I stumbled on a thread from Reddit’s Canadian personal finance community where a young investor sought feedback on his investment portfolio.  He held a low cost and diversified portfolio consisting of seven ETFs inside his tax free savings account.  The allocation was broken down like this:

  • Canadian equity (ZCN) – 25%
  • U.S. equity (VUN) – 16%
  • Global equity – developed countries (VDU) – 16%
  • Global equity – emerging markets  (VEE) – 16%
  • Canadian REITs (ZRE) – 6%
  • Canadian Bonds – long term (XBB) – 9%
  • Canadian Bonds – short term (XSB) – 9%

The investor has done a lot of things right here.  His portfolio is built using extremely low cost ETFs purchased through Questrade, the online broker that lets you buy ETFs commission-free.  At 28, the investor has chosen a bond allocation based on 110 minus his age (for a 82/18 stock-to-bond split).  So far, so good.

Related: The beginner’s guide on how NOT to start investing

The problem I see is that the account is only worth $29,000.  It’s a complicated portfolio that may require a lot of fine-tuning to keep the asset allocation in-line with his original strategy.  But to what end?

At this point the investor should be concentrating more on increasing his savings rate rather than tinkering to find the optimal asset allocation.

The Canadian Couch Potato blog has a great list of model portfolios for the novice and sophisticated investor.  For portfolios under $50,000, the recommendation is to keep things simple.  Two proposed solutions include:

  • Tangerine Balanced Portfolio – One global mutual fund consisting of 60% stocks and 40% bonds.  Total cost – 1.07% MER


  • TD e-Series funds – Four mutual funds consisting of Canadian, U.S., and International equities, as well as Canadian bonds.  Total cost – 0.44% MER

Related: Why TD e-Series funds aren’t just for beginners

Focusing too much on the perfect asset allocation and getting the costs as low as possible can become a never-ending chore.  New funds are introduced all the time, and while the costs have become a race to the bottom, realistically, it doesn’t make sense to jump in and out of funds every year to save a few hundredths of a percent on fees.

Embrace simple solutions

A simple solution with one-to-four mutual funds or ETFs can free you up to focus on what really matters – saving more!  How much thought do you want to give to the $1,700 in REITs or $2,600 worth of short-term bonds in your portfolio?

Related: 5 lessons learned about investing

At this stage it just doesn’t matter, not at 28-years-old with $29,000 invested.  Simplify the process.  Ignore what the markets do in the short term, avoid market timing, and stop guessing where interest rates are going or what will be the next hot emerging market.  Stop making things more complicated than they need to be.

I’m not suggesting that fees and diversification aren’t important.  But we need to be more willing to embrace simple solutions.  You’ll build more wealth by increasing your savings rate over a long period of time, rather than trying to slice-and-dice your way toward the perfect asset allocation.

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