3 Easy Ways To Build An Investment Portfolio On The Cheap

I ditched my financial advisor more than 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 low cost index 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. More recently I moved to an all-in-one solution with Vanguard’s VEQT.

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.

Related: How My Wife Saved Money With a Wealthsimple RRSP

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.

Related: Yes, You Can Retire Up To 30% Wealthier

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-Series 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 percent 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 by Vanguard. Since then, Horizons ETFs, iShares, BMO, and TD have all launched their own suite of all-in-one balanced ETFs.

Vanguard offers five of these ETFs, each with an MER of 0.25 percent. The most conservative allocation is 20 percent equities and 80 percent fixed income, while the most aggressive has 100 percent allocation to equities.

For retirees, check out Vanguard’s new VRIF income fund solution.

Horizons lists three asset allocation ETF portfolios; one with a 50 / 50 split between stocks and bonds, one with 70 percent equities and 30 percent bonds, and the other with a 100 percent allocation to stocks. The MER on these ETFs is between 0.15 percent and 0.19 percent.

iShares offers five asset allocation ETFs that mirror Vanguard’s line-up, from a 20/80 income ETF to a 100 percent equity ETF. All five of their balanced ETFs come with a MER of 0.20%.

BMO lists three asset allocation ETFs, starting with a conservative 40/60 option, a balanced 60/40 option, and a growth 80/20 option. All three come with a MER of 0.20%.

Finally, TD recently introduced its own suite of asset allocation ETFs. The three products include a conservative 30/70 option, a balanced 60/40 option, and an aggressive 90/10 option. The management fee is 0.25%.

Related: Wealthsimple Trade Review – Canada’s Only Zero-Commission Trading Platform

Final thoughts

I wish these options would have been available to me back when I first started investing. Now it’s easier than ever 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 stock picking and market timing expertise.

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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6 Comments

  1. sara on September 25, 2020 at 8:24 am

    Good article. wish had it long time ago. Wealth simple trade is commission free (may be built in the buy and sell trades). Keep investing smartly.

    • John Bruder on September 25, 2020 at 12:44 pm

      Is there not an annual fee at Wealth Simple, depending on the size of your investments with them? If so, that needs to be factored into the overall cost.

      • Robb Engen on September 25, 2020 at 1:28 pm

        Hi John, there’s a difference between Wealthsimple Invest (the robo advisor) and Wealthsimple Trade (the commission-free trading platform).

        The robo-advisor charges a management fee of 0.50% (decreases to 0.40% with $100,000 in assets) and for that you get a portfolio of index ETFs that are automatically monitored and rebalanced. Wealthsimple Trade does not charge any fees, but makes money on any foreign exchange when buying US listed stocks or ETFs with Canadian dollars.

  2. Gruff403 on September 25, 2020 at 8:44 am

    Solid article. If you’re paying more than 1% your paying to much IMHO. It will be interesting to see what new products and services are created in the future. Hard to keep up with all the changes.

  3. Cathy on September 26, 2020 at 6:59 pm

    We really like the all in one ETFs, especially since they do the rebalancing for us. Would you consider VEQT or VGRO too aggressive for retirees with defined pensions? Right now we live comfortably on our pensions.

    • Robb Engen on September 26, 2020 at 7:29 pm

      Hi Cathy, it’s tough to say without knowing more about your entire financial picture and legacy goals, but I’d say in general VBAL (the 60/40 balanced ETF) is a risk appropriate investment for many retirees – especially for those who also have income from multiple sources.

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