Indexers Are Terrible At Indexing

Despite all of the evidence that low cost passive investing outperforms actively managed portfolios, many investors still cling to the belief that an active approach can help steer them through turbulent times in the market.

Even investors who have taken the plunge into index funds and ETFs can’t help themselves when faced with uncertainty. Emotions take over, as do our instincts to tinker with our investments to try and optimize performance.

Earlier this month, Dan Bortolotti updated the investment returns from the ever-popular Canadian Couch Potato model portfolios.

Despite Dan’s best efforts to explain that these new and simplified portfolios should be used as part of a long-term investment strategy, the overwhelming number of comments from readers suggests that it’s nearly impossible for indexers to simply set-it and forget it.

Here are some of the questions that index investors asked Dan in the comments section:

I’m worried

I plan to retire in about 5 years so my question is; in this market when should I buy in? Is now a good time or should I wait some more? I know its impossible to identify a market bottom but I’m worried about buying in and having my equities drop 10-15%.

I’m waiting for the bottom

If it was you and you were sitting on some cash, would you invest in the Vanguard ETF portfolio now or wait and watch for some further downturn in the markets?

I don’t have a crystal ball, can I look through yours?

I am ready to implement your vanguard couch potato methodology. Realizing that no one knows what is going to happen in the market tomorrow, so to speak, would it be best to implement the portfolio now or wait until oil settles down?

I read too much

Given how the start of 2016 has been, how much should I be paying attention to the bear-ish news that has been coming out?

Am I crazy?

I know I cannot try to time the markets, and I have told myself over and over to just invest and forget it, but am I crazy to do this at the moment? I don’t know enough about the markets to know if there are any key dates in the next week or month that could affect anything? Is 25% in Canadian index a bad move if I am sinking a large chunk of money in my portfolio right now?

I’m bullish on the Canadian dollar

Investing a large amount now in a non-currency neutral US index fund seems risky since there could be much more room in the future for the Canadian dollar to move higher – and stay higher for a long time – rather than move down from where it is currently.

I’m locking in currency gains

For investors who have used currency hedging to date but now want to permanently drop this practice, would it be a bad time now (with a 68 cent Canadian dollar) to switch their investments over to non-hedged?

I’m staying the course…I think

The Tangerine Equity Portfolio has been hit hard this year so far, especially with a maxed-out TFSA. But I guess just stay the course and don’t panic…right…RIGHT!??

Tell us what to do, Potato man

When can we expect to see CCP’s 2016 model portfolios?


Love the site. When will 2016 model portfolios be published?

Me? I’m burying gold in the backyard and stocking up for the end of days

I’m intrigued as to what your recommendations are, going forward into 2016 where it seems likely the giant equity gains we’ve seen over the past 8 years, are likely to be very much muted now the QE bull is truly dead. Are you thinking to operate much the same and just accept the lower % gains or that the fundamentals of indexing will need to change to try and find yield?

Investing is hard

Indexing is certainly easier than picking individual stocks but it’s hardly a hands-off way to invest. There’s the tricky yet crucial act of rebalancing, either by adding new money or shifting assets to get back to a target allocation.

Rebalancing is counterintuitive, as it often means selling your winners and adding more money to your losers. Andrew Hallam, author of Millionaire Teacher, says that investors should rebalance their portfolios once a year, meaning that if you started 2015 with a portfolio equally spilt between a Canadian index, a U.S. index, an International index, and a bond index should have the same allocation now:

That means ignoring reports that a certain currency or market will keep falling through the floor. It means going against your gut. It means trading some of last year’s winners for the struggling Canadian index. This might sound like watering weeds and pulling flowers. But the strategy works – especially when markets are volatile and long-term returns are similar.

Investing is hard, and I’ve argued before that investors should consider a robo-advisor to manager their investments. These sophisticated online tools can make rational investment decisions for you based on your risk tolerance and target asset mix, rebalancing according to a pre-defined methodology rather than reacting to the news and succumbing to individual emotions.

Sure, many do-it-yourself investors will scoff at paying an extra fifty to one hundred basis points to have an algorithm manage their investment portfolio, but they often fail to consider the cost of letting their own behavioural biases and emotions dictate their investment strategy – straying from their original allocation, riding the temporary winners, abandoning yesterday’s losers, and often doing nothing at all, paralyzed by fear while waiting for “things to calm down”.

Final thoughts

It’s hard to stick to an investing strategy for the long term, through thick and thin, and not obsess over whether you’re doing the right thing. I know I couldn’t do it as a dividend investor. It killed me to see the likes of Canadian Oil Sands fall 50% or more, slashing the dividend along the way.

Indexing better suits my temperament. I don’t check my portfolio daily, or even care what happens in the markets from week-to-week. I’m confident that over the very long term, my all-equity portfolio gives me the best chance to amass a comfortable nest egg for retirement. But indexing isn’t without its own pitfalls.

As a DIY investor I still need to exercise my own judgement as to when to rebalance, what to do with new contributions, and how often to add to my portfolio. I have to ignore the temptation to “do something” when the Canadian dollar falls, or the economy slips into recession.

I’ve decided that I can do that competently at this point, but for anyone who stays awake at night asking themselves some of the questions above, I urge you to consider a robo-advisor to manage your investments while you focus your energy on the aspects of your financial plan that you can control.

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  1. John on January 25, 2016 at 6:23 am

    I’ve abandoned investing in individual stocks for the indexing game and I am so far pretty satisfied I did. I sold all my stocks and mutual funds and started buying ETF’s in late 2014 and during 2015. Even though it is hard to see the dip in the current market my investments are still up, ever so slightly, which did give me the opportunity to buy some more at the prices from last year when I didn’t have anymore to put in. This is called “Cost averaging”, something you don’t hear to much off these days but it really helps and I am going to better off once the markets regain the levels they did in December, which they will. They always do. Just look at the historical figures. Just give it time and buy in while you can.

    • Echo on January 25, 2016 at 9:55 am

      Hi John, that’s a great attitude. Just stick with your plan and you’ll be fine.

  2. Big Cajun Man (AW) on January 25, 2016 at 6:33 am

    Yeh, it is interesting as most folks I talk to about Index’ing still ask the questions like, “When is the best time to buy in?”, and “Should I be taking my profits now?”

    In the words of Indigo Montoya, “You keep using that word, but I don’t think you know what it means”.

    • FletcherLynd on January 29, 2016 at 2:36 am

      Inigo Montoya

  3. Grant on January 25, 2016 at 7:28 am

    Yes, indexing is simple but not easy. Although asset allocation and costs are important, avoiding behavioural errors is the most important determinant of an optimal outcome.

    • Jamie on January 25, 2016 at 8:15 am

      I have to agree with Grant, we tend to focus on inconsequential details and as a result we are to blame for our portfolio’s less than mediocre performances. Ignore the noise, buy your indexes’ fund units every month and time will take care of the rest.



  4. Jungle on January 25, 2016 at 7:50 am

    Over the last year, I sold all our stocks and moved to ETFs.. This was really hard to do, especially holding positions since 2010. What made me switch was tracking my returns VIA XIRR and realizing I was not always beating the stock market, but taking a lot more risk and not getting the reward. Sure I had portfolios that outperformed, but also had some that underperformed, and together I was getting market returns. Never knew when to sell or buy or what the right thing to do was. Consider myself lucky with timing overall because the market was cheaper. Hard to diversify with TSX- this shows up when one sector gets hit (IE Oil) so if you’re over exposed, your more at risk. Who knows what sector will come next but best to be well diversified. Slow and steady wins the race.

    Robb I noticed you are all equity, just wondering if you’ve done any reading on portfolio theory- specifically what happens to returns when stocks are added to bonds.

    I think this is shown well in CCC recent portfolio returns. The 20 year return of an assertive portfolio (25% bonds) is the same as an all-equity portfolio.

    Plus the benefit is less sequence of return risk. Imagine we enter a 20 year secular bear market and your retirement date is planned in the middle?

    • Echo on January 25, 2016 at 10:16 am

      Hi Jungle, thanks for your comment. I have seen the model portfolio 20-year historical returns and the performance of the conservative portfolio (70% bonds, 30% equities) is remarkably close to the performance of the aggressive portfolio (of 10% bonds, 90% equities). Of course, that was during a period of falling interest rates and so bonds did exceptionally well over that time. There’s no reason to think that stocks and bonds won’t return to more historical averages –

    • Richard on January 25, 2016 at 10:43 am

      Bond returns over the last 35 years are not necessarily applicable to the near future, unless interest rates go to -15% 🙂 That 20 year secular bear market might just be in bonds. They can still be useful if you need a more stable portfolio but they will lower long-term returns.

  5. Alissa on January 25, 2016 at 8:17 am

    I have invested my money as per the TD eseries couch potato balanced portfolio….I rebalance every 3 months- is this too often? Why or why not? 🙂

    • Grant on January 25, 2016 at 9:12 am

      Alissa, Vanguard looked at this question and suggested taking a look just once a year and rebalancing only if any of your funds have gone off target 5% or more.

      • Echo on January 25, 2016 at 10:17 am

        Hi Alissa, what Grant said 🙂

    • Darren on January 25, 2016 at 11:46 am

      Only rebalance when one or more of the funds is up or down by more than 5%

  6. Richard on January 25, 2016 at 10:48 am

    With experience, and learning more about the markets, I have become less and less interested in trying to guess things like these. There’s always a good chance that I’ll be wrong and I don’t want to bet my portfolio on it. Better to just have a simple plan and keep moving forward no matter what anyone else says.

  7. Jungle on January 25, 2016 at 1:10 pm

    I must say ever since selling all my stocks, I am less worried about whether potash is going to cut their dividend, or seeing IPL make huge swings down every day and watching the impact it makes on our portfolio.

    • Ron sinopoli on January 25, 2016 at 1:57 pm

      Good for you!
      Now invest it 1% bonds and you will be very wealthy in 1,000 years

    • Echo on January 25, 2016 at 2:36 pm

      Hi Jungle, that’s so true. I remember agonizing over stocks like COS. It’s nice that I no longer have to fuss over individual stocks.

  8. amber tree on January 25, 2016 at 3:20 pm

    It can be hard to index well while in asset gathering phase: Ideally you do not think and invest each month. I try to do this by automating what I can automate and I buy each first week of the month. IT keeps it automatic, mechanical.
    For the times where the markets really drop, I have a safe heaven that makes me sleep at night.
    For the need to perform and have market timing, thrills, I use my play money

  9. Jungle on January 25, 2016 at 3:30 pm

    Won’t be switching all to 100% bonds though-still have many years left of investing .Have 8% of portfolio in bonds right now . Working to rebalance over the next few years until I reach about 25-30% bonds. Using vab or Xbb.

  10. Kyle @ Young and Thrifty on January 25, 2016 at 10:50 pm

    Another great article Robb, well done! I am constantly getting emails about this kind of thing as well… You know what group seems to get it for some reason? Engineers. I’ve randomly helped like a dozen engineers, and they seem to just respect the inherent logic when it comes to indexing. Teachers on the other hand…

    • Echo on January 26, 2016 at 12:07 am

      Thanks Kyle! I would’ve thought the opposite about engineers; that they’d want to tweak and optimize their portfolios TOO much.

    • Jamie on January 26, 2016 at 5:54 am

      Teachers what? Please finish that sentence, I’m very curious about what your take is on this group of investors. I’ve noticed a certain level of ignorance as most assume that their golden pension will be more than plenty to take care of their retirement years and so, they don’t seem too concerned with self-directed investments.

  11. joanne dela cruz on January 27, 2016 at 11:34 am

    Keep on buying TDB900?

  12. Stephen Weyman on January 28, 2016 at 7:38 am

    I’m struggling with an interesting aspect in regards to index investing right now Robb that I don’t think is just me worrying too much – it is just a result of me not planning out my indexing strategy well enough because I’ve been too busy doing other things.

    I started DIY index investing in 2008 and back then there were less easily accessible globally diversified non-hedged Canadian ETFs. As a result I ended up overweight in Canadian index funds. Since then I’ve been slowly trying to rebalance things so I’m roughly 40% Canadian, 30% USA, and 30% ex-NA (15% developed and 15% emerging). I was doing this with new money but haven’t been investing much new money because I’ve been focused on growing my business and taking personal growth risks. Investing has been on the back burner.

    So unfortunately I was a bit too slow with this huge Canadian market crash/lag behind the rest of the world. The Canadian markets have kind of re-balanced for me a bit. The problem is I’m still overweight in Canada even after this drop and I’m starting to invest even more new money. I want to invest in Canada (which is what would normally happen when markets are down if I was balanced properly before it happened). However, to reach my target asset allocation I need to invest in my “winners”. That goes against everything you’re supposed to do when you’re taking your emotions out of it 🙁

    It’s quite a pickle as I can’t decide if it is more important to even out my diversification or invest in the beaten up sector at the risk of being too overweighted in Canada.

    I’m leaning towards just reaching my target asset allocation faster – but it REALLY hurts to do it because it goes against most of what the DIY investing community says you should do (except being diversified).

    • Richard on January 28, 2016 at 11:20 am

      It never hurts to follow your plan. It may or may not be the perfect move but it will work out. I started investing more in the stock market after 2009, which often meant buying assets that had gone up.

      Investing a little more in the Canadian market wouldn’t be the worst thing either. If you’re considering doing it I would ask yourself this question: what will you do if you invest more in the Canadian market and then it drops another 20%? That is a very real possibility. If you’re worried about that happening then it wouldn’t be a good move.

      If you can’t decide you can always take the new money and divide it according to your target allocation.

      • Stephen Weyman on January 28, 2016 at 1:13 pm

        That’s a good suggestion about just following my desired asset allocation for all new money Richard. Who knows what’s going to happen in the short term. Eventually Canada and other markets should converge somewhat again and I can rebalance when that happens.

        • Richard on January 30, 2016 at 11:59 am

          If you always add new money according to your allocation, you will eventually need to rebalance by adding more to an asset that’s gone down recently. Until then you may face a higher chance of short-term losses.

          Diversification works well. Recently I was surprised to see that the overall loss in my portfolio was nowhere near what was happening in the worst-performing markets.

  13. Marko Koskenoja on January 29, 2016 at 8:43 am

    A great article Robb! It shows how insecure we humans can be. I’m 55% FI/45% Equities and I am only down 4% YTD yet I have questioned what I might have done differently.

    Do you really think robo-advisors use sophisticated algorithms? I spoke with a number of them prior to going from TD’s Strategic Managed Portfolio to a DIY model using Vanguard & BMO ETF’s . My impression was that many just used staff and spreadsheets on the back-end but had a nice user interface on their website and/or apps. Google they are not.

    I was astounded when my former TD advisor would have to fax changes to my portfolio to TD HQ! That was in 2014 & 2015!

    The Nortel implosion revealed that Nortel HQ had been managing the books of the various enterprises they had acquired using independent spreadsheets.

    TD DI recently updated their user interface but the underlying mechanics are much the same – now I get booted out regularly when tabbing through account details. They also lost my “voice is my password” settings several times – this makes for frustrating customer interactions.

    As a career telecom and technology guy I have seen a lot of lipstick on pigs.

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