Sunday, October 12, 2014

TD Monthly Income beats couch potato portfolios

While still a young man back in the late '60s, I bought a two-seater English roadster, a Morgan. Sadly, recently I had to sell my lovely little car. Doctor's orders. But, I have kept many of the friends I made while driving the beautiful heritage sports car. Yesterday I bumped into a couple of those friends and we got to talking about our investments and our portfolios.

We should have kept our talk to cars and not stocks. Cars like Morgans are proving a better investment than equities at the moment. My friend confessed his portfolio has given back all the gains accrued since last April.

He said he was still considering going the "couch potato" route when it comes to investing. He has read a lot about the Canadian Couch Potato approach and the claims are enticing. Invest and forget. Keep management fees low and maximize profits.

I told him I'd been looking at the couch potato approach for years, too. I've even owned some of the recommended ETFs. I have not been impressed. Last January I went so far as to set up some imaginary portfolios using software offered by TD Waterhouse. Today not one of those ETF based portfolios is besting my personal portfolio, a mix of mostly equities with a few ETFs and a couple of mutual funds.

Let's take a look at the Canadian Couch Potato. If you click the link, you will discover that Option 1 of the couch potato approach is not a mix of ETFs but a single mutual fund: Tangerine Balanced Portfolio (INI220). With an MER of only 1.07% this low cost fund closely mimics the portfolio allocation of the couch potato portfolios.

If you had put $10,000 into INI220 at its inception, Jan. 10, 2008, you'd have $13524 today (Oct. 12/2014). Not bad but not great either. If you'd have put your ten grand in the TD Monthly Income fund (TDB622) you would have a thousand extra dollars according to figures provided by the Globe and Mail.

So much for Option 1. You saved money on the management fee but it was a costly savings. In this situation, spending approximately an extra half a percent would have put an extra grand in your pocket.

Let's move on tho Option 2 which suggests using TD bank e-funds to create a low maintenance cost portfolio. A mix of 20% each of TDB900 (Cdn. Idx), TDB902 (U.S. Idx), TDB911 (Int'l Idx) plus 40% of the Canadian bond fund TDB909 is the couch potato recommended portfolio. In this case your ten thousand would have grown to $13484.19. For all the ballyhoo about index funds, the Tangerine Balanced Portfolio fund bested this mix of index funds and, of course, the TD Monthly Income mutual fund beat both.

So much for Option 2. It was beaten by two mutual funds: Tangerine Balanced Portfolio and TD Monthly Income fund. It seems saving money on management fees does not always translate into greater investment success.

How, did the other options do? I don't know. I haven't done the calculations. That said, the Complete Couch Potato puts 10% of the portfolio into real estate in the form of the ZRE ETF from the Bank of Montreal. I am familiar with ZRE and I am not impressed. Why? It takes an equal weighted approach to investing in REITs and there are REITs I personally don't want to own. Buy an ETF like ZRE and you may own some stuff you don't want to own.

If you are going to insist on buying an ETF for your REITs exposure, I like the iShares product XRE. XRE has climbed from $15.10 to $16.10 in the same period. An increase of 6.62% compared to 6.4% for ZRE -- essentially a wash -- and both ETFs yield approximately 5%. So why do I like XRE better, iShares take a market weighted approach rather than an equal weighted one. Less of the investments I don't want to own are hidden in XRE.

I am not putting all my money in either ETF. I am buying some REITs directly. More bang for the investment buck. The extra volatility is offset, for me, by the increased potential for capital gain and increased monthly income. Dream Office REIT at its present price looks good to me as does Chartwell Retirement Residences. H&R Real Estate Investment Trust is anther REIT, I believe, is worth a look.

I dislike ZUT, the utilities ETF from the Bank of Montreal, for much the same reason that I dislike ZRE. The equal weighted investment approach. I don't want to own even one share of Just Energy. Yet, if a buy ZUT with its equal weighted approach I'd get more Just Energy stock than I would ever want in my portfolio.

Ten years ago, Just Energy was at $16. Five years ago it was at $13.60. Today it has dropped to $4.98. I feel the high dividend of Just Energy comes at a very steep price. In March of this year ZUT had 9.6 percent of its money in Just Energy and only 8.4 percent in Fortis. That allocation is just nuts, in my humble opinion.

Why? Well, ten years ago Fortis closed at $15.63. Today it is hitting $35.37. The Fortis dividend can be counted upon and should grow over time. I'd suggest one could do better dividing one's utility money between Fortis, Emera and a couple of other strong utility stocks and leaving it at. This is one case where I see the ETFs offering increased risk because of the myriad number of holdings in the ETF. Buy a sampling of the strong utility companies and leave the remainder to others.

If you really must have an ETF, I'd go with XUT. About a full 20 percent of the iShares utilities ETF is invested in Fortis. Check out the top holdings in XUT. I think you may be pleasantly surprised by how heavily weighted it is toward the hight quality utility equities. I may still buy a XUT if I'm feeling a wee bit lazy.

Do you recall the Money Sense Classic Couch Potato portfolio? It was an equal mix of XIU, XSP and XBB. If you had put a hundred grand in this ten years ago, you would have $143,179.38. Not bad but if you had instead put you money into the TD Monthly Income fund you would have $144,411.50. Not a big difference but I can do a lot with $1200 plus dollars.

If I did the calculations for all the different permutations of no-brainer portfolios, I'm sure some of them would come out ahead but there is no promise that they will continue their winning streaks. And some of them have been modified over the years. Clearly, even the folk behind these portfolios have modified their approach with time.

My portfolio is very volatile. When the markets are falling, I am sure it falls farther the TDB622. This is not the time to sell my stock and move to the TD Monthly Income fund. When the markets recover, my volatile portfolio will climb and then it will be time to rethink investing more in TDB622. I am leaning toward increasing my TDB622 allocation and upping my portfolio exposure to REITs and utilities with some equity holdings in the hopes of kicking up the dividend payout while staying away from extreme volatility.

Maybe I'll get a chance to blog more on this later but for now I'm going to post this and get it up early even if only half written. I want to partially answer some of the questions raised by my Morgan-owning friend.

p.s. In doing my last calculations I made sure that I was NOT reinvesting the monthly dividends from the TD mutual fund. That would give the fund an unfair advantage. If you are interested, if the monthly payments had been reinvested using DRIP (dividend reinvestment plan), today that original $100,000 would be worth almost double at $198,491.30. Amazing.

And if you had retired early and were taking 4% ($4000) out of the plan annually, after removing $40,000 in the last decade you would still have $143,886.13 in the plan.


  1. I believe investors need some perspective on the value they are receiving for their fees (MERs).

    I took a quick look at the TD Monthly Income fund and I think an investor could easily replace that product with a mix of 40% XBB (MER = 0.33%) + 60% ZDV (MER = 0.35%). The MER on TD Monthly Income is about 1.50%.

    My suggested approach saves almost 1% in fees, that’s saving $1,000 for every $100,000 invested every year as you know.

  2. I liked your suggestion and I once would have simply agreed. What has weakened my resolve has been watching the TD Monthly Income beating index-based portfolios time and time again. If you had opened your suggested portfolio on Oct. 28/2011, the earliest posted entry for ZDV that I could find on the Globe and Mail site, today you'd have $108,205.25. I'm assuming the Globe calculator does not factor in a DRIP. The TD mutual fund would have delivered $119,109 over the same period. If the TD monthly payments were rolled over using DRIP, you'd have $127,733.

    I believe an investor is getting very good value for their MER expense with the TD fund.

    1. All true enough. The history for ZDV is rather short and weak and I would expect the same thing from the G&M calculator. That said, TD monthly income is a stud and it's hard to argue with the results.