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?
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,
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.
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.
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!
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.
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)
