Personal Finance

The Yield-Hungry Couch Potato

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  • Mar 5th, 2012 11:22 am
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Newbie
Nov 2, 2010
28 posts
1 upvote
Calgary

The Yield-Hungry Couch Potato

About a year ago, I started to take a real interest in investments particularly the couch-potato strategy. I created a few different portfolios with RBC's DI practice account, and thought I would share my results on the Yield-Hungry strategy.

With a balance of $75,000 I invested exactly as the Canadian Couch Potato strategy outlined (http://canadiancouchpotato.com/model-portfolios/) - I believe it may have changed slightly since, nonetheless. I apologize if the means of posting the screen shots is a little crude.

It also seems RBC DI practice accounts cannot account for dividends, either as cash or DRIP so I've accounted for them manually (amounts pulled from google finance).

A screen shot of my RBC account:

[IMG]http://postimage.org/image/59j6v34yf/[/IMG]

As you can see, book value of $75,127.96 market value of $77,559.70, increase of $2,421.71

Dividend payout calculations:

[IMG]http://postimage.org/image/sia1nusqr/[/IMG]

So $75,000 results in $3260.58 cash (not drip) per year or roughly 4.34% return. That's a total gain (including the market value change) of $5692.32 or 7.56%.

I think that's pretty great, considering the low volatility of the funds (in market value) and the likelihood of dividend payout (the amount changed slightly on some, but all hit their monthly payout all year).

Thoughts, comments, feedback?

Stop reading here if you want, but I had originally looked at setting this up for my mom's retirement. Originally with Investors Group for years, with a bunch of junky high MER MF's that went nowhere. Lack of volatility is paramount, ultimately I wanted to give her better accessibility her savings (all of her banking is with RBC). Her pension will meet her living expenses, this is to cover things like emergency expenses, travel, that sort of stuff. I would probably simplify this portfolio, and focus on the top returning 4-6 funds. Again, lack of volatility is extremely important so if not this, I would probably look at a GIC ladder set up. The way I see it, base amount shouldn't fluctuate too much and the cash flow pays for a few trips a year without touching the principle. Does this set up seem to fit this situation? I don't want to commit her savings to this and miss something...
8 replies
Deal Addict
Oct 4, 2009
3590 posts
2954 upvotes
Montreal
With a 50% equity allocation, another 10% in preferreds and 22% in corporate bonds, your mother should be aware that she could lose over 30% of her portfolio in a severe correction(see 2008).

That isn't a low volatility portfolio for someone in retirement.
Deal Fanatic
Mar 24, 2008
6278 posts
2753 upvotes
Toronto
Uh oh... time to switch 50% to short term bonds!
Newbie
Nov 2, 2010
28 posts
1 upvote
Calgary
Well losing 30% certainly is something I would like to avoid, thank you for bringing that up. However, couldn't that simply be countered with a stop loss? At $10 a trade for RBC, it wouldn't be difficult to make that back by selling on its way down and re-buying when it recoups.

I would say as long as someone didn't fall asleep and not check on it for a couple of months, you should be able to spot that massive downward trend. In 2008 it took most of these funds about a month to lose that 25-30%.

But your argument is perfectly valid, thank you for pointing it out.

I think the yield hungry portfolio IS designed for someone in retirement though, no?
Deal Fanatic
Jul 23, 2007
5134 posts
4928 upvotes
AllPro wrote:
Stop reading here if you want, but I ha[/PHP]d originally looked at setting this up for my mom's retirement. Originally with Investors Group for years, with a bunch of junky high MER MF's that went nowhere. Lack of volatility is paramount, ultimately I wanted to give her better accessibility her savings (all of her banking is with RBC). Her pension will meet her living expenses, this is to cover things like emergency expenses, travel, that sort of stuff. I would probably simplify this portfolio, and focus on the top returning 4-6 funds. Again, lack of volatility is extremely important so if not this, I would probably look at a GIC ladder set up. The way I see it, base amount shouldn't fluctuate too much and the cash flow pays for a few trips a year without touching the principle. Does this set up seem to fit this situation? I don't want to commit her savings to this and miss something...
With what I've bolded above, I think you've already answered your own question. The last thing you want to do is mess up your own mother's portfolio. I bought a ladder of GIC's for her account ten years ago and haven't regretted it since. Her stipulation was that she did not want to take any risk in the portfolio and lose "any" capital. I listened to what she had to say.
Deal Fanatic
Mar 24, 2008
6278 posts
2753 upvotes
Toronto
AllPro wrote: Well losing 30% certainly is something I would like to avoid, thank you for bringing that up. However, couldn't that simply be countered with a stop loss? At $10 a trade for RBC, it wouldn't be difficult to make that back by selling on its way down and re-buying when it recoups.

I would say as long as someone didn't fall asleep and not check on it for a couple of months, you should be able to spot that massive downward trend. In 2008 it took most of these funds about a month to lose that 25-30%.

Sounds like you're day trading with her money. What would you put a stop loss at? $2.00 below a certain price? Once you hit that point, she'd have already lost money... does that strategy make sense if you don't want to take risk? I suggest you pull out and reinvest using a different strategy while you're still ahead.
Deal Addict
Oct 4, 2009
3590 posts
2954 upvotes
Montreal
AllPro wrote: Well losing 30% certainly is something I would like to avoid, thank you for bringing that up. However, couldn't that simply be countered with a stop loss? At $10 a trade for RBC, it wouldn't be difficult to make that back by selling on its way down and re-buying when it recoups.

I would say as long as someone didn't fall asleep and not check on it for a couple of months, you should be able to spot that massive downward trend. In 2008 it took most of these funds about a month to lose that 25-30%.
Market timing does not work. Stop losses will not help you. The whole point of a couch portfolio is its simplicity in letting the market work for you.

Say you do use stop losses, when do you jump back in? Every day you're out of the market you are losing money by not being invested. There is no way to know what will happen tomorrow, the next day, week or month. Looking in the rear view mirror will not help you see what's coming up ahead.
I think the yield hungry portfolio IS designed for someone in retirement though, no?
You specifically said she does not want volatility which is why I replied. Not everyone in retirement has the same risk profile. Even Dan B who is many years away from retirement included this note which you seem to have glossed over:

It may be suitable for investors in retirement, although it should be complemented with cash holdings such as GICs.

Perhaps part of your mother's portfolio could be in equities, prefs and corps but it's very unlikely the allocations should be as high as described on that page based on your description of her volatility tolerance. You won't be doing her any favours if she panicks and sells after taking severe losses. Don't substitute your own feelings about risk for hers.
Newbie
Nov 2, 2010
28 posts
1 upvote
Calgary
Thank you for the feedback everyone, it IS helping me make a better decision on this. First off, I am not currently nor I am looking to day trade with her account. This example was set up in a practice account only, and I thought after a year the data showed (barring another GFC/major market correction) that the strategy fits her needs - principle stability and some (minor) cash flow. However, something she is comfortable with is still my top priority.

I've looked in to the GIC ladder idea briefly, but does anyone have some personal experience/results they can share? What sort of maturity horizon did you go with, did you still see some amount of cash flow, did you still have enough access to the funds or were you constantly waiting for the next round to mature?
Deal Fanatic
Mar 24, 2008
6278 posts
2753 upvotes
Toronto
AllPro wrote: I've looked in to the GIC ladder idea briefly, but does anyone have some personal experience/results they can share? What sort of maturity horizon did you go with, did you still see some amount of cash flow, did you still have enough access to the funds or were you constantly waiting for the next round to mature?

Typically, you buy GICs for 1 year, 2 years... 5 years. GICs will start maturing every year starting next year and then you take that money and buy another 5 year GIC with it. So on and so forth.

You will not have access to your money and if you want that kind of flexibility, you should go with ING as they let you break your GIC early for no fee.

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