Canadian Couch Potato Model Portfolio: Is It Still Relevant in 2023?


One of the best resources for Canadian investors over the past decade has been (and still is) the Canadian Couch Potato. The blog, run by Dan Bortolotti, offers Canadians a complete guide to index investing. A big part of the blog is Dan’s series of “model portfolios” that offer Canadian investors ETF picks.

Since the launch of Vanguard, iShares, and BMO (TSX:) asset allocation ETFs, Canadian Couch Potato’s model portfolios have been drastically simplified to use these ETFs, and for good reason. Their simplicity and low fees bode well for DIY investors, who have a reputation for sometimes over-tinkering.

That said, the Canadian Couch Potato legacy “three ETF portfolio” was what got me into investing back then, and I think it’s still relevant today, despite its greater complexity. Most importantly, it provides a concrete example of the benefits of passive indexing and diversification.

Let’s take a look at what this portfolio includes and whether it’s worth implementing in 2023.

What is a couch potato portfolio?

In investing, laziness is actually a virtue. Sure, some of us might be obsessed with portfolio metrics like Sharpe ratios, drawdowns, correlations, etc., but it’s worth noting that the majority of Canadian investors don’t aspire to the same thing.

While investing can be a good hobby for some, for others it can be a chore and a necessary evil. Sometimes people just want to create an investment portfolio for their retirement and forget it so they can focus on the things that really matter to them.

That’s where the Canadian couch potato model portfolio comes in. Before the advent of asset allocation ETFs, the three-ETF version was intended as a simple, accessible, highly diversified, low-cost, easy-to-manage portfolio for the layperson who wanted to stay calm with their investment.

Comprised of just three ETFs (a global ex-Canada all-cap equity ETF, a Canadian all-cap equity ETF, and a Canadian total bond ETF), the legacy Canadian couch potato portfolio represented the best of John Bogles passive investment philosophy of “buy a haystack”.

While the Canadian couch potato portfolio won’t outperform the market, it’s also unlikely to underperform drastically. It aims to capture the long-term average market return which, combined with steady contributions, can provide investors with a solid retirement. As John Bogle once said, “shooting for average is your best chance of scoring above average”.

Construction of the couch potato portfolio

From my point of view, the Canadian couch potato portfolio had three main goals:

  1. To achieve diversification across global equities (US, developed and emerging) of all market capitalization sizes and market sectors with a home country bias
  2. Ensuring a healthy allocation of total Canadian bonds tailored to an individual’s risk tolerance and time horizon.
  3. Keep fees as low as possible, ETF turnover as low as possible and portfolio components as small as possible. This meant using passive index ETFs.

Back then, Dan suggested using three ETFs, one each from Vanguard, iShares, and BMO:

  • Global Ex-Canadian Equities: iShares Core MSCI All Country World ex Canada Index ETF (XAW)
  • Canadian Stocks: Vanguard Canada All Cap Index ETF (VCN)
  • Canadian Bonds: BMO Aggregate Bond Index ETF (ZAG)

For example, using the above specs, an 80/20 stock/bond allocation might look something like 60% XAW, 20% VCN, and 20% ZAG. This would result in a Canadian home country exposure of 25% on the equity side and a weighted average expense ratio of 0.16%.

Here’s how this annually rebalanced mix would have performed versus Dan’s current recommendation of the Vanguard Growth ETF portfolio (:VGRO).

portfolio growth
annual returns

The historical returns are almost identical. The couch potato portfolio has managed to squeeze a few basis points more in return and has lower volatility than VGRO, which I attribute to the former’s lower costs due to the lack of global bond ETFs.

However, I totally understand why Dan gave up for VGRO. Is the added complexity of managing three ETFs worth an 8 basis point (0.08%) improvement in returns? Remember that these backtests ignore trading costs such as commissions and bid-ask spreads.

In my opinion, Dan is right about putting simplicity first by replacing the couch potato portfolio with asset allocation ETFs. With VGRO, investors are less likely to compulsively tinker, time the market, or add additional unnecessary “fad” ETFs that might be trending.

This content was originally published by our partners on the Canada ETF Marketplace.

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