Is My Two-ETF Portfolio Too Simple?

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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  1. Ben on October 25, 2015 at 4:13 pm

    Rob – I previously had an all equity portfolio for essentially the same reasons as you. After reading the intelligent investor I’ve decided to gradually add bonds. I will probably will end up with a 10-15 percent allocation. It’s not because I can’t handle the all equity risk, but I’m convinced it’s a better risk adjusted return.

    • Grant on October 26, 2015 at 6:41 am

      Ben, remember that you can’t eat risk adjusted returns, only returns. I think an all equity portfolio will likely have better returns, but certainly nothing wrong with adding in some bonds to smooth the ride giving you the better risk (volatility) adjusted returns.

      • Ben on October 26, 2015 at 4:17 pm

        Note that the portfolio with 10%, 25% and 40% have nearly identical 20 year returns. Better risk adjusted returns doesn’t mean lower returns.

        If you look up the numbers you’ll find 100 equity doesn’t mean higher returns – at least based on historical results

        • Echo on October 26, 2015 at 8:13 pm

          Hi Ben, no issues with adding the bond component and I agree the results have been similar for more balanced portfolios over the last 20 years (although bonds have been in a 30-year bubble).

          I don’t feel the need to have bonds for the reasons I listed above. I’m also 36 years old, so while I don’t have bonds at this time I might add them as I get closer to retirement.

        • Grant on November 8, 2015 at 12:20 pm

          Ben, as Robb mentioned, the reason that the 60/40 portfolio has performed almost the same as a 100% equity portfolio over the last 20 years, is that we have been in a 30 year bull market for bonds. This is most unlikely to occur over the next 30 years – reversion to the mean. Since 1926, bonds have returned about 6% and stocks about 10%. Over that long term a 100% equity portfolio would return significantly more than one with allocations to bonds. I’m not knocking bonds. Most people need them in their portfolio to reduce volatility so they don’t make “the big mistake” of selling in a crash. But bonds will, most of the time, reduce returns. Anything we do to reduce volatility will reduce returns.

          • Ben on November 8, 2015 at 4:26 pm

            Yes, that’s likely true for 60/40, but unlikely for something closer to 90/10

  2. My Own Advisor on October 25, 2015 at 6:06 pm

    Good post Robb and like most things in life, simplicity is the ultimate form of sophistication.

    This was the best part of your post: “…focus my energy on things that truly matter, such as increasing my savings rate, spending time with family, and growing my side business.”

    You have your priorities straight and good on you.


    • Echo on October 26, 2015 at 8:20 pm

      Thanks Mark! I used to think that I didn’t spend THAT much time on my portfolio as a dividend investor, but this year opened my eyes to how much more time it really takes to manage a stock portfolio versus a simple two-ETF portfolio. I barely look at my portfolio now and I’ll just have to make a quick rebalance in January. That beats obsessing over the oil & gas sector and trying to figure out which stock to buy and sell.

      • Investor on November 10, 2015 at 1:51 pm

        Perhaps if you were obsessing over useless short-term fluctuations, you were mostly a speculator, rather than a dividend growth investor? 😉

  3. Tawcan on October 25, 2015 at 9:53 pm

    Very good points on why keeps no it simple is a good idea. Afterall the one of the key reasons of index ETF investing is simplicity. Why spend unnecessary time on investment when you can spend the time enjoying life?

  4. Grant on October 26, 2015 at 6:31 am

    No, it’s the best. We humans tend to feel that more complex must be better, but in most things, particularly in investing, it is the the exact opposite. As Jack says “simplicity is the master key to financial success.” You may decide to add some bonds as you approach retirement to deal with sequence of return risk, or you may not particularly as you have a pension.

    • Echo on October 26, 2015 at 8:26 pm

      Hi Grant, one reason why I couldn’t get behind indexing (aside from my own behavioural biases) was that it seemed so needlessly complex. The old couch potato model portfolios had WAY too many funds (and still people wanted to tinker with them). Dan has admitted that those portfolios were too complicated and obviously has simplified things considerably with the three new model portfolios. I think that was the key to winning me over, and hopefully winning over many other DIY investors.

  5. Richard on October 26, 2015 at 10:06 am

    I’m actually planning to remove some assets from my portfolio. They may have a slight edge. But there’s no way I want to risk investing the amount it would take to get a significant gain, or spend the time it would take to manage a small amount. I have much better things to do.

    • Echo on October 26, 2015 at 8:33 pm

      Hi Richard, do you think it would be easier to start a simple portfolio from scratch like I did rather than trying to pare down a more complicated portfolio that has been working for you for some time?

  6. Jon King on October 26, 2015 at 3:48 pm

    I’ve noticed some funds charge a separate TER (transaction expense ratio?) – I assume to make their MER look more attractive. Any idea whether this is the case for Vanguard?

    I like a simple portfolio. As for your “fixed income” investments, would it not be more appropriate to classify your business as being more like equity from a risk perspective?

    • Ben on October 26, 2015 at 4:21 pm

      TER are strictly to cover trading expenses and nothing more. They vary year to year depending on trading activity. The MER could be misleading if the TER was included in it, so it’s disclosed separately

    • Echo on October 26, 2015 at 8:42 pm

      Hi Jon, I have a goal to withdraw $3,000 per month from our small business (paid to my wife through dividends) and I have enough experience and contacts built up now that I can hit that mark consistently through advertising and freelance writing. Maybe fixed income isn’t the right wording, but it’s another income stream coming in so that I won’t have to rely on selling stocks in a downturn.

  7. Big Cajun Man (AW) on October 26, 2015 at 5:50 pm

    I looked at my major investment account (a spousal RRSP that I have been ignoring) and realized what a bloody mess of “Great ideas” that I never quite followed through on. It needs to be cleaned up, and I think your statement about not being too complicated really does resonate with me.

    • Echo on October 26, 2015 at 8:52 pm

      Hi Alan, I think it’s pretty common for investors to either be sitting on too much cash and not know what to do with it, or to have a mess of funds without any clear strategy or direction.

      What helped me when I decided to sell my 24 dividend stocks was treating the portfolio as a lump sum of cash rather than hemming and hawing over each individual piece and wondering whether to sell or hang on to them.

      I just said to myself, you’ve got $100,000 invested this way, and now you’re going to take that $100,000 and invest it a different way.

      • Big Cajun Man (aw) on October 27, 2015 at 6:57 am

        Robb, agreed, all I need now is the fire to be lit under my arse.

  8. Mike on October 26, 2015 at 8:23 pm

    Very interested in the Couch Potato ETF portfolio and the tangerine Streetwise funds for their simplicity. I am 52, retired from the military with a 1/2 pension and have 150K in RRSP and 35K in TFSA and have three years to use my “house money” 300K while I go out of country. I have researched Vanguard and am trying to compare total costs to the Tangerine funds (1.07%). Its easy to see the Vanguard MER but what about the other costs of holding an account, trading fees etc. I only intend to invest the RRSP and TFSA amounts, my house money will more than likely sit in a high interest account as I will need that money when I return in three years and can’t afford to lose a cent from it.

    • Echo on October 26, 2015 at 9:24 pm

      Hi Mike, thanks for your comment. You’re wise to keep your house money in a high interest savings account while you’re out of the country.

      With a portfolio that size ($185k total between RRSP and TFSA) the Vanguard funds would be cheaper, hands down. With an average MER of 0.2% you’d be paying $370 per year, compared to about $2,000 per year with the Tangerine funds at 1.07%.

      Trades cost about $9 or $10 each, and your account fee should be waived with an account that size.

      The decision will come down to whether or not you want to manage a portfolio of ETFs (rebalancing at least once a year) or pay higher fees to have that done for you with the Tangerine funds.

      • Mike on October 26, 2015 at 9:56 pm

        Thanks for the quick reply, I will pursue the ETFs and get myself set up with a discount broker to open an account and take the plunge. I am tired of paying 2.2 % with my Sentry Mutual funds, my advisor keeps telling me it costs money to make money but after fees and taxes I am lucky if I see 50% of my “earned” return. Great advice, keep it coming!

  9. Rudi on October 26, 2015 at 10:30 pm

    I have included VCN and must have bought at the wrong time, as it continues to be a “bear” and down 9%.

    • Echo on October 26, 2015 at 10:42 pm

      Hi Rudi, yes that’s because the Canadian market is down 9% in the last year. In this case you have to see the forest for the trees and understand that you’re buying the market and the market (Canada) is down.

      For me when it comes to rebalancing in January I will look to add some new money to the Canadian fund (which had a down year compared to VXC), forcing myself to buy low.

  10. Dan on October 27, 2015 at 5:16 am

    The nice thing about ETFs is that you can buy them for free if you use Questrade, so you can really start to dollar cost average down whenever you have cash available. I think simple is good, sometimes people are constantly following the latest stock tip only to be led down a path of disappointment

  11. Randy on October 29, 2015 at 1:10 pm

    I am in the midst of taking the plunge and becoming a DIY investor. Just opened my Questrade account and now have to transfer my high MER mutual funds over. Still have not finalized the mix of ETF’s I will buy, but will certainly be looking for simplicity. I’m 49, so I think it will include bonds for me – probably 40% as I’m looking at hopefully 12 years to retirement.
    Questrade does allow the purchase of ETF’s free, so my plan is to have an automatic transfer each month into my account and log on once a month to buy more. I’ll keep it in balance with my purchases. Should be fairly simple if I decide on only three funds.
    Can’t wait to get going…..

    • Echo on October 29, 2015 at 8:03 pm

      Hi Randy, that sounds like a well thought out plan. Good luck with it going forward!

      • Randy on October 30, 2015 at 8:39 am

        I’ve been working with Marie on this and she has been fantastic. She did a complete review of our current situation and I must say has given us the push we needed to dump the high MER mutual funds. My wife has opted for an even more simplistic approach and we’ve set her up with TD E-series funds. I’ve enjoyed doing some research on going the ETF route and am fairly confident in moving forward with that.

  12. Chris I on December 13, 2015 at 7:28 pm

    After commenting on your post earlier today about the MER fees and now reading further on your site I feel silly bringing up the Vanguard fees as you clearly know whats up. I myself hold the VXC VCN and VAB but want to reduce to two funds like you but I think I may change it up a bit differently. I think I will drop the TSX as it is far too equity based and I think the energy markets are in for a few crazy years that I don’t want to be part of while VXC is ridiculously diverse. Heck I may even drop VAB in the future although the monthly dividend disbursements are a real nice added bonus….well they all pay the dividend which is like christmas every quarter 🙂

    • Echo on December 13, 2015 at 8:56 pm

      Hi Chris, thanks for your comments. I don’t feel comfortable dropping the TSX altogether, even after a tough year and a bleak outlook. I’m in for the long haul and this might just mean buying Canada low for the next few years to keep my allocation in balance.

  13. Chris I on December 15, 2015 at 12:25 pm

    Im in for the long haul too and know the oil cycle will swing back up and my current holdings in VCN will see a big increase, buy low right now while it’s on sale right. I should add I have a few fun ETFs in the mix and I have seen them get beaten up a fair bit. CrescentPoint , CNRL, Lightstream and Pennwalt (I work in the oil industry) I made out great when Legacy sold to CPG and it looks like this slow down may make CNRL a bit of a powerhouse as they are great at cash management. CPG has been sliding but may find creative ways to solidify their past rocket like growth….Lighstream and Pennwalt keep selling themselves off and doesn’t look to good. Isn’t idea fund investing so much easier LOL Thanks for the reply 🙂

  14. Bernie on February 12, 2016 at 12:02 pm


    If you haven’t done so I suggest you compare or benchmark the performance of VCN to Mawer Canadian Equity (MAW106) and VXC to Mawer Global Equity (MAW120). You might be surprised with the comparisons. Heck, even a 50% VCN 50% VXC mix compared to Mawer Balanced Fund (MAW104), even though the balanced fund contains 30% bonds, is an eye opener. Low fees are not the end all.

  15. John Beattie on May 2, 2016 at 4:44 am

    Hi Rob – why buy Canada and ex-Canada versus a single global market fund?

  16. Dennis on May 24, 2017 at 4:59 am

    Do VCN and VXC hold shares directly, or via other ETF’s? If the funds hold other ETF’s aren’t investors paying double MER—one to VCN/VXC, and another to the fund held.

    • Ben Morrison on May 24, 2017 at 5:56 am

      No you’d only be paying the mer for the fund you would be directly holding.

  17. Kevin on September 15, 2017 at 6:25 pm

    Hi Robb,

    I’ve spent a lot of time on personal finance blogs recently, to try to learn a bit more about ETFs. Currently, most of my savings are in mutual funds. At the time I didn’t know better, but I’m on the road to switching over to ETFs and the lower MERs.

    I was wondering if you could comment a bit on why you decided on a 25/75 split between VCN and VXC?

    • Echo on September 16, 2017 at 9:54 am

      Hi Kevin, thanks for your comment. I think 20-25% Canadian equities is a good target allocation for Canadian investors. Yes, Canada only makes up a tiny percentage of the global markets, so to some people 20-25% might sound excessive. But there are advantages to having money invested in your home country, namely less overall currency risk:

      “investors who plan to retire in Canada should probably not have 96% of their equity investments in foreign currency.”

      VXC takes care of the rest of the global markets in just one fund.

      You could make a similar portfolio with three TD e-Series funds by allocating 25% to the Canadian index, 50% to the U.S. index, and 25% to the International index fund.

      Does that help answer your question?

  18. Peter Al on October 2, 2017 at 12:47 pm

    What do you think of the fairly new bond ETF, as written by Gordon Pape? It’s call “First Asset Enhanced Short Duration Bond ETF”, and he wrote about it in The Toronto Star, Sept. 29th, 2017.

    Could that be a good “bond substitute”?


  19. K. Kepler on October 20, 2018 at 6:20 pm

    I have a problem with the content of some equity funds, especially the broad indexers — manufacturers and users of things like nuclear power, civilian firearms, alcohol and tobacco, and military weaponry and bombs — and strongly suggest using a fund or funds with screens to eliminate what may be profitable but immoral investments. Also consider that some bond funds contain similarly uncomfortable securities. Just be careful that those who pick the investments have similar ethics and beliefs to your own. In the United States, leading screened-funds providers include Domini and Pax World. Vanguard unfortunately is not on that list.

  20. Bill on March 4, 2019 at 1:33 pm

    I am 82 years of age my wife is 76
    The only pension we have is OAS
    And Cpp
    Have a portfolio of 1.5 million

    In stocks bonds etc managed by a wealth management company
    This will provide our retirement income
    Tired of paying advisor fees etc 1 percent
    Can you recommend better approach to save on fees

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