# Help me understand the canadian couch potato / vanguard model



## fstamand (Mar 24, 2015)

Full disclosure, I'm a newbie at investing. Here goes:
I understand ETFs such as VAB, VXC, VCN are low commission/ low MER.

What I have a hard time getting my head around is what makes these ETF attractive for RRSPs or TFSA? Looking at the growth from the last year, add the low dividends, it's all red.

I understand the TSX didn't do so well, but beside that, these ETFs are not appealing to me, unless I fail to see something. 

Why would an investor not go for high paying dividend stocks instead of ETFs that seem stagnent?


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## james4beach (Nov 15, 2012)

Dividend stocks are still stocks, and they follow the motion of the general market. It's always possible to find one particular stock or another which does better than the market. For example one might say, well the TSX Index was down -7% in the last year, whereas BCE was up 12% in the last year, so is it better to invest in "stocks like BCE" instead of the TSX?

I think that's what you're asking.

The appeal of the TSX Index or S&P 500 Index, and index ETFs, is that over a long time horizon most people tend to get higher returns from the broad index instead of pursuing strategies where they select groups of stocks for whatever reason. This even applies to professional money managers, most of whom cannot beat the index. Even Buffett says that upon his death, his wife's money will go into: a S&P 500 Index ETF and bonds.

Picking "high paying dividend stocks" instead of the TSX has been a popular strategy for the last few years. It's another case of people thinking that a certain strategy can do better than the index. You won't be alone if you try that strategy, but the odds are against you.

Basic message at the end of the day is that over long time periods, sticking to the plain old TSX index (or US index) delivers the best returns. When talking about Canadian stock investing, it's very difficult to find better returns than just XIU, XIC or VCN


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## james4beach (Nov 15, 2012)

If you're interested in some other non-index investments that have delivered excellent long term results, here are a few others that people in this forum including myself like. They do as well as, or better, than couch potato methods with less work

RBC Monthly Income Fund
TD Monthly Income Fund
Mawer Balanced Fund

(All of the above are actively-managed 'balanced funds', providing a mix of stocks and bonds)


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## fstamand (Mar 24, 2015)

Thank you for your response. The way I tend to see it is that say you have stocks that pays dividends, you will always have a payout, even though the TSX tanks, or the stock temporarily nosedives/goes though a period of correction. And when re-investing the dividends/compounding, grows the investment. I don't see this as much with these ETFs. Again, being new, I must be missing something.


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## AltaRed (Jun 8, 2009)

The underlying stocks in the ETF also pay dividends/distributions, and all 3 you mentioned pay dividends/distributions (which also can be re-invested). All markets were down last year. A well diversified stock portfolio would have also been in the Red last year. You have to compare apples with apples.


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## LBCfan (Jan 13, 2011)

fstamand said:


> Thank you for your response. The way I tend to see it is that say you have stocks that pays dividends, you will always have a payout, even though the TSX tanks, or the stock temporarily nosedives/goes though a period of correction. And when re-investing the dividends/compounding, grows the investment. I don't see this as much with these ETFs. Again, being new, I must be missing something.


Dividends are not guaranteed to come forever. Check what happended to dividends from POT, COS and other O&G stocks. Dividends are a bit like stock price appreciation, you can rely on them until you can't.


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## GreatLaker (Mar 23, 2014)

Cdn Couch Potato did a 6 part series on dividend myths starting here:
Dividend Myth #1: Companies that pay dividends are inherently better investments than those that don’t.

You can link to the other posts in the series from the URL above:
Dividend Myth #2: Dividend investors are successful because they select excellent companies and buy them when they are attractively priced.
Dividend Myth #3: Dividend-paying stocks are a substitute for bonds in an income-oriented portfolio.
Dividend Myth #4: You can beat the market with common sense: just focus on blue-chip companies with a competitive advantage and a history of paying dividends.
Dividend Myth #5: It’s easy to build a well diversified portfolio of Canadian dividend stocks.
Dividend Myth #6: Investors who follow a dividend growth strategy will eventually beat the market on yield alone

Dividend growth investors can do well, and some do really well. It is typically less diversified than total market investing (indexing), and tends to be concentrated in sectors like financials, telecom and utilities. With current low fixed income yields I often read that investors are substituting dividends for bond interest, and many of my friends and coworkers talk about their great dividend investing success.. and there is a risk that it has bid the price of high yield stocks above their fundamental valuations. When that happens it is inevitably followed by regression to the mean, sometimes in very rapid und unpleasant ways. The current dividend growth investing trend reminds me (in a lesser way) of the "Nifty Fifty" of the 1960s... and that did not end well.

Larry Swedroe has also written extensively on the subject:
https://www.google.ca/#q=larry swedroe dividend investing

It might sound from the above that I don't like dividend investing, which is not true. But every time I think about increasing my allocation to dividend stocks, I consider the above issues, realize that it means rather than diversifying my investments I would be concentrating them in a few sectors and stocks that just might have been bid up above their fundamentals.


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## slacker (Mar 8, 2010)

You are making 2 major mistakes in your analysis.

1. Favour dividend, instead of looking at the total return.
2. Use very short term recent history, to project for very long term future.

A dollar earned with dividend is the same as a dollar earned from capital appreciation. It is illogical to decid otherwise. [1] In fact, due to the phenomenon popularity of dividend investing, I believe that one has to pay a premium price for companies who pay dividends.

[1] Not withstanding tax policies in a non-registered account.


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## fstamand (Mar 24, 2015)

Thanks guys


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## brad (May 22, 2009)

+1 to what slacker said.

Investing in an RRSP is generally a long-term investment (unless you're only a few years from retirement, and even at that point some of your portfolio will still be long-term investments that you'll tap into in your 70s and 80s and hopefully 90s). In long-term investing, current trends don't matter: what matters is your growth over the entire investment time horizon. That's why index funds are the recommended choice there: there's lots of evidence to show that over the long term, index funds tend to do better than managed funds. Short-term investing is a different story, but that's not your goal here.

As for dividends, they generally come at the expense of growth. For long-term investing, you want to aim for growth, not payouts now. Sure, the payouts now can be reinvested for more growth, but read those Canadian Couch Potato articles on the myths of dividend investing. Many investors are ignorant about the issues he raises in those articles, and many people here have never read them (or read them but ignored them).


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## Electric (Jul 19, 2013)

The Couch Potato journalist and the EMH zealots can say what they want, but as I understand it the way it plays out in the real world is:

1. Most discount broker customers lose money. I'm sure nobody on this forum does, but most customers do.
2. Most gains in private investors' accounts, according to studies of actual accounts at large American brokerages, are attributable to reinvested dividends.


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## MrMatt (Dec 21, 2011)

Electric said:


> The Couch Potato journalist and the EMH zealots can say what they want, but as I understand it the way it plays out in the real world is:
> 
> 1. Most discount broker customers lose money. I'm sure nobody on this forum does, but most customers do.
> 2. Most gains in private investors' accounts, according to studies of actual accounts at large American brokerages, are attributable to reinvested dividends.


The other way is the average return is the average stock performance - average fees = average net return.

If you accept you can't easily get better than average stock performance, the only place for you to outperform the average net return is to minimize fees.
By buying the index fund at much lower fees, you're going to beat the average net return.

It's all well and good, if you're focused on getting the highest return, you're likely doing better than most.

That being said there is a lot more to money management than maxing out your return.


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## Electric (Jul 19, 2013)

There is more in heaven and earth than is dreamt of in your philosophy. If what you are saying was true, the studies of actual retail investor accounts would reveal that they captured the market return on average. But they don't; the typical customer loses money because of how he behaves in extremis.

Here is what is going to happen to a substantial fraction of the current Boglehead/Couch Potato disciples: they will experience a 20% loss within about (edit: I mean in the space of) two weeks. They will sell at the bottom. They will stay out of the market until near the next peak.

The people with the advisors to whom they are paying 1%, get a lecture when they call to sell after the 20% drop. They stay invested and take advantage of the low prices to add to their positions.


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## james4beach (Nov 15, 2012)

Electric said:


> 1. Most discount broker customers lose money. I'm sure nobody on this forum does, but most customers do.


This is my understanding as well. This tells me that most people's stock picking adventures end catastrophically. Discount brokerages mainly want to tempt people to trade as much as they can -- e.g. iTrade saying, become a new client and get 500 free trades. What the hell is someone going to do with 500 trades?

So I think the usual scenario is that someone signs up with a discount brokerage because they think they're going to trade stocks and make money. They do some half assed research and buy some stocks they've heard of ("oh I heard Tesla is hot, I should buy TSLA"). Maybe waste tons of money on fees. Within five years, many of their stocks have crashed and the average result is worst-than-index.


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## AltaRed (Jun 8, 2009)

Everyone's mileage wil vary. There is nothing wrong with a Couch Potato porfolio. Getting market return less small MER fees over a period of 20-30 years will do one just fine. Just look at the Total Return indices over the past 20-30 years. It is the 'swinging for the fences' or 'trying to beat the market' that dooms most investors.


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## My Own Advisor (Sep 24, 2012)

I like what most have mentioned, although I have a few quibbles with Dan's articles, some select ones anyhow: 

1. Dividend-paying stocks are not bonds. I don't know what mature investor thinks this. 

2. "You can beat the market with common sense: just focus on blue-chip companies with a competitive advantage and a history of paying dividends." You can!! However, it is the timing of when you buy your stocks that is the HUGE challenge in doing this - which makes the possibility very rare. So, instead of timing, but buy and hold stocks for income. That's it. Don't trade.

3. You can build a good CDN portfolio from CDN stocks. The stocks that have paid dividends for generations continue to pay them. The challenge is to get a diversified international portfolio which you cannot do investing in Canada only, or any country only.

Back to the question I think the following ETFs are great for Potatoes:
Canadian equity – XIU or XIC or VCN (inside TFSA or RRSP).
U.S. equity – VTI or VUN for U.S. equity (inside RRSP).
International equity – VXUS or VXC or VDU (inside RRSP).


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## Electric (Jul 19, 2013)

AltaRed said:


> Everyone's mileage wil vary. There is nothing wrong with a Couch Potato porfolio.


Be careful taking investment advice from journalists! For many years, the CP site was publishing a model portfolio that had exactly the same equity/FI allocation for everyone whether they were 25 years old or 75. 



> Getting market return less small MER fees over a period of 20-30 years will do one just fine.


There are a lot of people in Japan who would disagree with that! 

I fully understand the EMH upon which the whole Boglehead philosophy (and the derivative CP site) is based. I am just saying that many, many people who follow those sites are not going to act the way the CP author hopes they will. And they will not achieve the 20-30 year ideal gains you are positing.

I am also saying that investment advisors can provide a lot of value to the skittish or spooked thirty year-old investor who has just lost 20% of his equity value. Those people almost need to have someone advising them who has had twenty years in the markets, and has seen it all. Is it worth 1% per year? Again, I will come back to the fact that most discount customers lose money, so maybe it is.


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## My Own Advisor (Sep 24, 2012)

Electric, you've hit on something I should have mentioned in my post:

"I am just saying that many, many people who follow those sites are not going *to act* the way the CP author hopes they will."

I suspect _most people benefit _from the CCP model not because of what they are invested in, but HOW they invest. I.e., they keep their hands off the keyboard and it prevents any trading and doing stupid stuff with their portfolio. Just my take since I've learned investing is mostly about fighting your behavioural demons, at least they are for me.


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## AltaRed (Jun 8, 2009)

^ I agree with MOA. That said, I also agree with Electric that most retail investors are likely better off with a paid advisor to hold their hands and help keep investors from 'selling low' in bad times.

Electric: I wasn't so much referring to Canadian Couch Potato specifically, but to the concept of passive index investing and keeping one's hands off he keyboard. A diversified portfolio across geographic regions and asset classes will do just fine over a long period of time. Japan is a good example of NOT concentrating one's portfolio to one region or country. I would never commit myself excessively to Canada for similar reasons. We could have decades of stagflation (and thus equity market underperformance) due to the collapse of the super commodity cycle.


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## Kim (Jan 10, 2011)

Where is the " LIKE " button for what My Own Advisor posted above.


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## rl1983 (Jun 17, 2015)

+1 for MOA!

But do advisors really steer their customers towards index funds? I just calculated my retired Dad's RRSP ( soon to be RRIF ) and discovered had he been in a CCP, he could have doubled his retirement pot. I'm not too impressed with this advisor, who has his investments in funds with 2.8% MERs.


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## GoldStone (Mar 6, 2011)

Electric said:


> The Couch Potato journalist and the EMH zealots can say what they want, but as I understand it the way it plays out in the real world is:
> 
> 1. Most discount broker customers lose money. I'm sure nobody on this forum does, but most customers do.


Most discount broker customers do not follow CP model.


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## GoldStone (Mar 6, 2011)

Electric said:


> I fully understand the EMH upon which the whole Boglehead philosophy (and the derivative CP site) is based.


No you don't. The case for Couch Potato investing does *not* rest on the EMH. It rests on CMH and KISS.

CMH = Costs Matter Hypothesis
KISS = Keep It Simple, Stupid

EMH is a red herring. You don't have to believe in efficient markets to build a strong case for couch potato investing.




Electric said:


> I am just saying that many, many people who follow those sites are not going to act the way the CP author hopes they will.


Maybe, maybe not. The same statement applies to financial advisors. Some add value that justifies their costs, most do not.




Electric said:


> I am also saying that investment advisors can provide a lot of value to the skittish or spooked thirty year-old investor who has just lost 20% of his equity value. Those people almost need to have someone advising them who has had twenty years in the markets, and has seen it all. Is it worth 1% per year?


Most investment advisors are glorified mutual fund salesmen. They peddle the funds that happen to pay the highest trailing fee (MER 2.5% and higher). The all-in cost of their "advice" is much higher than 1% you cited.

BTW Electric, are you an advisor yourself?


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## Electric (Jul 19, 2013)

GoldStone said:


> No you don't. The case for Couch Potato investing does *not* rest on the EMH.


Sorry, but if you believe in indexing, you necessarily believe in the EMH. I would explain further, but it would be better for you, if you do your own research. I could recommend the e-books by William J. Bernstein that you can find on Amazon Kindle, which are quite readable. There are also many academic papers on this subject, available for free through Google Scholar, some more readable than others.



> Some add value that justifies their costs, most do not.


I agree with you to the extent that you need to treat the type of advisors/salesmen who advise people with $40k in investable assets, with some caution.

The type of advisor you get with a big bank brokerage, if you have $500k in investable assets, tends to be much better. i.e. the guy has 20 years in the business and has seen a lot in that time. When you play at that level, you are getting a portfolio of individual stocks and FI instruments, not mutual funds with 2% MERs.



> BTW Electric, are you an advisor yourself?


No. I decline to state my qualifications, and may in fact have none whatsoever.


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## GoldStone (Mar 6, 2011)

Electric said:


> Sorry, but if you believe in indexing, you necessarily believe in the EMH.


Not true at all. Read William Sharpe's The Arithmetic of Active Management. One can build a very strong case for indexing based on CMH alone. EMH is not required.


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## Electric (Jul 19, 2013)

GoldStone said:


> Not true at all. Read William Sharpe's The Arithmetic of Active Management. One can build a very strong case for indexing based on CMH alone. EMH is not required.


Look, I am just a guy on the same investment journey as you are. But I am telling you that you need to be a less dedicated uncritical swallower of what you read on random websites, and at least understand the theory behind how they are recommending you invest your life's savings. There is more to the Boglehead philosophy than "minimize costs." Certain truths have been obtained by people smarter than you and I, and it behooves you to at least understand the fundamental theory behind it.

You need to read Eugene Fama, Zvi Bodie, Harry Markowitz, just for starters. The original papers in the economics journals, I mean. If you don't, you will not be able to distinguish between website noise and theories with real value.


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## none (Jan 15, 2013)

Electric said:


> There is more in heaven and earth than is dreamt of in your philosophy. If what you are saying was true, the studies of actual retail investor accounts would reveal that they captured the market return on average. But they don't; the typical customer loses money because of how he behaves in extremis.
> 
> Here is what is going to happen to a substantial fraction of the current Boglehead/Couch Potato disciples: they will experience a 20% loss within about (edit: I mean in the space of) two weeks. They will sell at the bottom. They will stay out of the market until near the next peak.
> Km
> The people with the advisors to whom they are paying 1%, get a lecture when they call to sell after the 20% drop. They stay invested and take advantage of the low prices to add to their positions.


Rubbish. What the 1% advisor will do is sell everything and take his commission and then get another when you buy back in. An advisors does not cure stupid.


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## AltaRed (Jun 8, 2009)

I had full service (commissioned) advisors for the first 10 years or so of my investing life.... until broadband internet, world wide web and E*Trade came along circa 1998, The 3 advisors I had during that time were a mixed lot, the last one being the best. They do cause some churn and/or put investors in high MER funds to create some level of commission income for themselves and their firm. But they also had good ideas some of the time and can keep people invested in times of crisis. If I was goint to recommend retail investors going to advisors, I would recommend firstly, a fee for service advisor, and failing the availabilit of one of those, one that charges % of AUM annually since that advisor gains nothing through churn, but goes gain as the investor gains. To that extent, the advisor's and investor's interests are aligned. I would never recommend anyone go to a commissioned advisor unless the investor was smart enough to keep the brakes on churn.

@none - You have it wrong. A 1% advisor is % of AUM and gains nothing from churn.


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## james4beach (Nov 15, 2012)

My Own Advisor said:


> I suspect _most people benefit _from the CCP model not because of what they are invested in, but HOW they invest. I.e., they keep their hands off the keyboard and it prevents any trading and doing stupid stuff with their portfolio. Just my take since I've learned investing is mostly about fighting your behavioural demons, at least they are for me.


I also suspect that _this_ part is the real magic.

About 10 years ago, I had an epiphany (based on my trading data) that the less I traded, the more I profited. Assuming it's the same for most people out there, this explains why a couch potato approach, or Buffett's "hold the S&P 500 and a bond fund" is a good idea


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## brad (May 22, 2009)

I think the easiest way to understand all this is by looking at evidence. The SPIVA report series shows the percentage of managed mutual funds that beat the index every year, showing the differences after 1, 3, and 5 years. It's easy to see how a respectable percentage of managed mutual funds can do better than the index in any given year, but as the time horizon lengthens (even to just five years), index funds are the clear choice in terms of your probability for earning the highest return. This has nothing to do with investor behaviour.

All reports are at http://ca.spindices.com/search/?ContentType=SPIVA and I've pasted the most recent comparison below.










If you think you can do better by buying individual dividend-paying stocks, you'd have to do better than the professionally managed dividend mutual funds, which do really terribly compared with the dividend aristrocrats index: only 2.3% of those funds outperformed the index over five years. Why not just invest in the dividend aristocrats index? There's an ETF for that.


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## Electric (Jul 19, 2013)

brad said:


> I think the easiest way to understand all this is by looking at evidence...This has nothing to do with investor behaviour.


You're not wrong as far as that goes, but those are theoretical returns and nothing more than that. There is additional evidence that the investing behaviour discount customers actually exhibit, in the absence of a sober advisor, ensures that they do not capture those index returns. And, interestingly, the ones who do make money, make money mainly because of reinvested dividends.

It is for this reason that I suggest most people sign up for the cheapest robo-advisor they can find (because they are all the same as far as I can tell), that will allow them to do auto-transfers on payday which will be immediately invested according to "the plan." And not to read the financial news. Until you get into the $500k+ club, at which point you can get the upper-tier advice and instruments available at the big bank brokerages, for about 0.7% of AUM (at least in my case).

Also, keep your eye on the goal, which is to accumulate enough assets to retire at age 60, or buy the Ferrari. It matters little, whether you meet external benchmarks like the dozens of indices there are in the world. There are many roads that lead to your goal; there is not One True Road. I would suggest that stocks like the ones in the dividend aristocrats tend to be stable, well-managed companies who consistently spin off free cash - sounds like a perfect place to put your RRSP equity allocation, and I doubt you will be very disappointed after doing that for 20 years.


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## My Own Advisor (Sep 24, 2012)

james4beach said:


> I also suspect that _this_ part is the real magic.
> 
> "About 10 years ago, I had an epiphany (based on my trading data) that the less I traded, the more I profited."
> 
> ...


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## GoldStone (Mar 6, 2011)

Electric said:


> You're not wrong as far as that goes, but those are theoretical returns and nothing more than that. *There is additional evidence that the investing behaviour discount customers actually exhibit, in the absence of a sober advisor, ensures that they do not capture those index returns.*


One more time... most discount brokerage customers do NOT follow the couch potato model. I made this point before but you ignored it.

Your argument is akin to saying: physical exercise is a bad idea because most people are not able to stick to a regular exercise regime, so no one should even try.




Electric said:


> And, interestingly, the ones who do make money, make money mainly because of reinvested dividends.


Please provide a reference to the source of this claim. 

ADDED: Even if your claim is true, this is not an argument against indexing. Index funds and ETFs include all dividend paying stocks on the market. You can easily DRIP the dividends thrown by an index fund or an ETF.


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## brad (May 22, 2009)

Electric said:


> You're not wrong as far as that goes, but those are theoretical returns and nothing more than that.


I'm not sure what you mean by "theoretical." Those returns are based on actual data, not hypothetical examples.

As for individual investor behaviour, I think that can be addressed with education. If most investors don't follow the plan, it's because they don't understand the plan and don't understand the dangers of emotional responses. You can argue that people will behave irrationally even if they have a rational understanding, but I think you're underestimating people's capacity to learn and to control their behaviour based on their understanding.

The argument that investors cannot capture index returns without an advisor is like arguing that swimmers will drown unless they have a swimming instructor with them at all times. At some point, you learn to swim on your own. You might benefit from being observed by an instructor from time to time to improve the efficiency of your swimming, of course.


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## GoldStone (Mar 6, 2011)

Electric said:


> It is for this reason that I suggest most people sign up for the cheapest robo-advisor they can find (because they are all the same as far as I can tell), that will allow them to do auto-transfers on payday which will be immediately invested according to "the plan."


Robo-advisor will not hold your hand when markets plunge 20+%. Nothing stops a robo-client from going online and selling their robo-portfolio. A person who "manually" manages their couch potato portfolio is likely a better educated investor than a know-nothing-robo-client. Therefore, a regular couch potato is likely better prepared to deal with market volatility.




Electric said:


> And not to read the financial news.


Good advice, but you have to follow it in any case, whether you are a regular couch potato or a robo-one.




Electric said:


> Until you get into the $500k+ club, at which point you can get the upper-tier advice and instruments available at the big bank brokerages, for about 0.7% of AUM (at least in my case).


1. This and similar forums are filled with the horror stories about "upper-tier" brokerage advisors who churn their client accounts to generate outrageous commissions. 
2. It's hard if not impossible to negotiate 0.7% fee with merely $500K. In most cases, you need to amass well above $1M to drop below 1% all-in.




Electric said:


> Also, keep your eye on the goal, which is to accumulate enough assets to retire at age 60, or buy the Ferrari. It matters little, whether you meet external benchmarks like the dozens of indices there are in the world.


You are arguing off the both sides of your mouth. First you said that couch potato model is flawed because most discount brokerage clients are not able to capture the index returns. But then you said that external benchmarks are irrelevant. Which is it???




Electric said:


> There are many roads that lead to your goal; there is not One True Road.


Couch potato advocates do not claim that CP model is the One True Road to prosperity. Me thinks you are jousting with imaginary wind mills of your own making.


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