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Couch Potato Investment Portfolio with regular rebalancing

  • 28-05-2021 8:51am
    Registered Users Posts: 997 ✭✭✭

    i often hear about the so called couch potato portfolio.

    Basically you decide what percentage of your cash you wish to invest in risky investments (like ETFs, Shares, etc) and what percentage you wish to invest in risk-free (cash on demand)

    Say for example you decide to split the investment into 50% risk and 50% risk free and you have €10000 to invest:

    * €5000 invested in an MSCI World ETF
    * €5000 left sitting in a bank account

    Now you forget about your investment and in 1 year you check your investment and see if the relationship is still 50% : 50%

    If this is not the case then you re-establish the 50% 50% relationship.

    Say your investment is now worth:

    * €2000 in MSCI World ETF (maybe there was a crash)
    * €5000 - this cash is the risk-free part of the investment

    Your total investment is now worth €7000

    In order to re-balance you will need to transfer €1500 from cash into the MSCI WorldETF

    After re-balancing your investment will be:

    * €3500 in MSCI World ETF
    * €3500 in risk free cash

    The advantage of re-balancing is that you trade anti-cyclical.
    You are investing in additional MSCI World ETF when their price is low.

    Long term you expect the price of your MSCI WorldETF to rise (minimun invest horizant is greater than 10 years).

    Does anyone here practice this investment philophosy and could you please share your personal expereinces.

    Alternatively, could you please let me know of an alternative.


  • Registered Users Posts: 3,088 ✭✭✭Static M.e.

    I have an alternative.

    Set aside an emergency fund in cash - Credit Union, Bank - somewhere you can get the money easily enough but that is not part of your day-to-day banking. A separate account for emergency's. How much of an emergency fund is needed is down to you but typically it is about 3-6 months wages.

    Once you have that step completed max your pension contributions.

    Think about overpaying your pension.

    Read up on the tax implications of investing.

    Invest the rest in an EFT which follows the S&P500 or All-world. I personally use the Vanguard FTSE All-World - Accumulating (VWCE). I do not think that investing in the above is a risky bet at all over the long term (10-20 years). I invest twice a year into the above because of the deemed disposal rules and the difficulty of trying to figure it all out in 8 years time.

    - this is just an alternative to start the conversation. Each step above is almost a separate discussion on its own.

  • Registered Users Posts: 2,251 ✭✭✭massdebater

    OP, if your time horizon is greater than 10 years, the 50/50 approach you mentioned is quite conservative. Not a bad thing necessarily but the cash portion will consistently lose its value due to inflation (5k 10 years ago worth more than 5k now). This will have a drag on your overall portfolio.
    Shorter term, having a portion in cash will help when the market is down but longer term, it's better to have more in the ETF.

    As for rebalancing, you can either sell some of the winning side and transfer to the other but this is probably only good if you never want to invest any other money. Also if you sell some of the ETF, that'll trigger a taxable event.
    You can avoid this by adding money to the "losing" side to bring it back into the ratio you're happy with

  • Registered Users Posts: 9,395 ✭✭✭Shedite27

    To be honest, I've never heard it called the couch potato portfolio, for me, the cash amoutn should be a number, not a percent. Say 3 months expenses is 6-8k, that should be the safety number in cash, maybe round it up to 10. I don't see the point in having more sitting in cash to keep it a nice ratio.

    3 months epenses at 7 days notice, rest in growth phase for me (I'd have a different approach once I get to 50).

    My own Pensions invests in 3 funds, split 70%/15%/15%. The numbers fluctuate, some years the 70% becomes 80%, another the 15% becomes 20%, It fluctuates, no need to rebalance constantly.