Couch Potato, but finding myself a bit Attached

6013 Views 18 Replies 9 Participants Last post by Ben, Oct 30, 2009

Wealthy1Day

Discussion Starter · Oct 24, 2009

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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osc

· #2 · Oct 24, 2009

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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osc

· #10 · Oct 25, 2009

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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