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I recently came across the Couch Potato Portfolio concept and was happy to find an investment strategy that made sense to me. Its origin seems to be the Canadian version, and it has been translated for investors in the U.S., but I'm in Europe.

I can't find any good info on translating the Couch Potato concept to Europe. Are there fundamental reasons for this? Are fees higher, or are index funds not as popular in Europe? Has it just not been done yet? How could this be approached?

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    If you're asking this question I think you should learn more about investing before you invest any of your money. – Victor May 11 '13 at 21:00
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    I'm not investing yet. I'm simply learning about different approaches, and wondering why there is very little information to apply simple portfolio strategies in Europe. It sounds like you would be able to share more knowledge than you let on - why not simply say what about my question makes you say this so I can learn? – Thomas Vander Stichele May 11 '13 at 21:03
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    Well you basically would invest 50% of your money into an index fund that traces your country's local index, e.g. the DAX, and then 50% into an index fund tracing government bonds. I am not a fan of this couch potato investing and am more into active investing, but reading your link on the subject, I would find it easy to interpolate such a strategy for the Australian market or for any other local market. So maybe you should read and understand a bit more about your local markets before even contemplating investing, including into a lazy person's investment strategy. – Victor May 11 '13 at 21:16
  • I think this is a good question. – Chris W. Rea May 11 '13 at 22:54
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    @all I think this is a good question too, so I'm trying my hand at this whole bounty deal. I tried to keep it pretty general, but hopefully more people will chime in to get some ideas moving. – John Bensin Aug 15 '13 at 14:28
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+50

The question is asking for a European equivalent of the so-called "Couch Potato" portfolio. "Couch Potato" portfolio is defined by the two URLs provided in question as,

  1. A 50:50 allocation of assets between
    • a long position in an stock fund; and
    • a long position in a fixed-income index fund.
  2. Holding these two long positions for five years at a minimum, and taking no other action besides re-balancing back to a 50:50 ratio of asset value at some periodic interval of a year or maybe six months.

Criteria for fund composition

Fixed-income: Regardless of country or supra-national market, the fixed-income fund should have holdings throughout the entire length of the yield curve (most available maturities), as well as being a mix of government, municipal (general obligation), corporate and high-yield bonds.

Equity: The common equity position should be in one equity market index fund. It shouldn't be a DAX-30 or CAC-40 or DJIA type fund. Instead, you want a combination of growth and value companies. The fund should have as many holdings as possible, while avoiding too much expense due to transaction costs. You can determine how much is too much by comparing candidate funds with those that are only investing in highly liquid, large company stocks.

Why it is easier for U.S. and Canadian couch potatoes

It will be easier to find two good funds, at lower cost, if one is investing in a country with sizable markets and its own currency. That's why the Couch Potato strategy lends itself most naturally to the U.S.A, Canada, Japan and probably Australia, Brazil, South Korea and possibly Mexico too.

In Europe, pre-EU, any of Germany, France, Spain, Italy or the Scandinavian countries would probably have worked well. The only concern would be (possibly) higher equity transactions costs and certainly larger fixed-income buy-sell spreads, due to smaller and less liquid markets other than Germany. These costs would be experienced by the portfolio manager, and passed on to you, as the investor.

For the EU couch potato

Remember the criteria, especially part 2, and the intent as described by the Couch Potato name, implying extremely passive investing. You want to choose two funds offered by very stable, reputable fund management companies. You will be re-balancing every six months or a year, only. That is four transactions per year, maximum. You don't need a lot of interaction with anyone, but you DO need to have the means to quickly exit both sides of the trade, should you decide, for any reason, that you need the money or that the strategy isn't right for you.

I would not choose an ETF from iShares just because it is easy to do online transactions. For many investors, that is important! Here, you don't need that convenience. Instead, you need stability and an index fund with a good reputation. You should try to choose an EU based fund manager, or one in your home country, as you'll be more likely to know who is good and who isn't. Don't use Vanguard's FTSE ETF or the equivalent, as there will probably be currency and foreign tax concerns, and possibly forex risk. The couch potato strategy requires an emphasis on low fees with high quality funds and brokers (if not buying directly from the fund).

As for type of fund, it would be best to choose a fund that is invested in mostly or only EU or EEU (European Economic Union) stocks, and the same for bonds. That will help minimize your transaction costs and tax liability, while allowing for the sort of broad diversity that helps buy and hold index fund investors.

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    Good answer; I was hoping for an answer that gave a good overview, instead of just listing a few funds, and your answered delivered. – John Bensin Aug 22 '13 at 15:36
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    Yay! Thank you, @JohnBensin! It was fun. I kept thinking of baked potatoes wrapped in foil jackets, on a sofa, with a Bloomberg terminal in the corner. There really isn't any harm in being a passive investor. The danger is in doing what my uncle does: Buying unhedged calls on AMZN with merely a (casual) intuitive understanding of options! – Ellie Kesselman Aug 22 '13 at 22:47
  • How do you buy from funds directly in Europe? What is the website? – Cloud Feb 26 '18 at 11:45
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If the 50% bond component is composed of short-term riskless assets, such a couch-potato portfolio is a form of "Fractional Kelly" investing.

The questioner will find several articles on this, and given an expected equity return (above the bonds), and volatility, he should be able to choose how much he wants to keep in each asset class.

If the investment is long term, or if he is not drastically risk averse, then the questioner could find that he prefers 100% equities. In this case there is no re-balancing to do, making this a don't-even-need-to-get-out-of-bed.portfolio. In fact, over long time scales, just not bothering to re-balance tends to allow the equities to take over and have an increasingly similar effect-:)

There are however a few gotchas in Europe.

Firstly, funds, tend to be slightly more expensive. You might even find that iShares are the cheapest, and you should be able to find something with international exposure or otherwise low volatility.

Also, the Greek precedence indicates that EU bond holders can loose 75% of their value, and cannot be regarded as riskless assets. On the other hand, investing in bonds denominated in other currencies increases volatility. I would suggest looking for a currency-hedged ETF to solve this problem. Anyway, I think the questioner is going in exactly the right direction in looking for a portfolio which looks after itself, and wish him many happy years sitting on the couch.

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Here's my take on the couch potato for Europeans... I believe might be valuable for many European investors seeking a really easy strategy. Besides the yearly rebalancing and an investment horizon +15 years, there's very little to do!
 

Criteria for fund composition

I choose only physical low-expense ETFs with +100m in assets and...

Fixed-income: Same as the answer above. Most available maturities) with a mix of government, municipal and corporate bonds.

Equity: Combination of developed countries and Emerging markets worldwide with a focus on European stocks to limit the currency risk.
 

Portfolio                                                                       (total MER:0.15)

Europe Stoks  

30% - Lyxor STOXX Europe 600 (DR) UCITS ETF C-EUR                (MER:0.07)  

World Stocks 

49% - db x-trackers MSCI World Index UCITS ETF (DR) 1C           (MER:0.19)  

6% - db x-trackers MSCI Emerging Markets UCITS ETF (DR) 1C    (MER:0.20)  

Europe Bonds  

15% - SPDR Barclays Euro Aggregate Bond UCITS ETF                 (MER:0.17)

  • Do you have a citation for this, or did you create it on your own? – RonJohn Jan 28 '18 at 2:34
  • Just made it myself with the data available here justetf.com/en. You can double check the MER just searching the ETFs name – MrSlash Feb 1 '18 at 19:21

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