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Discussion Starter #1
Hey everyone,

A portion of my portfolio is based on the couch potato strategy, but another portion consists of managed funds which I've had prior to becoming a couch potato. Although I'm sold on the strategy, I'm having a hard time letting go of the managed funds.

Here's an idea of my portfolio along with average return since 2003 (used strictly for demonstration purposes and not intended to reflect my personal rate of return)

Index Funds
TD Canadian Index - 12%
TD US Index Currency Neutral - 5.2%
TD International Index - 4.1%

Managed Funds
TD Canadian Equity - 14.3%
TD Dividend Income - 10.5%
TD Dividend Growth - 11.8%
TD Monthly Income - 9.6%

To reduce redundancy in my portfolio, I would like to transfer at least 2 of the above managed funds into index funds or the managed funds that I retain. I'm leaning towards eliminating the TD Dividend Growth and TD Monthly Income funds from my portfolio.

Although past performance is not an indicator of future performance, it appears that investing in the higher cost TD Canadian Equity fund has proved successful in comparison to the lower cost TD Canadian Index. In other words, the higher MER is/has been worth it. Or is/has it?

Switching it over to the TD Canadian Index fund doesn't concern me, but in an attempt to be geographically diversified I'm concerned that I wouldn't be doing myself a favour by switching a portion into the US and International Index funds. What are your thoughts about this?

I've been happy with the market and dividend reinvestment returns on the TD Dividend Income fund. I'd say I'm a bit attached to this fund (yeah, one shouldn't become too attached, I guess). Could I be misguided? Whereas, the only reason why I have an inkling to continue with the TD Canadian Equity is because of it's higher returns compared with the TD Canadian Index.

How do I satisfy my conversion to a couch potato portfolio without risking the loss of the possible benefits of what appear to be strong actively managed funds?
 

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Those fund returns look great for the period mentioned.
However, as you have mentioned, past results mean very little and on average actively managed mutual funds have lower returns than the indexes.
If you believe that some mutual funds return more than the average because of probabilities (luck) instead of better management (as I do) then you'd move all your funds to indexes. If you believe that the management does make a difference, then keep the funds (in this case, probably you should keep all of them as they have great returns).
 

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Why would you be more attatched to the fund with lower total returns (before tax)?? That makes zero sense... look at that unhealthy attachment first. BTW the only acceptable answer is the risk-adjusted after tax return being superior, I didn't check if that was the case.

Anyway if the managed funds are superior than why switch, this obsession with ETFs is really quite foolhardy. Sure most funds are garbage, but so are most ETFs. People have yet to realize that they are simply the latest great marketing ploy of the investment industry.

While high fees are of course bad it is not true that you can conclude that a high fee fund is bad. Many idiots will miss this basic point, don't be one of them. That said it is always better to choose the low fee alternative of comparable choices.

Diversity is overrated.

Reversion to the mean is a reality in all cases, however often temporary. In other words a good fund will falter and then outperform once again in many cases, some never will recover. People will trade these funds like lemmings and loose money. If you go couch potato then you don't trade and you win in the long run, however even that doofus author guy sold at the bottom so...
 

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• Here's an idea of my portfolio along with average return since 2003 (used strictly for demonstration purposes and not intended to reflect my personal rate of return)
What really matters is your rate of return, not an illustrative number. That said, I’m not sure where you got your figures from because they don’t correspond particularly well with the published figures. In fact, the TD Canadian Equity Fund has pretty much lagged its benchmark – the S&P/TSX Total Return Index over all time periods that current management has been in charge. While the TD Canadian Index fund won't beat the index either (lagging by its MER), it has been quite competitive with the active fund being sometimes better and sometimes worse with the differential varying depending on the snapshot in time.

Looking at the top 25 holdings of the TD Canadian Equity fund and its sector weightings, it is fairly obvious that it is a closet index fund. If you’re going to pay for active management, you should be getting active management, so IMO it is a fairly easy call that this particular fund is redundant.

• Switching it over to the TD Canadian Index fund doesn't concern me, but in an attempt to be geographically diversified I'm concerned that I wouldn't be doing myself a favour by switching a portion into the US and International Index funds. What are your thoughts about this?
The whole point of the couch potato portfolio strategy is to remove as many decisions from the process as possible. You seem to be intent to inject some decision making into it by making a call on the US and international economies and currencies. You have to accept the fact that you might be buying stuff that goes down for a while. I can almost guarantee you that you won’t be able to call the turn. At some point, the investment in foreign assets will pay off and that point will likely occur long before you are a believer in the investment merit.

Folks are drawn to the Couch Potato Portfolio because of its simplicity. We all love quick easy fixes. The problem is that very few have the discipline to embrace the simplicity and follow the strategy as designed. Most people want to take action; they will feel compelled during times of turmoil. That action will most likely turn out to be counter productive over the long haul and will defeat the purpose of the strategy. So, you really need to decide if this truly passive approach is suited to your personality. Believe it or not, but it takes a fair bit of market experience before an investor can become truly comfortable and committed to passive investing. For those who can’t resist the urge to be active, then dedicating a small portion to active management could provide you with the needed fix, but for most, that will never be good enough.

• I've been happy with the market and dividend reinvestment returns on the TD Dividend Income fund. I'd say I'm a bit attached to this fund (yeah, one shouldn't become too attached, I guess). Could I be misguided?
I suspect that what appeals here is the lower volatility and regular distributions. These will largely be a result of the bond component. You don’t have any bonds in your index portfolio, so a portion in the TD Canadian Bond Index could be added to help lower the volatility of the overall portfolio. A blend of the Canadian index and the Canadian bond index is a reasonable proxy for the TD Dividend Income Fund. (FWIW I understand your attachment to this TD fund completely as I used to own it for many years and it was one of my favourites.)

How do I satisfy my conversion to a couch potato portfolio without risking the loss of the possible benefits of what appear to be strong actively managed funds?
As I mentioned above, you can satisfy the desire to include an actively managed component within a passive index portfolio by designating a small portion to (an) active fund(s). Just ensure that what you want to include is truly actively managed in that the fund(s) has a low correlation to the major equity indices that comprise the bulk of your passive assets.
 

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seriously, scomac?

i don't think W1Day is a serious investor. Think he sounds like a TD funds shill. That misrepresentation of returns over several years is telling.

a TD advisor was looking at this website w me a few weeks ago. She said that they are never allowed to post anything in any media, not even anonymously or secondhand, without getting their managers' approval. And such approval is never forthcoming.

such concerns on the part of financial houses are entirely legitimate. That's why most of the obvious financial advisors posting here tend to be lone or fairly isolated practitioners, able to skate below the radar, or so they hope.

and a few try to masquerade as genuine investors.
 

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I'll assume he's just a loyal customer ( beats me but many TD small investors are)....

If you want to maintain some actively managed funds why not put that $$ into a small-cap fund. There is lots of evidence that active management in this arena DOES outperform the index .... because there are sooo many losers there.
 

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Discussion Starter #7
leslie, you're certainly more observant and I'd like to add that I appreciate all of your constructive posts on this board. I am a TD customer though as far as the funds go it has less to do with loyalty rather than simply beginning my investing foray through my bank. All my mutual funds are within a TD Mutual Fund account. Perhaps one day my zero balance in my TDW account will instead consist of non-TD products. :)

i don't think W1Day is a serious investor. Think he sounds like a TD funds shill. That misrepresentation of returns over several years is telling.
humble, don't be too quick to pounce. Call me a novice, right, or wrong, but don't call me a shiller. I got the averages based on the annual returns from 2003 to Sep 30, 2009 from the TD web site which grabs it's information from the Morningstar QuickTake reports.

TD CDN Index 25.9% 13.5% 23.0% 16.4% 9.0% -33.4% 29.3% 12.0%
TD US Index Currency Neutral 29.7% 10.7% 2.9% 13.6% 2.8% -39.3% 15.7% 5.2%
TD International Index 11.9% 9.8% 9.1% 24.4% -6.8% -28.6% 9.1% 4.1%


TD CDN Equity 23.7% 18.9% 26.2% 23.1% 10.5% -42.2% 39.7% 14.3%
TD Dividend Income 20.3% 13.4% 16.7% 13.2% 10.0% -28.8% 28.6% 10.5%
TD Dividend Growth 24.2% 16.8% 23.8% 15.9% 1.3% -29.9% 30.2% 11.8%
TD Monthly Income 21.3% 14.0% 13.4% 11.4% 3.1% -23.4% 27.6% 9.6%

I'm fully aware that these aren't to be confused with personal rates of return. And I guess I don't know what other rates I should use for the purpose of asking my questions. But I do wish to remind you of my point made in italics in my original post. At the end of the day, it's not the actual rates that are important for people on this board to provide their advice.
 

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Discussion Starter #8
scomac, you made some keen insights into my thinking...

You seem to be intent to inject some decision making into it by making a call on the US and international economies and currencies.
You've made a good point and I understand that this goes against the couch potato strategy. If I was starting at the very beginning, knowing what I know today, this would not even be a consideration. I would simply follow the couch potato strategy 100%. But since I started investing a few years ago (with very little knowledge), I now find myself holding some funds that I fear switching out of might not be a benefit to me. So since I didn't adopt a couch potato strategy from the beginning, I am being reactive based on my current holdings.



I suspect that what appeals here is the lower volatility and regular distributions. These will largely be a result of the bond component. You don’t have any bonds in your index portfolio, so a portion in the TD Canadian Bond Index could be added to help lower the volatility of the overall portfolio. A blend of the Canadian index and the Canadian bond index is a reasonable proxy for the TD Dividend Income Fund. (FWIW I understand your attachment to this TD fund completely as I used to own it for many years and it was one of my favourites.)
You are right. I have a very small bond/fixed income component in my portfolio and I'm leaning towards changing this. I think you've made a very good suggestion.


As I mentioned above, you can satisfy the desire to include an actively managed component within a passive index portfolio by designating a small portion to (an) active fund(s). Just ensure that what you want to include is truly actively managed in that the fund(s) has a low correlation to the major equity indices that comprise the bulk of your passive assets.
I'm leaning towards making 90% of my portfolio couch potato perhaps looking a lot like this:
TD Canadian Bond - 10%
TD Canadian Index - 50%
TD US Index Currency Nuetral - 20% - any thoughts on the regular fund vs. currency nuetral?
TD International Index - 20%

The bond component is still low at 10%. I'm 32 with still a long term investment horizon (this is under my RRSP)... maybe I'm not being conservative enough?

The remaining 10% of my portfolio would be active instead of couch potato. I think this satisfies my current thinking... which I am the first to admit could very well be flawed. :)
 

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You first need to figure out your risk tolerance and then decide how much of each investment type to buy... aka asset allocation.

The one problem I see with Scomac's point about buying an actively managed fund to satisfy your desire for active management is that you're are not the one doing the managing. You simply act as a passive fund holder. Is this sufficient to quelch your thirst to "manage" your investments?
 

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You need to use the geometric mean instead of arithmetic mean to evaluate past performance for a time series. That would be the compound rate of return.
Entering your numbers in a spreadsheet, I got:
TD CDN Index 9.77%
TD US Index Currency Neutral 2.78%
TD International Index 2.77%

TD CDN Equity 10.71%
TD Dividend Income 8.89%
TD Dividend Growth 9.80%
TD Monthly Income 8.41%

To evaluate the risk, you need to compute standard deviation. The standard deviation for TD CDN Equity is 26.40%, for TD CDN Index is 21.23%, so it's slightly lower risk.
I would say that the difference between TD CDN Index and TD CDN Equity is statistically insignificant and I would choose the one with the lower mer (the e-series funds have the lowest mer for TD funds, comparable with ETFs).
The same can be said about the performance of TD Dividend Income fund, TD Dividend Growth Fund and TD Monthly Income Fund compared to TD CDN Index. These three funds have slightly lower returns and slightly lower risks. However the differences are statistically insignificant.

All these funds have equivalent ETFs with lower mer, which can be traded with costs as low as $5/transaction. If you balance only a few times a year, ETFs are usually lower cost. For examples of ETFs, check http://ca.ishares.com/index.do. You can then compare the costs and returns with the TD funds.
 

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Discussion Starter #11
The one problem I see with Scomac's point about buying an actively managed fund to satisfy your desire for active management is that you're are not the one doing the managing. You simply act as a passive fund holder. Is this sufficient to quelch your thirst to "manage" your investments?
It's not my desire to manage my own investments that has led me to ask these questions. If I could turn back time, I would have adopted a couch potato strategy from the very beginning. But I didn't... in fact, if I told you how I chose funds when I first started, it would seem very foolish. But, hey, I was 22 years old, ignorant, and was thinking short term. I guess I was like most 22 year olds.

So here I am now, a couch potato... but being reactive and finding myself concerned about reallocating out of what may be a really good fund (that I purchased prior to becoming a couch potato) into an index fund that is certainly a sound decision, but might not be a better financial decision. So in a sense, going 90% couch potato may satisfy this concern of mine and I still have a long enough investment horizon to "smarten up" and go 100% should I determine that that is the way to go. :)

As for actually managing my own investments, I would do that in my TDW account after learning how to value and pick stocks. But I'm not going to jump into that right away. I don't want to buy a stock without first educating myself first and feeling secure with my buying decision. Otherwise, I'm just better off sticking with mutual funds/ETFs.
 

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wwunday, i do most sincerely apologize if you really are an individual human person.

but since when did 25-year-old males agonize wordily and endlessly with strangers over whether they should convert 10% of their investment savings accounts from one fund into a near-clone fund with a microscopic difference in yield ... because they had converted from one investment philosophy into a related philosophy ... and the microscrap didn't match the new philosophy ... although it actually had a better performance ... and should we wear our navy blue socks or our brown socks today ...

maybe you're a nice young man who should be hanging out at football games and dating bars, and who just happens to do an amazingly good impersonation of what a td marketing shill might dream up in a highly creative reach-out educational campaign to beat some sense into all these hordes of newbies who have been crashing the online brokers for nearly a year now.

you know how td's classy p. lovett-reid is doing her mini-webinars about how to use the big new research tools on the td's trading website? She's trying to prevent these same crowds of newbies from losing their money faster than 2008-09. To their everlasting joy, the discounters have managed to snag a huge population of brand-new clients, and now they're anxious to make sure all the new $$$ don't exit the firm pronto via trading losses.

coyly, madame lovett-reid assures us she doesn't know zip about how to run the td tools, let alone the td website. I'll bet.

and, coyly, it would also make sense for td to send a persona, a charming anonymous puppet, out onto message boards like this one to drum up attention to 1) how well td funds have performed and 2) how easy it is to have a portfolio full of them.

please permit me to apologize once again, wwunday, if you are a real human being. However, i do beg of you not to be offended when i say that i will follow your split portfolio philosophy. I will 90% believe you. But i'll keep a 10% doubt in reserve with the hypothesis that you might really be a clever td waterhouse hallowe'en scarecrow.
 

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Discussion Starter #13
:D

and should we wear our navy blue socks or our brown socks today ...
That would depend on the shoes you chose to wear today.

Okie dokie...

I have a new question and I'm already laughing because if humble doesn't already think I'm a td shill then he definitely will now... but so far everyone else has been able to answer my questions... heck, maybe even he can contribute. This should be an easy one and I thought the answer would have been easy to find myself.

I have a small RRSP with Manulife resulting from an RRSP savings plan with a previous employer. I'd like to transfer it all to my "main" portfolio so that I can consolidate and keep things simple. Oh, for entertainment's sake, I'll mention that I want to transfer the funds into my TD account. ;)

On both TD and Manulife's transfer forms they refer to Transfer Out fees, but I haven't been able to determine what the Transfer Out and/or Account Closing fee is. If it's significant then I may as well leave the funds where they are. Keeping everything in one portfolio is a nice-to-have, but if I don't then the power of spreadsheets make it easy for me to review all together.

Does anyone know what Manulife's Transfer Out fee is? Or even TD's and any other institutions since I imagine there would be a standard rate. It seems these things aren't explicit on their web sites.
 

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Does anyone know what Manulife's Transfer Out fee is? Or even TD's and any other institutions since I imagine there would be a standard rate. It seems these things aren't explicit on their web sites.
I don't know Manulife's transfer out fee but it is certainly not a standard rate. IIRC, TD Waterhouse charges $125 plus GST and I'd be surprised if Manulife's is not a comparable amount. My suggestion is talk to TD and ask them if they'll refund the transfer out fee charged by Manulife. If you're transferring $15 K or more, they might agree to a refund. Note the name of the CSR, send in your transfer application to TD and once the transfer is done, call in again and request the refund.
 

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CanadianCapitalist, thanks very much. That is a good idea. It's less than $15K, but it will be worth a try.
Hold on a second here. If this was a work pension, especially with employer contributions, odds are this is vested and locked in. You'll need to check with Manulife on the particulars... generally if it's a small amount you can cash it out or transfer it without much grief.
 

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Discussion Starter #17
That's a good point, mogul, but they aren't locked in. It's a personal plan.

Even if they were locked-in, I think you can transfer to another locked-in account at another institution. This is what happened at an even earlier employer. When I left the company, I transfered the funds to my bank. My contributions are in my personal RRSP and the employer contributions are in a locked-in RSP.

Now here's something strange. The funds with Manulife were originally in an RRSP and a DPSP under my group account while working at my previous employer. But when I switched it to a personal account, everything is under the same RRSP. Isn't it strange that the DPSP is not locked-in? I thought it would be the same as before where the employer contributions would be locked-in.
 

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Here's an idea of my portfolio along with average return since 2003 (used strictly for demonstration purposes and not intended to reflect my personal rate of return)

As osc pointed out, your math is wrong. You can't arrive at multi-year rates of return by averaging annual rates of return. Go to Globefund, Morningstar, or Fundlibrary and compare charts of the returns for the managed funds versus index funds. Funds like TD Canadian Equity are closet indexers that follow the index but return slightly less because of their management fees.
 

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Hold on a second here. If this was a work pension, especially with employer contributions, odds are this is vested and locked in. You'll need to check with Manulife on the particulars... generally if it's a small amount you can cash it out or transfer it without much grief.
I have this exact situation, about $2000, vested and locked with Manulife. I had been under the impression that there was nothing I could do with it until 65, although I'll admit I haven't done any homework on my options, because it was such a small amount.

What sort of grief would I run into, assuming a transfer to my 'main account' is possible as you imply?
 
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