While I continue to battle my behavioural biases when it comes to investing, I’ve at least given some thought as to how I’d make the move to indexing from my current portfolio of dividend stocks.  The answer is a two-fund solution.

To make things as simple (and cheap) as possible I’d start by liquidating all the stocks in my RRSP – 23 holdings valued at roughly $100,000 – and then use those funds to purchase units of Vanguard’s All World ex-Canada Index ETF (VXC).

Then, I’d set up monthly contributions to my tax-free savings account (TFSA) and purchase units of Vanguard’s Canada Index ETF (VCE).

What’s behind the two-fund solution?

Foreign content restrictions were lifted on RRSPs a decade ago and yet many Canadians – including me – still keep their holdings close to home by investing in Canadian stocks.

Related: Do you suffer from home country bias?

Of course, Canada makes up just a tiny fraction of the global economy and so it makes sense to diversify as much as possible. Years ago this diversification was only possible by holding several mutual funds or ETFs (U.S., Europe, Japan, Emerging Markets, etc.).

Earlier this year, Vanguard introduced its All World ex-Canada Index ETF. The fund holds over 3,000 small-to-large cap stocks across a wide variety of sectors. U.S. stocks make up 50 percent of the holdings, while the rest is split amongst some 36 countries from around the globe.

How much does it cost to own a small slice of nearly every company in the world outside of Canada? The MER on Vanguard’s All World ex-Canada ETF is just 0.25%.

*Note that holding this fund in an RRSP means paying foreign withholding taxes on international dividends, which has been estimated to add up to 0.45% to the cost of the fund. The only way to improve the tax situation, according to Canadian Couch Potato author Dan Bortolotti, is to use US-listed ETFs in an RRSP.

“Of course this carries the added complexity/cost of currency conversion. So you can choose your poison.”

If an investor decides to stick with Canadian-listed ETFs, Bortolotti suggests that VXC is preferable to holding three separate funds for US, international and emerging markets.

Related: The true cost of foreign withholding taxes

My dose of Canadian content would come from holding Vanguard’s Canada Index ETF (VCE) inside my TFSA. The fund holds 76 of the largest Canadian stocks, although nearly two-thirds of the fund is invested in financial and oil & gas stocks.

VCE has a dirt-cheap 0.05% MER.

I liquidated my TFSA three years ago in order to top-up the down payment on our new house and avoid CMHC fees. I now have $35,000 in contribution room – going up to $40,500 on January 1st, 2015 – and would like to start funding this account again next year.

The ideal allocation for my entire portfolio would be 15-25 percent Canadian and 75-85 percent U.S./International.

Final thoughts

So I’ve got the indexing strategy figured out. The question now is when and how do I start?

Related: 5 lessons learned about investing

The TFSA will be the easy part – just set up the monthly contributions and then periodically purchase units of VCE. The RRSP will be the tougher mental hurdle to climb – swallowing my pride as I abandon my dividend growth strategy (not to mention the cost of selling 23 stocks).

Slowly, but surely, I’ll get there.

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