# Average Couch Potato Portfolio Return?



## Dragonprotein (May 22, 2017)

I'm a bit confused about a reasonable average expected return rate for a couch potato portfolio. I've read that the historical market average return is 7%, but with bonds making up an age-appropriate percentage, should the cp portfolio still return 7% over the long haul? By long haul I mean 20 years minimum, adjusting bond/stock mix age-appropriately, and making regular fixed contributions adjusted for inflation.

For specifics I'm a Canadian investor planning on putting 30% in a short-term bond ETF, 35% in CAD stock ETF, and 35% in an international ETF (half of which is US stocks).

Thank you


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## AltaRed (Jun 8, 2009)

Look at Stingy investor's Asset Mixer http://www.ndir.com/cgi-bin/downside_adv.cgi and play with the numbers. Take 0.2% or so off the numbers you get to account for MERs, etc. You will have to iterate, for changes in your asset mix. Many say that one should not expect future returns to be as robust as historical returns. Probably correct given that global growth isn't what it used to be.


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## james4beach (Nov 15, 2012)

There seems to be general agreement among experts that forward returns will be a bit lower than historical average returns in both stocks and bonds. For bonds it's for the obvious reason that yields are low. For stocks it's because (US) valuations are high right now.


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## james4beach (Nov 15, 2012)

Dragonprotein said:


> For specifics I'm a Canadian investor planning on putting 30% in a short-term bond ETF


Why would you put that much in short term bonds if your horizon is 20 years minimum?


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## AltaRed (Jun 8, 2009)

james4beach said:


> Why would you put that much in short term bonds if your horizon is 20 years minimum?


Probably has to do with OP's current age. The OP will have to iterate for differing bond amounts to get a feel for what historical returns were for various percentages of bonds, e.g. 20-40% range over a 20 year period... average 30%. No need to get very specific as the world will change in unkown ways. Example: A range of 5-7% might be as close as one can assume.


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## olivaw (Nov 21, 2010)

james4beach said:


> Why would you put that much in short term bonds if your horizon is 20 years minimum?


I can't speak for anyone else but some of my portfolio is in short term bond ETFs. My thinking, when I purchased, was that they would not decline as much as ETFS with a longer average duration when interest rates go up.

( In hindsight, it was an attempt at market timing. Live and learn)


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## Jimmy (May 19, 2017)

I did some studies of similar portfolios recently using the Asset mixer mentioned ^^ above. Looked at 2000 - 2015 which wasn't the best period ( 2008 and 2000 dot com crash), But generally you will find the returns before fees of ~ 5.2 - 6% depending on the mix. Bonds did quite well in that period and weightings of 50% didn't really affect returns but sure reduced risk ( standard deviation).

Longer period 1990 - 2015 for a 50 Bond/ 50 Equity(1/3 in US, Cdn, intl) 
Return : 8%
SD : 7.9% 

Not sure we'll have growth like the 90s again though.


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## My Own Advisor (Sep 24, 2012)

Hard to say what the future holds but if I had to guess...I would expect 3-4% real return.


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## james4beach (Nov 15, 2012)

Yes, thinking about real returns is the right way to go. Personally I expect slightly lower than My Own Advisor, maybe 2%-4% real return (for a 60/40 portfolio).


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## AltaRed (Jun 8, 2009)

Jimmy said:


> I did some studies of similar portfolios recently using the Asset mixer mentioned ^^ above. Looked at 2000 - 2015 which wasn't the best period ( 2008 and 2000 dot com crash), But generally you will find the returns before fees of ~ 5.2 - 6% depending on the mix. Bonds did quite well in that period and weightings of 50% didn't really affect returns but sure reduced risk ( standard deviation).
> 
> Longer period 1990 - 2015 for a 50 Bond/ 50 Equity(1/3 in US, Cdn, intl)
> Return : 8%
> ...


Remember that the Asset Mixer is nominal returns.....so it includes periods of higher inflation (and stagnation) too. Real returns would have been less than the nominal returns noted. I tend to agree with OMO about 3-5% real returns going forward....on the premise of 2% inflation, 70/30 mix as noted by the OP, and use of efficient low MER ETFs. The bond bull run has about run its course and we are likely intoa prolonged period of a relatively flat yield curve...or worse.


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## Jimmy (May 19, 2017)

AltaRed said:


> Remember that the Asset Mixer is nominal returns.....so it includes periods of higher inflation (and stagnation) too. Real returns would have been less than the nominal returns noted. I tend to agree with OMO about 3-5% real returns going forward....on the premise of 2% inflation, 70/30 mix as noted by the OP, and use of efficient low MER ETFs. The bond bull run has about run its course and we are likely intoa prolonged period of a relatively flat yield curve...or worse.


I can't get excited about them but they are one of the least correlated to stocks so they survive in downturns. Good to have a safe 3% after fees w some corp bond ETFs. Agree 30% weighting is right though


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## AltaRed (Jun 8, 2009)

Jimmy said:


> I can't get excited about them but they are one of the least correlated to stocks so they survive in downturns. Good to have a safe 3% after fees w some corp bond ETFs. Agree 30% weighting is right though


I agree fixed income/bonds are good in downturns but corporate bonds of high (A-AA+) investment quality don't yield 3%, and lower quality bonds tend to follow stocks down to some degree (witness 2008-2009). XBB is the proxy for bonds.

My point was around expected future returns most likely being less than historical.


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## james4beach (Nov 15, 2012)

As AltaRed says, to get best diversification/lowest correlation you have to go to the highest rated bonds -- probably heavy in government for best effect.

When picking asset allocation, also remember the maximum drawdown issue. 70/30 is a fine allocation but peak-to-trough losses will be more intense than in a balanced 50/50.


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## doctrine (Sep 30, 2011)

All of this talk of lower returns has been very strong, especially in the last 6-7 years, and everyone continues to be very wrong, yet the message continues. And many people are missing out on these great long term returns. I continue to expect 5-7% real returns on most balanced portfolios. 2016 was 8% total return, 6.5% after inflation. 2017 is already at 8% total return. 70-30 portfolios with US assets are easily seeing these numbers with very low volatility.


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## My Own Advisor (Sep 24, 2012)

Doctrine, do you really believe equity markets can return more than 7% after inflation?


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## AltaRed (Jun 8, 2009)

Doctrine appears to being influenced by the 8 year bull (for the most part) market from the depths of 2008-2009 and personal portfolio numbers for 2016 and 2017 YTD. That hardly is an endorsement for the next 20 years. 

We will almost certainly go through a correction (10+%) or even a bear (20+%) in the not too distant future making 10 year rolling average performance returns...quite average. US mid-term seems to be where the euphoria of campaign promises and early administration actions gets deflated and returns revert to the mean. We will continue to go through business cycles and with lower global GDP growth, there isn't much in the way of tailwind available to juice stock performance beyond very average levels.


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## doctrine (Sep 30, 2011)

Mean real equity returns are in the range of 7-8%, for 100% equity. I'm tempering my expectations to 5-7% for a more balanced portfolio. All of these returns are certainly available longer than the current bull - I have been around longer than that. Of course there will be corrections. But the next -20% correction just sets up the next +30% rebound.

One of my favorite comparisons is 1994, how the bull market at the time was 7 years old and getting stale, and plenty of talk of overvaluation. Those who tried to time the market, literally could never get back in anywhere near those prices.


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## AltaRed (Jun 8, 2009)

The best evidence is still Norm's Asset Mixer http://www.ndir.com/cgi-bin/downside_adv.cgi to compare historical returns. It is up to the individual to decide whether historical norms will apply to the future.

A 100% TSX portfolio from 1990 to 2016 shows 7.753% nominal (5.678% real) geometric gain, and 9.089% nominal (7.007% real) arithmetic gain.
A 100% S&P500 portfolio did a few percentage points better.

I will stick with my belief of a few percentage points lower going forward. Not that it matters much to me as I am 11 years into retirement and anything over 6% nominal (4% real) is a cakewalk.


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## Jimmy (May 19, 2017)

doctrine said:


> All of this talk of lower returns has been very strong, especially in the last 6-7 years, and everyone continues to be very wrong, yet the message continues. And many people are missing out on these great long term returns. I continue to expect 5-7% real returns on most balanced portfolios. 2016 was 8% total return, 6.5% after inflation. 2017 is already at 8% total return. 70-30 portfolios with US assets are easily seeing these numbers with very low volatility.


Larry Berman on his BNN show explains why growth will be lower. GDP has grown at 3% for the past many decades. Now per the world bank, population and productivity only add up to 1.3 gdp growth going forward. 

So expectations for returns should be lower than before too. Maybe 5-6% vs the 7-8% before.

http://www.bnn.ca/larry-berman-why-...ortant-contributing-factor-to-growth-1.764113


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## My Own Advisor (Sep 24, 2012)

I will be thrilled with 4% real return personally! (100% equities = up to 30 CDN + 10 U.S. dividend paying stocks + a couple U.S. listed ETFs).


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## AltaRed (Jun 8, 2009)

My Own Advisor said:


> I will be thrilled with 4% real return personally! (100% equities = up to 30 CDN + 10 U.S. dividend paying stocks + a couple U.S. listed ETFs).


Lordy, that is a lot of holdings! I'd be more inclined to hold uo to 20 Cdn equities and 1-2 ETFs for ex-Canada no matter how big a portfoiio is.


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## My Own Advisor (Sep 24, 2012)

I probably need to bring it down a few notches. I should clarify, those 30 CDN include REITs. I will over time. I will likely always have the 1-2 U.S. listed ETFs (ex-Canada).


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## Pluto (Sep 12, 2013)

I'd like to draw your attention to the Globe and Mail's " strategy lab where one may follow four strategies, Indexing, value, dividend and growth. 

Indexing is the worst performer out of the bunch in that lab. Now I'm not trying to convince you to try something different if you are a committed indexer, rather, I am pointing out alternatives in case you have an open mind.


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## Jimmy (May 19, 2017)

Pluto said:


> I'd like to draw your attention to the Globe and Mail's " strategy lab where one may follow four strategies, Indexing, value, dividend and growth.
> 
> Indexing is the worst performer out of the bunch in that lab. Now I'm not trying to convince you to try something different if you are a committed indexer, rather, I am pointing out alternatives in case you have an open mind.


I think indexing is ok over longer periods. I don't think anyone is expecting double digit returns over 20+ yrs using any strategy. I think the results of the G&M contest may be a little skewed for the indexing strategy due to the price of oil collapsing in 2015 which was a little exceptional. The TSX posted a -8% return for the year and is just returning now to its 2014 peak.

I don't like the TSX as an index though due to this heavy weightings in energy . A Cdn low volatility ETF like ZLB or dividend ETF would be better. ZLB is up 8 % ytd while the TSC has been flat.


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## AltaRed (Jun 8, 2009)

Ditto. The Cdn index is far too concentrated in a few areas. Boutique ETFs or stock picking is likely the best choice here. I have no resources/commodities in my Cdn equity. The closest I get is ALA which has some equity in NG producers and/or ATCO that relies quite a bit on the resource industry.

For ex-Canada, nothing (in my mind) beats broad market ETFs based on MSCI or FTSE indices.


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## GreatLaker (Mar 23, 2014)

Pluto said:


> I'd like to draw your attention to the Globe and Mail's " strategy lab where one may follow four strategies, Indexing, value, dividend and growth.
> 
> Indexing is the worst performer out of the bunch in that lab. Now I'm not trying to convince you to try something different if you are a committed indexer, rather, I am pointing out alternatives in case you have an open mind.


I have seen that too. Andrew Hallam's indexing portfolio consists of about 25% short-term bonds (VSB) which has a 5-year compound return of around 2%. Relative to the other portfolios that gives it a significant performance handicap in the strong stock market since Strategy Lab started in fall 2012. Kudos to Andrew for sticking to his portfolio strategy and asset allocation. If we were in a bear market the relative performance of the portfolios could be very different. Nonetheless I would like to see his index portfolio results except all-equity.

Looking at the results, lowest to highest: indexing, dividend, value, growth. Indexing is clearly the simplest, most investors could succeed just by following a couch potato method. Dividend investing is also relatively straightforward, just buy a reasonable number of solid, boring, consistent dividend paying equities. Value investing is clearly more difficult, success requires studying stocks and picking good undervalued stocks that will not turn into value traps, and knowing when they have become fully valued and should be sold. Then IMO growth investing is harder still, requiring a keen sense of what stocks will grow, when to buy, and knowing when to sell since growth stocks can turn into big losers very quickly.

So IMO, the results are indicative of the amount of skill and research are needed to succeed with each strategy. Could I invest successfully with indexing or dividend stocks? Absolutely! Could I have reached any where close to Chris Umiastowski's growth investing results? I doubt it, and I think very few investors could even come close and many would lose bigly.


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## OnlyMyOpinion (Sep 1, 2013)

^+1. Good summary of the spectrum of investing 'styles'.


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## james4beach (Nov 15, 2012)

Jimmy said:


> I don't like the TSX as an index though due to this heavy weightings in energy . A Cdn low volatility ETF like ZLB or dividend ETF would be better. ZLB is up 8 % ytd while the TSC has been flat.


Yeah, same complaints from me. I'm also concerned about the high financial weight. I've been shifting away from the TSX index towards a more sector-balanced portfolio.

ZLB also continues to intrigue me, mainly for its good sector diversification and great performance.


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## james4beach (Nov 15, 2012)

GreatLaker said:


> Kudos to Andrew for sticking to his portfolio strategy and asset allocation.


Some people say that sticking to a strategy, methodically, over the long term is more important than ultra-optimization of an investment portfolio. I tend to agree with that.

My priority has been finding an investment strategy/allocation that works for me, where I'm comfortable with its risks, and know I can follow under any conditions. There will be periods of many years sometimes where one's strategy under performs others. To do well in the long term, you have to be able to stick to the plan.

Therefore a big part of the magic of the "couch potato" approach is that it's a simple, easy to implement approach that you can stick with long term. Is it the most optimal sector/asset/geographic mix possible? Maybe not, but that doesn't matter so much as the consistent execution over the long term.


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## EngPhysGuy (Jul 9, 2015)

Pluto said:


> I'd like to draw your attention to the Globe and Mail's " strategy lab where one may follow four strategies, Indexing, value, dividend and growth.
> 
> Indexing is the worst performer out of the bunch in that lab. Now I'm not trying to convince you to try something different if you are a committed indexer, rather, I am pointing out alternatives in case you have an open mind.


I really enjoyed listening to CCP podcast #5 where he interviews Andrew Hallam and they talk specifically about this. There's good justification for his approach, even though he is currently at the bottom of the pack!
http://canadiancouchpotato.com/podcast/


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## dubmac (Jan 9, 2011)

Apparently, reports Rob Carrick in the Sat. G&M Report on Business, that MER on ishares bond funds XBB, XSB, XSH has dropped to 0.09% (to compete with Vanguard & GIC rates). VAB and ZAG have fees 0.13 and 0.14 % respectively.
Previously, XBB was 0.3%, XSB 0.25 and XSH 0.12%. A little good news for the self-directed, cost wary investor.


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## AltaRed (Jun 8, 2009)

Indeed. I just checked XSB on the iShares page. They had been at obscene levels IMO.


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## mrPPincer (Nov 21, 2011)

EngPhysGuy said:


> I really enjoyed listening to CCP podcast #5 where he interviews Andrew Hallam and they talk specifically about this. There's good justification for his approach, even though he is currently at the bottom of the pack!
> http://canadiancouchpotato.com/podcast/


Thanks for the link EngPhysGuy.
Didn't know Dan Bortolotti was doing these podcasts. I'm marathoning through the whole series now, good stuff. 

In the podcast #5 Andrew Hallam mentions that his index portfolio has a bond component, which is practical for an actual long-term real portfolio, but not so much for winning a contest, in which case 100% equity would probably fare better against the others. So, apples and oranges I guess. Also he mentions the time frame, just a few years so far, which is just a blip in the long term.


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## BoringInvestor (Sep 12, 2013)

Johnymal said:


> I need workers with good photo processing skills. Here there is a section, for those who are interested, I ask to go and start earning wedding-retouching job


Did you calculate your return using the XIRR function on excel?


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## My Own Advisor (Sep 24, 2012)

james4beach said:


> Some people say that sticking to a strategy, methodically, over the long term is more important than ultra-optimization of an investment portfolio. I tend to agree with that.
> 
> My priority has been finding an investment strategy/allocation that works for me, where I'm comfortable with its risks, and know I can follow under any conditions. There will be periods of many years sometimes where one's strategy under performs others. To do well in the long term, you have to be able to stick to the plan.
> 
> Therefore a big part of the magic of the "couch potato" approach is that it's a simple, easy to implement approach that you can stick with long term. Is it the most optimal sector/asset/geographic mix possible? Maybe not, but that doesn't matter so much as the consistent execution over the long term.


Totally agree - define a plan that meets your objectives and stick with it.

The reality is, all Couch Potato investors have some active decisions to make and I believe that always gets overlooked in the behavioural side of things (what to own, when to own, when to rebalance, etc.).

There is no ultra-optimization of any investment portfolio; otherwise, everyone would be doing the same thing.

Would Chris Umiastowski's approach work for others? Likely not. But Andrew's approach works for many investors and therein lies the beauty of indexing. You can copycat it.


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## Pluto (Sep 12, 2013)

EngPhysGuy said:


> I really enjoyed listening to CCP podcast #5 where he interviews Andrew Hallam and they talk specifically about this. There's good justification for his approach, even though he is currently at the bottom of the pack!
> http://canadiancouchpotato.com/podcast/


I listened to that podcast as well. He saved and picked individual stocks and ended up with over $700000.00 in stocks. He said over 12 years as an individual stock picker he out performed the market by about 2% anually. Then all of a sudden he decided maybe he was just lucky. After all Bill Miller had a bad year after out performing the S&P for some 15 years, and a Random Walk Down Wall Street convinced him he must just be lucky. So he sold all his stocks and bought index funds. He probably is a very good stock picker and would have continued with fine performance.


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## mikep (Mar 13, 2017)

why go through all that trouble when maw104 has a track record of:
15 Year Avg 7.92% 
20 Year Avg 7.86% 
other than 2008 there hasn't been any sizeable dips. just slow and steady. easy on the stomach.


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## GreatLaker (Mar 23, 2014)

mikep said:


> why go through all that trouble when maw104 has a track record of:
> 15 Year Avg 7.92%
> 20 Year Avg 7.86%
> other than 2008 there hasn't been any sizeable dips. just slow and steady. easy on the stomach.


It is not that much trouble. A couch potato portfolio can be as simple as 3 ETFs.

There are many mutual funds that had long-term outperformance vs. market averages, then suffered from regression to the mean, or bad performance that erased the earlier gains. Templeton Growth, Trimark Fund, Altamira Equity, Industrial Growth, Front Street Growth, Sprott Equity, AGF, Fidelity Magellan, Legg Mason Value. Books like The Four Pillars of Investing explain the many reasons that occurs. It's easy in hindsight to see the reasons, but when all your money is in one fund and it has a couple of bad years how do you evaluate it and what do you do? Wait and hope it's just a dry spell and the fund will recover? What if it does not?

Mawer is a good fund company and I have a chunk of money in MAW105, but I would not bet all my retirement savings on any one actively managed fund or fund company.


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## mrPPincer (Nov 21, 2011)

Don't chase performance.
You will get burned.

You may have to learn this lesson first hand to understand.

MAW105 is a latest superstar among the actively managed funds.
There is always one that shines based on past performance.

It is pretty much 100% of the time that over time these superstars will inevitably fall below their indexed compatriots.

With ever-evolving computer AIs competing with a bunch of floors full of sweaty dudes in suits and ties, even if they are using computer algos, come-on, forget about it.

The marginal edge an active fund _might?_ have had will surely be eaten away plus some by the MER.


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## mikep (Mar 13, 2017)

GreatLaker said:


> It is not that much trouble. A couch potato portfolio can be as simple as 3 ETFs.
> 
> There are many mutual funds that had long-term outperformance vs. market averages, then suffered from regression to the mean, or bad performance that erased the earlier gains. Templeton Growth, Trimark Fund, Altamira Equity, Industrial Growth, Front Street Growth, Sprott Equity, AGF, Fidelity Magellan, Legg Mason Value. Books like The Four Pillars of Investing explain the many reasons that occurs. It's easy in hindsight to see the reasons, but when all your money is in one fund and it has a couple of bad years how do you evaluate it and what do you do? Wait and hope it's just a dry spell and the fund will recover? What if it does not?
> 
> Mawer is a good fund company and I have a chunk of money in MAW105, but I would not bet all my retirement savings on any one actively managed fund or fund company.



thanks for the info. is maw105 for the non registered accounts and would one use maw104 within an rrsp?


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## dubmac (Jan 9, 2011)

mikep said:


> thanks for the info. is maw105 for the non registered accounts and would one use maw104 within an rrsp?


Yes. That has been my strategy. 
I have complemented MAW104 (0.94% MER) in a 3 RRSP accounts by purchasing other MAWER funds, like MAW102 (1.43% MER), MAW106 (1.19%), MAW120 (1.36%), MAW150 (1.81%) to lesser amounts. In 3 RRSP accounts I have been keeping MAW104 at around 50-60%, a low cost fund bond fund MAW100 (MER 0.69%) at 20%, and other global/international funds at another 20%. So far, so good. (1/3 of MAW104 is bond fund, so the fixed income is 30%, the remaining is a mix of cdn, int'l, emerging markets equities.). The management cost based on the MER will average around 1% - which I'm OK with). I set it and forget it.

I agree that Mawer is, like any other MF company, not immune to lack-lustre results. They have benefited in recent years by avoiding the oil & energy sectors (3.7% in MAW104) , as well as gold & materials (7.1% in MAW104). They are 24% in financials, they like industrial and IT companies. Their approach, so says their website, is value based investing. 

Not saying that this company can not or will not stagnate in the future.


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## OnlyMyOpinion (Sep 1, 2013)

GreatLaker said:


> ... Mawer is a good fund company and I have a chunk of money in MAW105, but I would not bet all my retirement savings on any one actively managed fund or fund company.


I agree. We have a chunk in MAW104, but its only 8% of our total assets. I'd be comfortable with more, maybe up to 20% but prefer to have additional eggs in the basket as well.

Added: to be clear, this is because we are talking about an actively managed fund versus index etf(s).


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## GreatLaker (Mar 23, 2014)

mikep said:


> thanks for the info. is maw105 for the non registered accounts and would one use maw104 within an rrsp?


Yes, that's correct. Mawer is vague about the tax-effective strategy, simply saying "The manager minimizes taxes through the application of a tax overlay strategy, with the objective to minimize taxable distributions."

http://www.mawer.com/our-funds/fund-profiles/tax-effective-balanced-fund/


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