Blogs & Comment

Reviewed: MoneySense Guide to the Perfect Portfolio

A new investment guide from MoneySense magazine gathers in one place a wealth of knowledge about passive index investing.

A new investment guide is out that’ll have stockbrokers and mutual-fund salespersons cringing, if not waking up in the middle of the night in a cold sweat.

At $9.95 and an unassuming 128 pages, including the occasional ad, the MoneySense Guide to the Perfect Portfolio is in fact the Couch Potato Portfolio espoused by MoneySense magazine for several years now.

The reason advisers and managers don’t want you to see it is because it defines the perfect portfolio as an easy-to-assemble collection of low-cost index funds or exchange-traded funds (ETFs). And as the name suggests, it doesn’t take a lot of skill or effort to set up and maintain.

But why a book about passive investing with index funds or ETFs? Haven’t regular MoneySense articles and other sources covered the bases by now?

The editors at MoneySense say that despite the Couch Potato’s relative simplicity they have “come to appreciate that the Couch Potato strategy isn’t always so easy to execute.” The challenges include the nuts and bolts of setting up a savings/investing plan, determining risk tolerance, choosing assets, discerning wrinkles in ETF and index-fund offerings, opening up brokerage accounts, placing buy and sell orders, rebalancing, and having the discipline to stay the course.

Many of these details can be found separately in financial blogs such as Canadian Capitalist, but the book conveniently gathers it all in one place.

And veteran journalist, author and blogger Dan Bortolotti does a great job of conveying the information in a clear, concise manner. One area where his clarity rings through is a discussion on minimizing the high, poorly disclosed currency fees on foreign investments traded within RRSPs. Investors can cut such costs by opening an account with a brokerage that allows U.S. dollars inside an RRSP, washing trades (asking a broker to skip the currency conversions when selling one U.S. security to buy another) and doing the “Norbert gambit” (buying an interlisted stock in Canada and journaling it over to the U.S. side for a sale).

A strong first chapter presents the case for passive investing, summarizing highlights from the supporting academic literature and quoting investing legends such as Ben Graham and Warren Buffett on recommending index investing. Capping it off is testimony from Andrew Hallam, an investor who for years beat the market by picking stocks. However, after witnessing Legg Mason’s Bill Miller blow up following a 15-year run of outperforming the market, he decided to convert to passive investing.

The Perfect Portfolio ends just as strongly in discussing the virtue of staying the course. “The truth is, it`s often easier to become a passive investor than to stay a passive investor,” Bortolotti acknowledges. There is a lot of temption out there, ranging from the brother-in-law who made a bundle in penny stocks (when your index funds were losing money), to the news reports about some brilliant forecaster, or a can`t-miss trend in interest rates. But with the leveling effect of efficient markets, these shiny lights burn out over time.

For beginning or discouraged investors, MoneySense Guide to the Perfect Portfolio, is certainly worth a read. There is still a lot more Couch Potato advocates can do in terms of spreading the word and gaining converts. Passive investing has grown in popularity in recent years but the amount of money in mutual funds is still about 20 times the amount in ETFs. This little manual, widely available and attractively priced during the peak shopping season of the year, should serve to accelerate the shift away from actively managed funds.