3 Easy Ways To Build An Investment Portfolio On The Cheap

I ditched my financial advisor about a decade ago and started investing on my own. I was fed up with paying high fees for underperforming mutual funds. Dividend paying stocks were growing in popularity and so I decided to take the plunge and build my own portfolio of blue-chip companies.

Several years later I realized my folly; it’s hard to pick winning stocks. It’s even more difficult to consistently pick winners and avoid losers over the long term. Overwhelmingly, the academic research showed that passive investing using mutual funds or exchange-traded funds (ETFs) has a much better chance of outperforming active investing that focuses on stock picking and market timing.

I bought into the research, sold my dividend stocks, and set up my new investment portfolio using two low cost, broadly diversified ETFs.

Today investors have many more choices available to build an investment portfolio on the cheap. I’ll show you three ways to lower your investment costs, diversify your portfolio, and reduce the time you spend worrying about investing.

1). Use a robo-advisor

A traditional financial advisor or wealth manager might cost an investor between 1.5 to 2.5 percent in management fees each year. Then along came robo-advisors to disrupt the portfolio management model and drive down costs to less than 1 percent.

A robo-advisor helps you build a portfolio based on your risk tolerance, experience, and time horizon. Once your model portfolio is built all you have to do is make regular contributions and the robo-advisor will allocate your cash into the appropriate investments.

The robo-advisor takes care of rebalancing your money whenever the portfolio drifts away from its original allocation (due to market movements or from your own contributions).

Competition is heating up in the robo-advisor space with the likes of Wealthsimple, Nest Wealth, Justwealth, ModernAdvisor, Questwealth, and WealthBar all vying for your investment dollars. BMO SmartFolio has been around for a while and more recently RBC launched its own robo-platform with RBC InvestEase.

2.) Invest in index funds

An index fund tracks a stock or bond market and aims to deliver market returns minus a very small fee. All of the big banks offer index funds, typically at half the cost (or lower) than their traditional equity or bond mutual funds.

One popular set of index funds is TD’s e-Series funds. These funds can only be purchased online but they offer tremendous savings over their actively managed mutual fund cousins. Investors can find e-funds for Canadian equities, Canadian bonds, as well as U.S. equities and International equities all for fees of about 0.50 percent or less.

Another solid set of index funds comes from Tangerine’s Investment Funds. These are one-fund solutions that come in five flavours; with the traditional 60 per cent equities, 40 percent bonds balanced portfolio being its most popular. The expense ratio on Tangerine’s funds comes in at 1.07 percent – higher than TD’s e-Series funds, but still a bargain compared to the industry average.

Investors who use dollar cost averaging and make regular contributions throughout the year should consider index funds over ETFs. That’s because investors can buy and sell mutual funds without incurring any commission charges or fees, whereas ETFs may be subject to trading fees, depending on your broker.

3.) One-ticket ETF solutions

It’s never been easier to build an extremely low cost and globally diversified portfolio with just one investment product. The one-ticket ETF solution was first introduced to Canada last year by Vanguard. Since then, Horizons ETFs and iShares have all launched their own suite of all-in-one balanced ETFs.

Vanguard offers five of these ETFs, each with a management fee of 0.22 percent. The most conservative allocation is 20 percent equities and 80 percent fixed income, while the most aggressive has 100 percent allocation to equities.

Horizons lists two balanced ETF portfolios; one with a 50 / 50 split between stocks and bonds, and the other with 70 percent equities and 30 percent bonds. The MER on these funds is 0.17 and 0.18 percent respectively.

Finally, iShares launched two of its own one-fund ETF solutions; one with a traditional 60 / 40 split between equities and fixed income, and the other with 80 percent equities and 20 percent fixed income.

Final thoughts

I wish these options would have been available to me back when I first started investing. Now it’s easy to build an investment portfolio on your own. You can invest on the cheap, too, if you know where to look. Hint: It’s not with the big banks and investment advisors who sell you on their expertise picking stocks and timing the market.

Indeed, you can build a hands-off portfolio for less than 1 percent a year with a robo-advisor. Or, with slightly more effort, open a discount brokerage account and buy a one-ticket ETF solution for less than 0.25 percent a year.

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14 Comments

  1. Belinda on February 8, 2019 at 5:25 am

    This is great info! Could you please talk a bit more about regularly investing and ETFs vs index funds? I didn’t understand that fees issue. Thanks!

    • Robb Engen on February 8, 2019 at 9:02 am

      Hi Belinda, thanks – I wasn’t sure if I should go too far into the weeds explaining that in the post but I’m happy to do so here.

      Stocks and ETFs are traded on an exchange and so whenever an investor buys or sells they’ll typically pay a commission. I invest through TD Direct Investing and they charge $9.99 per trade.

      Mutual funds don’t charge these brokerage commissions so if you make regular bi-weekly or monthly contributions they can be quite cost effective to own.

      I’ll give you an example.

      I hold my two-ETF portfolio inside my RRSP. I contribute monthly but I don’t want to incur a $9.99 commission every month so I wait until my cash contributions have built up to $1,000 or more before making a trade.

      With my kids’ RESPs, though, I contribute $416 per month and have chosen TD’s e-Series funds for that portfolio. This way I’m able to make regular purchases without incurring any trading commissions, and I can immediately direct each contribution into the appropriate fund. I have the Canadian index, U.S. index, and International index, and contribute to one of them each month (whichever has the lowest market value).

      The overall MER for my RESP portfolio is about 0.42 percent, whereas the MER on my two-ETF RRSP portfolio is about 0.22 percent.

    • Mike on February 8, 2019 at 9:36 am

      Hi Belinda. Perhaps I can explain (although Robb will likely do it much better than I can).

      Typically, exchanged-traded funds (ETFs) have lower management expense ratios (MERs) than a passive mutual fund that tracks the same index. However, whenever you buy or sell units of a mutual fund, it’s usually free (i.e. no commissions), at least it is if you’re investing through a discount brokerage. ETFs on the other hand are like stocks in that you pay a commission every time you buy or sell units on the stock exchange. Discount brokerage trading commissions are typically below $10 per trade but they can get rather high if your invest through an advisor or through a full-service brokerage.

      To keep the math simple, let’s assume you already have $10,000 invested and you’re going to invest another $1000 per year with a discount brokerage that charges $10 per trade on ETFs. You have a choice to invest in an index mutual fund with an MER of 1.0% or a comparable ETF that charges an MER of 0.1%.

      First, let’s first look at what happens if you’re the type of investor who puts a lump sum into their RRSP or TFSA once a year. In that case, the cost of investing in the mutual fund in the first year would be ($10,000 + $1000) times 1% = $110 in the first year. On the other hand, the cost of investing in the ETF would be ($10,000 + $1000) times 0.1% + $10 in purchase commissions = $21 per year. So, in this case, overall the ETF will cost you $110 – $21 = $89 less than investing in the mutual fund.

      Now let’s look at the other case (which Robb was discussing) where you’re an investor who uses dollar cost averaging and makes regular (let’s assume monthly) contributions throughout the year. In this case, investing in the ETF would now cost you ($10,000 +$1,000) times 0.1% + $120 in purchase commissions (because you’re now making 12 monthly purchase transactions per year instead of one annual one) =$131. The cost of investing in the mutual fund remains the same so overall the ETF will now cost you $131 – $110 = $21 more than investing in the mutual fund.

      If you’re one of those “regular contributors” who makes several contributions per year, you will need to run the numbers for your own situation to see whether the ETF you like is better than the comparable mutual fund. My simplified calculations also assume two other things:
      1. the mutual fund is “no load,” i.e. the fund manager charges no loads or purchase/sales fees. Be sure to factor loads into your decision if they apply, particularly if you have a large balance in your account;
      2. the difference in performance between the ETF and the mutual fund is equal to the difference in their respective MERs. That is rarely the case so you’d need to consider that if the “cost” difference in your case turns out to be small.

      A bit long-winded but I hope this helps.

  2. Gert on February 8, 2019 at 5:26 am

    Hi Robb,
    How does one go about moving to a Vanguard solution?
    I’m currently with a big bank but it’s getting to the point where I pay big fees and can’t even get answers. I sent mail out asking for advise a month ago along with two reminders since and I’m Still waiting for a reply. Meanwhile I have my TFSA contribution just sitting waiting to be invested.
    Thanks!

    • Deborah S. on February 8, 2019 at 8:49 am

      Hi Gert! Vanguard’s website states: “If you’re a self-directed, do-it-yourself investor, you can buy or sell Vanguard ETFs during normal trading hours through an online or discount brokerage account. Your brokerage or trading platform will likely charge its customary commissions and/or fees.” So, you need to open an account with an online or discount brokerage, transfer your existing account(S) there (the new brokerage will handle all the paperwork), and then you’re set. Easy-peasy!

    • Robb Engen on February 8, 2019 at 9:09 am

      Hi Gert, yes as Deborah says you need to open a discount brokerage account. All the big banks have one. I use TD Direct Investing, but there’s BMO InvestorLine, RBC Direct Investing, CIBC Investor’s Edge, and Scotia iTrade. I’d only recommend something like Questrade for more experience traders as the platform is not user friendly.

      Open an account and transfer your existing investments as ‘cash’ rather than ‘in-kind’. Once the funds get deposited into your discount brokerage account as cash, you can then make a trade. Search for the appropriate ticket symbol, such as VBAL for the Vanguard Balanced ETF, and purchase however many units you need.

      Justin Bender has made a bunch of video tutorials to show you how to build an ETF portfolio at each of the various discount brokerages: https://www.canadianportfoliomanagerblog.com/diy-investing-tutorials/

      • Chris on February 8, 2019 at 9:35 am

        Hi Robb: I agree with much of what you say, but I disagree completely with your point about Questrade. I find their website very clear and easy to use. We have our TFSAs, RSPs, and a joint equity account there, and could not be more pleased with how well it has been working for us. We invest mainly in Vanguard ETFs. I do not like dealing with the big banks; their customer ‘service’ is, in my experience, generally appalling.

        • Robb Engen on February 8, 2019 at 10:19 am

          Hi Chris, I’m glad you’re able to navigate the Questrade platform and you find it easy to use. I’ve heard from many clients and blog readers who have trouble understanding the trading platform if they’re not familiar with that environment. They also tend to be late sending out tax slips, although I have not heard that issue in a few years.

          I get that investors want to ‘optimize’ all aspects of their investments and therefore must have a no-fee Questrade platform and perform Norbit’s Gambit with their U.S.-listed ETFs to save the most on fees.

          But in reality an investor is more likely to stick with a simple solution in an environment they are comfortable with.

          All that said, nothing against those who wish to optimize and save on fees. It sounds like it is working very well for you.

  3. Dale Roberts on February 8, 2019 at 5:56 am

    Great post Robb. This info is needed this time of year (RRSP) season as Canadians consider their options.

    Hopefully more Canadians will continue to ditch paying the highest mutual fund fees in the world.

    I will certainly share this post.

  4. Karen on February 8, 2019 at 7:08 am

    Thank you for this information. Do you have any suggestions for retirees wishing to receive monthly withdrawals?

    • Robb Engen on February 8, 2019 at 9:15 am

      Hi Karen, thank you. I still recommend an ETF portfolio for retirees looking to receive monthly withdrawals. It’s hard to explain without knowing your exact situation but essentially you divide your retirement portfolio into three buckets:

      Bucket #1 has enough cash for one or two years’ spending
      Bucket #2 has your fixed income (mix of bonds and GICs) from which you draw to replenish bucket #1
      Bucket #3 holds your equities for the long term. Even in retirement you still need equities to grow your portfolio and ensure it can last your lifetime and/or meet your retirement income goals. This bucket is for long term growth and you can withdraw from it (i.e. sell ETF units) to replenish bucket #2.

      This excellent article by Dan Bortolotti explains how to generate income from an ETF portfolio using this approach: https://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/

  5. Dave on February 8, 2019 at 4:23 pm

    Great article. I think for many new young investors the Roboadvisors are really going to take off

    That being said I personally think the better option is the All in one ETFs – with MERs around 0.25 they are a very inexpensive way to own the market.

    Question – where do the estimates come from for the new IShares all in one ETFs come from? The official site says the Management fee is 0.18% with the MER not listed. Morningstar has it at 0.84% which is so far off the Vanguard equivalents that can’t be accurate

    • BartBandy on February 9, 2019 at 8:41 am

      Dave, the new iShares portfolios used to have a different mandate and have been repurposed to compete with Vanguard’s. Prior fees and tracking history are now redundant. Newly launched ETFs report a Management Fee but not a full MER until a full year later (they also can’t report performance for a year). The newly launched all-equity Vanguard portfolio (VEQT) carries a management fee of 0.22%. The similar VGRO has been out for over a year and has a management fee of 0.22% but an MER of 0.25%. I’d expect the iShares portfolios to clock in around 0.21-0.22%.

  6. Gene on February 8, 2019 at 7:50 pm

    Always love your posts Robb.

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