I get plenty of questions about my two-ETF retirement portfolio. Some advisors think it’s too simple – stating that a properly diversified portfolio should contain at least six asset classes. Further to that, some clients and blog readers ask me whether it’s wise to add a dash of gold, REITs, or even farmland to their portfolios – usually after reading doom-and-gloom advice from the likes of Peter Schiff or Jeff Rubin.

My two-ETF solution, which is made up of Vanguard’s VCN and VXC, is about as diversified as it gets when it comes to global equities. VCN holds 231 large-, mid- and small-cap Canadian stocks, while VXC holds 5,150 stocks from across the globe in developed and emerging markets outside of Canada.

Related: Why investors should embrace simple solutions

I’ll concede that an all-equity portfolio is not appropriate for most investors. My portfolio is missing a bond ETF, which is included in the popular three-ETF model portfolio listed on the Canadian Couch Potato blog.

I chose two equity ETFs for a few reasons:

  1. Stocks have outperformed every asset class over the very long term.
  2. I trust myself not to panic when stocks are tumbling.
  3. I treat my defined benefit pension and my online business as the fixed-income portion of my retirement – meaning I can take more risk with my portfolio.

So most investors should add the bond ETF, and that still makes a nice and simple three ETF solution, which is all an investor needs for a long-term retirement portfolio.

In the latest edition of MoneySense, Dan Bortolotti asked why, even though the Couch Potato portfolio is cheap, easy to manage, and proven to perform, do investors still want to tinker with it?

Related: Why I simplified my investment portfolio

Dan gets similar questions from his readers, saying things like:

“I like your Couch Potato portfolio, but I would like to make some changes. What do you think about adding some gold, small-cap stocks, commodities, real estate, global bonds, sector ETFs, infrastructure and maybe some blue-chip stocks to the mix?”

Bortolotti is only slightly exaggerating but says when it comes to investing many people seem bent on making their portfolios needlessly complicated.

Mebane Faber’s new book, Global Asset Allocation, dispels the notion that the secret to investing is about finding the optimal portfolio mix. He looked at seven popular portfolios, including the Permanent Portfolio, the Endowment Portfolio, and the All Season Portfolio, and compared their historical returns to a traditional balanced portfolio made up of 60 percent stocks and 40 percent bonds.

Which strategy won? All of them performed similarly well – the inflation-adjusted annual returns ranged from 4.12 percent to 5.67 percent.

The key takeaway: as long as you get the big decisions right by keeping your costs low, broadly diversifying your portfolio, and sticking with your strategy for the long term, you’re going to be fine. The endless tinkering, optimizing, and searching for an edge will more than likely lead to higher costs and poor behaviour – which will result in worse returns.

RelatedHow behavioural biases kept me from becoming an indexer

So that’s why I’m sticking to my super-simple two-ETF solution. It has all the diversification I need with close to 5,500 stocks from around the world. The fees are extremely low; VCN has a MER of 0.06 percent while VXC has a MER of just 0.23 percent.

I’ve got the basics down – I’ll beat nine out of 10 investors on fees alone. Is it worth the time and effort to add and rebalance additional asset classes to try to minimize risk or squeeze out an extra percentage point of returns? Not to me. I’d rather get 90 percent of it right and then focus my energy on things that truly matter, such as increasing my savings rate, spending time with family, and growing my side business.


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