What is the Couch Potato Investing Method?
Learn more about couch potato investing, a low-effort, low-cost method for building a diversified portfolio of investments.
Updated 
5 min. read
Just like couch potatoes eschew going out in favour of streaming their favourite shows from the comfort of their ottomans, couch potato investors adopt a more laidback approach than their more actively engaged cohorts.
Also referred to as passive or index investing, couch potato investing requires less effort and time than traditional investing. The strategy is simple: invest in low-cost index funds or exchange-traded funds (ETFs) for the long-term, turn on autopilot, and check-in periodically.
Whether due to a tight budget, busy schedule and/or limited financial expertise, couch potato investing is a popular choice for many to reach their investment goals.
Why is couch potato investing so popular?
Though it’s been around for a while, passive investing seems to hold a steady interest and allure. And it’s not hard to see why.
Low fees
One of the primary benefits is the cost. Couch potato investing involves low-cost index funds or ETFs which represent nominal fees and transaction costs. Portfolios also require minimal effort to set up, making the process less costly overall. Keep in mind, an investment advisor is not a prerequisite to couch potato investing which can be attractive to budgeted and/or first-time investors with less money to spend.
Hands-off approach
The couch potato strategy is music to the ears of wanna-be investors with little time, desire or understanding of how to supervise their portfolio on a regular basis. Employing what many refer to as the “set it and forget it” approach, the strategy – as it involves building a diversified portfolio – allows you to step away from actively managing your investments. Over time, your investments can grow and compound without you actively buying and selling individual stocks. To be fair, you will still need to oversee the overall effort. But, with passivity the name of the game here, a hands-off approach makes it the perfect solution for anyone looking to simplify the process.
Easy to implement
Another advantage of passive investing is it’s simple to put into motion. For one thing, investing in index funds doesn’t require intensive research into assets, the market, or timing it effectively to predict the “winners.” Because you’re effectively investing in the total market overall. For another, it takes just a few steps to implement. In short, couch potato investing requires a lot less work (and hair-pulling) than active investing.
Diversified portfolio
Diversification is essential to couch potato investing, making the approach particularly attractive. Since indexes are made up of an array of companies in a market, you can technically build a portfolio that represents a balanced variety of bonds and stocks from different sectors and/or industries. What’s more, a diversified portfolio reduces the investment risk – bonus!
Higher returns
Diversification also increases the potential for higher returns. As a long-term investment strategy, a diversified portfolio of index funds or ETFs allows you to benefit from returns in a variety of market segments. Long-term growth is integral to the couch potato investment strategy, after all. And, while the market may fluctuate in the short-term, it tends to enhance its value over time.
How to set up a couch potato portfolio
Want to join the growing segment of couch potato investors? To get the most out of your passive approach, follow these steps.
Though couch potato investing is less risky than active investing, any investment falls along a risk continuum. So, as a first step, decide how much of a risk you’re comfortable with. And make sure your risk tolerance aligns with your investment goal – effectively the “why” of your investments (e.g., growth or income).
Next, select the index funds or ETFs consistent with your risk tolerance and investment goal. If, for example, you have a lower risk tolerance and are focused on income, you’re probably better off selecting index funds or ETFs that investing in bonds.
Once the ideal funds are selected, determine the asset allocation - the percentage of the portfolio that you want to invest in each asset class e.g., stocks, bonds, cash. Having a good sense of your time horizon will also help you decide how to divvy up your portfolio to reach your desired outcome. Of note, for those who prefer this approach, it may be worth looking at BMO’s ETF Portfolios, which allows an investor to mix different asset classes into one ETF, which is then rebalanced automatically.
Though hands-off is at the heart of this passive approach, make sure to review and balance your portfolio occasionally. That way you can ensure the asset allocation continues to meet your investment goals.
Couch potato vs active investing
How does passive investing compare to active investing and how do you know what’s right for you? The main distinctions come down to performance and cost.
Couch potato investing is designed to reproduce the performance of a benchmark index while active investing is focused on outperforming the market. Right off the bat, we can appreciate the reduced risk for the passive investor. A highly diversified portfolio, meanwhile, helps a couch potato hedge their losses.
Still, with greater control over their investments, active investors can leverage their own research and analysis when making decisions. For those who prefer to sit in the driver’s seat, the advantage is obvious. Plus, all that extra time and effort spent researching or analyzing the market can sometimes mean higher returns. (And if you’re someone who likes a bit of control - but not too much - there’s always the option to mix passive and active investing).
But let’s not forget that active investing necessitates higher fees and transaction costs which can undermine those returns and capacity to outperform the market. Thanks to lower fees and expenses, it’s perhaps not surprising that passive investing has been shown to outperforms active investing in the long-term.
Final Thoughts
While passive investing is not for everyone, it’s easy to see why the hands-off approach has become a popular one. If you want to build an investment portfolio with minimal effort, time, risk, money - and headaches - a couch potato strategy seems a good bet. To be sure, you will still need to do your research, assess your risk tolerance, allocate your assets, and measure them against your long-term investment goals. But, if done properly, your portfolio can help you achieve those goals with little hassle and much reward.
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