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Alternatives to Couch Potato?

19K views 66 replies 23 participants last post by  andrewf 
#1 ·
I am in my early 30s and I have a high risk tolerance, I have the patience to stick with a plan, provided that it works.

I agree indexing is a cost efficient way to reduce the investment expenses and pocket most of the investment growth; however, I am having second thoughts after seeing the statistics posted on the Couch Potatoes website:

http://canadiancouchpotato.com/wp-content/uploads/2012/08/CCP_Model_Portfolio_Performance.pdf

With the "Complete Couch Potato" plan, the ROI averaged over the past 15 years is close to 7%, others 2 plans have lower returns.

I must say it is not bad already to produce this kind of return without active managing and little effort. However, for someone like myself who is willing to put in a bit more time and go after a higher annual return, say 7-10%, where do I start? Should I start indexing on selected sectors, removing the fixed income portion of the couch potato and go entirely equity, or doing the couch potato as well as stock picking?

Thoughts?
 
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#2 ·
Many here carry the battle scars of active management. It is very rewarding and time consuming. My recommendation is core and explore. Put a half in couch potato and the active manage the other half. Asset allocation determines the risk tolerance and volatility of your investments. Good luck.
 
#3 ·
Evidence suggests you can spend arbitrary amounts of time and not generate any extra return.

That is to say that 'couch potato' investing isn't just for people who are lazy or can't be bothered, but even for those who are willing to spend large amounts of time. This is true because active management, on average, provides no return benefit (aka 'alpha'), and generally increases costs.

One way to increase returns, then, is to take more risk.
 
#4 ·
Long term returns of equities is approximately 7% plus inflation, thus about 10% nominally. No one can really expect to exceed 10% nominal returns for an extended period of time. But 10% returns have been achievable for long term investors over long periods of time. You aren't going to get anywhere near that now with a couch potato portfolio that includes bonds paying 2-3%. I would suggest that what you are looking for is a pure equity portfolio, either through ETFs or individual stocks. However, the risk is higher. In my opinion, as someone who is building capital, bring on risk; a 30% market correction would be a great buying opportunity.
 
#7 ·
Long term returns of equities is approximately 7% plus inflation, thus about 10% nominally. No one can really expect to exceed 10% nominal returns for an extended period of time. But 10% returns have been achievable for long term investors over long periods of time. You aren't going to get anywhere near that now with a couch potato portfolio that includes bonds paying 2-3%. I would suggest that what you are looking for is a pure equity portfolio, either through ETFs or individual stocks. However, the risk is higher.
If you invest in the total market, you will get the return of the total market (minus your costs). This part is indisputable! The only way to get above market returns is to attempt to pick. With that choice comes the risk of getting less than the total market -- also indisputable. All equity portfolios aren't necessarily the answer either because when you are fully invested in equities, you have lost the ability to rebalance during a market correction/crash. This is the rational for recommending a minimum of 25% fixed income (a la Ben Graham) so as to afford the opportunity to rebalance. You might suggest that you will do this via employment earnings, but if you don't have any free cash sitting around, you won't be able to earn it fast enough to make the difference. The concept of multiple assets that simultaneously reduce risk and increase return is illustrated in this
Efficient Frontier
graph that was popularized by Markowitz:

Line Text Slope Diagram Parallel
 
#6 ·
Curious as to when andrewf became a born-again indexer who says nobody can beat the market? Was it after his XIV holding got crushed in August 2011? If he can't beat the index, no one can. Or perhaps he deftly traded in and out of it, thus becoming what he preaches against? Not trolling, just curious.

To the OP: Outperforming the couch potato is very possible. The catch is you have to be genuinely interested in following the markets, willing to spend a lot of time researching and analyzing, and you have to have some knack for it. If these things don't apply, couch potato may be for you.
 
#9 · (Edited)
Somewhat off-topic, but sure.

I still have XIV. I was a bit overzealous in 2011, and my avg cost by the end of 2011 was 9.17 (so yes, there definitely was a big drawdown). 2012 made up for it though, and I have trimmed my XIV position through 2012. I do this with a small part of my portfolio and expect it not to outperform stocks on a risk-adjusted basis. If you look back, I also mentioned some VXX puts that I put on in Jan 2012. On the whole 2012 has been a good year to be short volatility. I'm not convinced that the risk is worth it, nor would I recommend anyone else to dabble in this. I would also note that this is not something that requires a lot of time, and spending more time doing it would not increase my returns.

My point on active management is that on average, active investing adds no value. This is because alpha is zero sum. Unless you think you are above average... Alpha is hard to earn consistently. There is evidence to support value and momentum factors, but these can be achieved through low-cost indexing and without high levels of portfolio turnover. And alpha generated from these strategies strictly comes at the expense of other active investors.

~ 85% of my portfolio is index ETFs and shares of my employer (share ownership program that I trim periodically).


And having the 'knack' for outperforming couch potato is not something you can know, a priori. Just like 90% of people think they are above average drivers, I'm sure more than 50% of people think they are above average investors. This includes a large body of pro investors, and they have a very difficult time generating alpha.

I read an article a while ago about a study on Buffet. Apparently his returns can be explained through a combination of low cost leverage (from his insurance business) and value investing. The trick for the avg investor is low cost leverage. Anyone can buy a value fund. Neither require hundreds of hours of stock research...

Now, if you like to do research as a hobby and can keep your costs low, I have no doubt you can match the performance of the market, on average. I don't think your returns will be well correlated with how much research you do (monkey throwing darts stock picking strategy). I prefer to read a book.
 
#8 · (Edited)
@wwwater

What I suggest to you is the ideas from Benjamin Graham+Charlie Munger. You learn what investing is about from Benjamin Graham. Charlie Munger is the man behind Warren Buffett.
You won't do too bad with that combo. I just realized that after 5 years of learning. My annual return of the past 5 years is around 6~7% vs the index's 2% or Complete Couch Potato's 3%.
I was only using value approach. After adding Munger's idea, it'll give it a bigger boost. On top of that, my portfolio is less volatile than the index.

Active trading doesn't necessarily translate into higher return but inteligent selection does give higher return.
The simple reason is there're businesses that are more profitable than the average.
 
#10 ·
There is theory and there is practice. Individuals with consistent outperformance do exist, here and elsewhere, and it is more of an achieveable goal than you make it out to be. And you don't have to frequently trade either; in fact with low commissions nowadays many stockpickers will pay less in fees than indexers by virtue of the latter's MERs. Stockpicking does not necessarily equal high turnover.

As an aside, in theory I'd rather sell VXX calls than buy puts. That way you're selling both premium and volatility. But in practice, this could blow up in one's face.
 
#12 ·
Writing VXX calls requires more capital to ride out margin calls, and that risk is very truly eliminated. Long puts have a fixed, manageable risk. Also, you can buy puts in a registered account.

Also, being short VXX is a roundabout way of selling option premium. Using a put on VXX is like reinsurance...
 
#14 ·
Argo created a straw man.


1. Andrew claims "active management, on average, provides no return benefit"

2. Argo distorts Andrew's claim in #1 with "(Andrew) says nobody can beat the market"

3. Argo attacks the distorted claim #2 with "Outperforming the couch potato is very possible", and conclude Andrew's claim #1 is without merit


Just a argument nerd... :p
 
#16 ·
When a child expresses interest in playing a sport, should we say, "On average, kids do not make it to higher level in sport. Instead, spend your time on general exercise." Or if a teenager wishes to become a doctor, should we tell them, "On average, students flunk out before they complete Med school, so go take general courses at the community college instead." The OP expressed interest in outperforming, so rather than sending him directly to the couch, I would nurture this ambition.

The acceptance of mediocrity is a strange concept to grasp; yet many seem to embrace it, even worship it as a mantra of sorts.
 
#17 ·
Agreed, that there is a certain cult like following with the whole passive/couch style of investing, at least as far as it pertains to a minority of couch advocates. The efficient market theory always seem overstated to me.

PS: I am a complete couch potato portfolio though, doesn't mean I don't notice the oddity around it's "believers".
 
#20 ·
Also, education is not zero sum. If you become more educated, it does not mean someone, somewhere must become less educated. Encouraging more people to pursue their education grows the pie of human capital. Encourage active investing doesn't grow the pie. If anything, some crumbs fall on the floor and get wasted. That's not to say that some people won't end up with bigger slices than average.
 
#21 · (Edited)
Active in what? Transactional activity? Or learning? I am always active, in learning but my stocks holding rarely change. I already spent the time to find them. I'll try to keep them as long as they're still profitable businesses. Most of my holdings were profitable businesses during the 08-09 financial melt down.

If you meant active in trading, then I agree day traders are profiting from other day traders. This case is zero sum game.
However, day traders can not profit from buy and holders. Buy and holders buy on fundamentals. So if day traders only hold the stock for a fraction of secs. They're not benefiting from the continue rise of business profit but buy and holders do. In this case, there's only opportunity cost.
 
#23 ·
Harold and all
just for the sake of fun I will quote the FATCAT opinion:biggrin:

see post #14
i recommended dreamcatcher in the first at santa anita
----------------------
1st race - Santa Anita Park - Sunday, January 06, 2013

Off at: 12:31 Race Type: Allowance Optional Claiming Video Race Replay
Age Restriction: Four Year Old and Upward
Purse: $60,000
Distance: One And One Fourth Miles On The Turf
Track Condition: Firm
Winning Time: 1:59.47
Pgm Horse Jockey Win Place Show
2 All Squared Away Garrett K. Gomez 7.60 3.60 2.60
7 Fire With Fire Martin Garcia 3.20 2.40
5 Dreamcatcher Joseph Talamo 2.40
Also ran: 3 - Shaun Washington , 4 - Surrey Star (IRE) , 6 - Romp (ARG) , 1 - Sebastian Flyte (GB)
-----------------------------------------

he ran third and paid $2.40

that's an annualized return 7300%

which, on a 100K returns $7,300,000

i'm just sayin, don't overlook the ponies
 
#25 ·
The inherent inefficiency of the fund market works against it. When the market is buoyant and increasing, new money is flowing into the funds and they are under pressure to invest this money asap. When the market turn around into a decline, the investors demand redemptions, and the fund manager is forced to sell their holdings into a declining market in order to pay their investors money back.

Individual investors have no such constraints. They can buy stocks when their prices are declining. They can hold stocks during market troughs. They can cherry pick stocks rather than hold a broad base in a sector.

These differences give individual investors an inherent advantage. They also don't have any pressure to sell to new participants so their overheads might be lower.

These structural advantages can easily be blown by poor choices, hanging on to losers and a litany of other factors that they share with fund managers. YMMV
Keith
 
#27 ·
Education is more about productivity than actual quantity of labour available. We've become progressively more productive over the past few centuries, and we don't see that showing up as higher unemployment, but rising incomes.

But it's the same thing with supply of labour. People use it as an argument against immigration. But when immigrants bring supply (labour), they also bring demand (food, housing, services, consumption goods).
 
#30 ·
But it's the same thing with supply of labour. People use it as an argument against immigration. But when immigrants bring supply (labour), they also bring demand (food, housing, services, consumption goods).
Yes, that is the lump of labor fallacy, but I am not saying that.
In aggregate, education is also a zero/sum game because having more of it means having less of something else.

If it were not so, there would be infinite expansion in productivity and GDP across the world.
Anything that requires allocation of labor and/or capital is a zero sum game.
 
#28 · (Edited)
For me, in the accumulation phase, it's not about potential that I could outperform the market; it's more about the risk of underperforming.

It's a risk I'm not willing to take. In some cases, investors are not rewarded by taking more risk. Long and steady wins the race.

I have picked stocks in the past (and still hold them) and learned a little luck was on my side. Right time and right place shall I say? I can't count on this going forward as a sensible retirement strategy. I don't know where individual stock prices will go, other than vaguely say "up" over a long period of time. Then again, they can also go bankrupt and decrease in price.

Remember a couple of bad stock picks can really screw up your % and since time and the markets move forward, you can't really go back to get the returns you underperformed.
 
#35 ·
I was responding to your statement above that : education is not zero sum. If you become more educated, it does not mean someone, somewhere must become less educated.
My counter-point was that education is also a zero/sum game for society as a whole.
One person becoming more educated means that some amount of labor and capital has been directed towards that, which means something else did not get done.

And if that education did not yield full results through productive employment (i.e. en-cashing the human capital), then it was not an efficient allocation of resources.

In lieu of that, someone else could have become more educated, or something else could have been done (like a new oil well dug up, or a new casino been built for our friend thenegotiator)
 
#34 ·
it is very hard to measure capital investment in education
there are kinds of hidden benefits like socialization which means better health and less crime

the biggest hidden benefit is that it nurtures creativity which can advance us by leaps and bounds

educated people are likely to have the tools to think more creatively and this just cannot be measured
 
#37 ·
...the biggest hidden benefit is that it nurtures creativity which can advance us by leaps and bounds
educated people are likely to have the tools to think more creatively and this just cannot be measured
I'm not sure how widely true this is ... certainly a lot of the junk I experienced in university had more to do with "playing the game" than creativity.

For example, for one prof, violating any of thirty-five rules such as using pen instead of pencil to write the assignment or stapling the assignment pages out of order resulted in a five percent deduction of marks earned.


I pretty much was discouraged from creativity, unless it fit in a neat little box.


Cheers
 
#44 ·
The point where you might be smarter then the seller is when people are selling just to get out because they can't stand the selling and the losses from that any more. The reverse is also true when the buying is just for the sake of buying or you are buying because everyone else is then the seller will be smarter. When gold hit $1,900, silver hit $50.00 and oil almost hit $150.00 in the last 5 years those were easy sells. In fact when someone told my wife I should buy silver when it was passing $46.00 a few years ago I told them I was about to short it and I posted it here at that time.

Otherwise you are correct Belguy and that is there is probably good reasons why someone is buying or selling.
 
#47 ·
and is currently the world record holder for thinking-talking-bragging-reflecting-spending-time on a portfolio that is designed to be simple and require the least amount of thinking-reflecting-bragging etc etc etc etc etc :cower::tongue-new: ...belguy you need to open a trading account and have some fun ... no wait, oh god, we'd never hear the end of that :hopelessness:
--------------------

eclectic, it is easy to frame creativity as "what happens to inspired geniuses" regardless of their education and therefore to dismiss all that we are taught in university

but the fact remains that creativity requires hard work and well-educated people have the tools and knowledge to connect a lot more creative dots than less educated people

despite all the well known examples of creative geniuses like steve jobs and zuckerberg, they still are in the minority

university and corporate laboratories are still the places where most industrial and economic creativity comes from and these tend to be well educated people

but i get your point there is a lot of pedantry on the average university campuses, we all must suffer through it to a degree
 
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