors, the idea of a “Couch Potato Portfolio” made up entirely of ETFs has a great deal of appeal. After all, it’s simple to implement, offers lower cost than a portfolio of mutual funds, provides pure asset class exposure, is fully transparent, and can be more tax efficient than a comparable portfolio of mutual funds.

While the theory is sound and the appeal is undeniable, the question is always “does it work”? There really isn’t a definitive answer to that question. For example, we have had our Couch Potato Portfolio up and running for four and a half years, yet its performance hasn’t exactly shot the lights out. Since its launch, the portfolio has shown an annualized return of 1.9%, assuming all the dividends received were reinvested.

In comparison, a portfolio made up of four actively managed funds that I was recommending in 2008 would have posted an annualized gain of 2.6% including all reinvested dividends. The funds I used for this exercise were PH&N Bond, Dynamic Value Fund of Canada, CI American Value and Mutual Global Discovery. Judging by the since inception numbers, the more active strategy is the way to go, right?

Well, not so fast. If we look at the performance of both of the portfolios since the February 2009 market low, the clear winner has been the ETF Couch Potato Portfolio. Since the February low, the ETF Couch Potato has posted an annualized gain of 10.3% while the comparable portfolio of mutual funds gained only 8.3%. This big difference in performance can be attributed to one main factor – the mutual fund portfolio weathered the 2008 market drop much better than the ETFs. Since market bottom, it has been ETFs that have bounced back more sharply than the funds.

To further complicate things, on a year to date basis, the mutual fund portfolio is outpacing our Couch Potato Portfolio. While this may help make determining a clear cut winner between the two strategies, it reinforces what we said in our last review of the Couch Potato Portfolio which was “…there may also be extended periods of time where the couch potato style of investing may lag an approach that is much more hands on. We believe that we are in one of those periods. We are experiencing periods of extreme market volatility and while things appear to have settled down slightly, there are still many headwinds and issues that remain unresolved. In this uncertain environment, it is our view that investors would be better suited using a more active strategy, either by making tactical shifts within their portfolios themselves or by investing in high quality, actively managed funds.”

We stand by that statement today. Based on our market forecasts, we believe that a more active strategy will outperform an index based approach in the next few months.

Here is the latest report on the couch potato portfolio performance. Results are based on the prices as of April 30, 2012.