MoneySense Guide to the Perfect Portfolio

Dan Bortolotti’s MoneySense Guide to the Perfect Portfolio is the most accessible explanation of the merits and mechanics of index investing I’ve seen to date. He takes a topic that is often explained in a technical manner and makes it understandable for non-specialists. At 128 pages of easy-reading, it’s not painful to get through, either. I expect to be lending out my copy to friends and family.

This book is actually a cross between a book and a magazine. It contains 10 pages of ads and has a fair bit of interesting artwork. Readers can decide for themselves what they think of a book with ads, but presumably the ads helped to get its cost down to $9.95 + $3 for shipping + taxes.

The book begins by explaining how “Couch Potato” investing with indexes is a different way of thinking about investing. It then goes on to look at how to decide what should go in your portfolio and how to set up accounts to buy the chosen investments. Even investors who feel intimidated by financial jargon should find the discussions clear.

In some ways this guide is deceptively simple. Bortolotti takes a subject that goes counter to most people’s instincts about investing and makes it seem natural. Overall, the content is top-notch, but there are always some nits to pick. The remainder of this review is my take on some details in the book.

Challenging Fund-Pickers

I laughed out loud at Bortolotti’s suggestion to challenge advisors who believe they can pick the best mutual funds by asking “them to show you a list of the funds they were recommending 10 years ago.” I’m guessing that this would usually generate a very sour look.

Correlation

“One of the laws of nature is that it is impossible for two asset classes with positive expected returns to have perfect negative correlation.” I’m not sure what point the author was trying to make here, but this statement is not literally true. Two investments can have positive returns and 100% negative correlation if the average of their returns does not exceed the risk-free rate. See one of my past posts for an explanation of a common misunderstanding about correlation.

Market Timing

“You shouldn’t keep changing your overall asset allocation to respond to market moves.” This is a great message. This “responding” is really just market timing and it gives more sophisticated investors a chance to take advantage of your mistakes.

The author also says that “it’s fine to change your asset allocation if you realize you overestimated your risk tolerance.” That’s fine as long as you don’t bump up your allocation of risky assets when they feel safe to you again. If you yo-yo your allocation this way, you’re just buying high and selling low.

Online Security

Bortolotti says that we don’t need to be concerned about the security of online investing. I agree that people don’t need to lose sleep over online security, but they do have to follow sensible precautions such as protecting their passwords, running anti-malware programs, and other precautions listed in their agreements with their online brokerage.

TFSAs

“You can withdraw funds from a TFSA any time, and you get the contribution room back at the beginning of the next calendar year.” Enough Canadians have been caught returning money to TFSAs too early that I think an extra sentence of warning about penalties is warranted here.

Transferring Assets to a New Account

In the discussions of leaving an advisor and moving assets to a new account, I think it makes sense to explain that it is best to fill out paperwork with the brokerage handling the new account to make the transfer. I’ve heard of too many people who try to initiate a transfer by talking to their advisors. Whether or not you choose to talk to your advisor about leaving him or her, when the time comes to transfer assets, you do it by signing papers with the new brokerage.

Stop-Loss Orders

“Stop loss orders ... just ensure that you’ll sell low.” This is a good warning for couch potato investors.

Emotions

“The hardest part of Couch Potato investing is sticking to your plan when your instincts tell you to bail out.” Bear markets in stocks are a difficult test for long-term index investors.

Cost of Investing Advice

“Good quality, unbiased advice is worth 1% to 1.5%.” I think this is dependent on portfolio size. It makes sense to pay more for good advice if your portfolio is 10 times larger, but it doesn’t make sense to pay 10 times more.

Sample Portfolios

Bortolotti gives 7 different sample portfolios for different portfolio sizes and goals. Five of them look reasonable to me, but the “Yield-Hungry Couch Potato” and the “Über-Tuber” are aimed at fairly large portfolios and seem expensive with MERs of 0.50% and 0.45%, respectively.