Nobel laureate Harry Markowitz famously said that diversification is the only free lunch in investing. A portfolio concentrated in just a handful of stocks, or one that holds only Canadian or US stocks, may have a much wider range of outcomes than a more broadly diversified portfolio that includes stocks from every country. Most investors should also have some bond exposure to help reduce volatility. Bonds tend to hold their value when stocks fall (yes, 2022 was a notable exception), so when that happens a diversified investor can sell bonds to buy more stocks at a discount.

This concept of diversification and using an appropriate asset mix makes good sense, but it might also make things complicated for the average investor to build a properly diversified portfolio.

However, if investing has been solved with low cost index funds, then investing complexity has been solved with asset allocation ETFs, or all-in-one ETFs.

What are Asset Allocation ETFs?

An asset allocation ETF holds a pre-determined mix of Canadian, US, international and emerging market stocks, plus Canadian, US, and international bonds. It automatically rebalances this mix when markets move up and down, so you don’t have to worry about tinkering with your portfolio.

Let’s say you invest in Vanguard’s Balanced ETF (VBAL). This asset allocation ETF is made up of seven underlying ETFs representing stocks and bonds from around the world. Altogether it holds more than 13,000 global stocks and 18,000 global bonds.

Most major ETF providers offer their own suite of asset allocation ETFs. You’ll typically find the classic 60/40 balanced ETF, an 80/20 growth-oriented ETF, a 40/60 conservative ETF, and even an aggressive 100% equity ETF.

Related: How I Invest My Own Money

For this article, we’re going to stick with the two biggest names in the asset allocation space: Vanguard and iShares.

Vanguard’s asset allocation ETFs include: 

• Vanguard’s Conservative Income ETF (VCIP) – 20% stocks and 80% bonds
• Vanguard’s Conservative ETF (VCNS) – 40% stocks and 60% bonds
• Vanguard’s Balanced ETF (VBAL) – 60% stocks and 40% bonds
• Vanguard’s Growth ETF (VGRO) – 80% stocks and 20% bonds
• Vanguard’s All Equity ETF (VEQT) – 100% stocks

iShares’ asset allocation ETFs include:

• iShares Core Income Balanced ETF (XINC) – 20% stocks and 80% bonds
• iShares Core Conservative Balanced ETF (XCNS) – 40% stocks and 60% bonds
• iShares Core Balanced ETF (XBAL) – 60% stocks and 40% bonds
• iShares Core Growth ETF (XGRO) – 80% stocks and 20% bonds
• iShares Core Equity ETF (XEQT) – 100% stocks

How to choose the right asset allocation ETF?

This isn’t like the old days when you would try to pick winning mutual funds by looking up their past returns. By nature, over the long term, an all-equity portfolio is going to outperform an 80/20 portfolio, which will outperform a 60/40 portfolio, and so on.

Choosing the right asset allocation ETF starts with determining the most risk appropriate portfolio for your age, time horizon, goals, and your capacity to endure the ups and downs of the market. Too often investors chase past winners and then abandon ship when those winners come crashing down to earth. Conversely, many investors flee to conservative investments after a downturn, only to miss out on the eventual recovery when stocks rise again.

What we want to do is select an asset mix that we can stick to for the long term, regardless of the current market conditions. For many people, that’s the tried-and-true 60/40 balanced portfolio. For others, who maybe have a longer time horizon or a larger appetite for risk, an 80/20 or even a 100% stock portfolio may be perfectly sensible.

You can get a decent sense of your risk tolerance by taking this investor questionnaire on the Vanguard website.

Follow that up by watching this excellent video by Shannon Bender on how to choose the right asset allocation ETF:

I like this video because it gives you an idea of the range of outcomes you can expect from the various asset mixes over time. Hint, you should probably be more conservative than you think over timeframes of less than 10 years.

I use the following assumptions for expected future annual investment returns in my financial planning projections:

Average return assumptions

• Low risk 20/80 portfolio = 3.30%
• Conservative 40/60 portfolio = 4.00%
• Balanced 60/40 portfolio = 4.70%
• Growth 80/20 portfolio = 5.40%
• Aggressive 100% portfolio = 6.10%

Keep in mind these are long-term projections. Investment returns can vary widely in a single year. PWL Capital’s Justin Bender back-tested returns for each of the Vanguard and iShares‘ asset allocation portfolios and found the worst 1-year return for each of them:

Worst 1-year return

• Low risk 20/80 portfolio = -12.18%
• Conservative 40/60 portfolio = -18.85%
• Balanced 60/40 portfolio = -25.49%
• Growth 80/20 portfolio = -31.79%
• Aggressive 100% portfolio = -37.74%

However, the annualized 20-year returns were a lot closer to my financial planning assumptions:

Annualized 20-year returns

• Low risk 20/80 portfolio = 4.24%
• Conservative 40/60 portfolio = 5.14%
• Balanced 60/40 portfolio = 6.01%
• Growth 80/20 portfolio = 6.82%
• Aggressive 100% portfolio = 7.58%

You can see that there isn’t a huge difference in long-term returns between these portfolios. The goal is to be in an asset mix you can stick with for the long term, so if chasing the highest return with 100% stocks is going to cause you stomach-churning anxiety throughout your investing life, then take comfort knowing you’re not giving up much by choosing a balanced or growth portfolio.

Remember, nobody failed to meet their retirement goals because they invested in a sensible low-cost balanced portfolio instead of a more aggressive portfolio.

Strike a compromise between FOMO and fear. What I mean is that you want an asset mix that makes you feel just a little bit of FOMO when stocks are soaring, and feel a little bit less afraid when stocks are falling.

Vanguard, iShares, others?

Okay, so once you’ve selected an appropriate asset mix, you’ll still need to decide which ETF provider to choose (Vanguard, iShares, BMO, TD, Horizons, Mackenzie, and Fidelity all offer a suite of asset allocation ETFs).

I’ll keep this part brief because there’s no need to overthink it.

For simplicity, if you want to narrow down your decision, the asset allocation ETFs offered by Vanguard and iShares are perfectly sensible options for your portfolio. There aren’t enough differences to lose sleep over the decision.

iShares’ asset allocation ETFs are slightly cheaper – they cost 0.20% MER compared to Vanguard’s 0.24% MER at the time of this writing.

In terms of geographical weighting, iShares holds slightly more US equity and international equity, while Vanguard holds slightly more Canadian equity and emerging market equity.

The iShares’ portfolios have also slightly outperformed Vanguard’s pretty much across the board over all time periods, likely owing to US and international equity outperforming Canadian and emerging market equity.

The differences are negligible, though, so pick one provider and stick with it – or hedge your bets by holding a Vanguard product in one account and iShares in another. Just don’t switch between them every year chasing past performance.

Final Thoughts

It has never been easier to be a successful DIY investor than it is today. That’s because new one-stop investing solutions like asset allocation ETFs have taken the complexity out of building and maintaining a portfolio.

They’ll also save you a bundle on fees. Where most mutual fund portfolios charge an average MER of 2%, you’ll pay 1/10th of that with an asset allocation ETF.

If you want to reduce the investment fees that you pay, diversify your portfolio into an appropriate mix of global stocks and bonds, and simplify your investments with an all-in-one automatically rebalancing ETF, then consider switching to a risk appropriate asset allocation ETF.

That’s exactly what my DIY Investing Made Easy video series is designed to do – show you exactly how to make the transition from an expensive and underperforming mutual fund portfolio and into a simple, low cost asset allocation ETF so you can cut your fees to the bone and move on with your life.

*Updated for Aug 31, 2024*

Regular blog readers know that I’m a big proponent of passive investing with low cost, globally diversified index funds and ETFs. Why? Low fees are the best predictor of future returns. Global diversification reduces the risk within your portfolio. Index funds and ETFs allow investors to hold thousands of securities for a very small fee.

Investors who eventually come to understand these three principles want to know how to build their own index portfolio. There are several ways to do this: pick your own ETFs through a discount broker, invest with a robo-advisor, or buy your bank’s index mutual funds.

Still, the amount of information can be overwhelming. There are more than 1,100 ETFs, thousands of mutual funds, a dozen or more discount brokerage platforms, and nearly as many robo advisors. The choices are enough to make your head spin. 

Must read: Reboot Your Portfolio – 9 Steps to Successful Investing with ETFs

I narrowed these investment options down when I wrote about the best ETFs and model portfolios for Canadians. I’ve also explained how you can retire up to 30% wealthier by switching to index funds. Finally, I shared why you should hold the same asset mix across all of your accounts for maximum simplicity.

Now, I’ll explain exactly how I invest my own money so you can see that I practice what I preach. 

My Investing Journey

I started investing when I was 19, putting $25 a month into a mutual fund. When I began my career in hospitality, I contributed to a group RRSP with an employer match. The catch was that the investments were held at HSBC and invested in expensive mutual funds.

When I left the industry I transferred my money (about $25,000) to TD’s discount brokerage platform. That’s when I started investing in Canadian dividend paying stocks. I followed the dividend approach after reading Norm Rothery’s “best dividend stocks” in Canada articles in MoneySense.

I later found dividend growth stock guru Tom Connolly (plus a devoted community of dividend investing bloggers) and started paying more attention to stocks with a long history of paying and growing their dividends.

Five years later I had built up a $100,000 portfolio with 24 Canadian dividend stocks. My performance as a DIY stock picker was quite good. I had outperformed both the TSX and my dividend stock benchmark (iShares’ CDZ) from 2009 – 2014. My annual rate of return since 2009 was 14.79%, compared to 13.41% for CDZ and 7.88% for XIU (Canadian index benchmark).

But something wasn’t quite right. I started obsessing over oil & gas stocks that had recently tanked. I had a difficult time coming up with new dividend stocks to buy. I read more and more opposing views to my dividend growth strategy and realized I was limiting myself to a small subset of stocks in a country that represents just 3-4% of the global stock market.

Related: How my behavioural biases prevented me from becoming an indexer

Furthermore, new products were coming down the pike – including the introduction of Vanguard’s All World ex Canada ETF (VXC). Now I could buy a tiny piece of thousands of companies from around the world with just one product. 

So, in early 2015 I sold all of my dividend stocks and built my new two-ETF solution (VCN and VXC). I called it my four-minute portfolio because it literally took me four minutes a year to monitor and add new money. No more obsessing over which stocks to buy or worrying if a stock was going to go to zero. 

Fast-forward to 2019 and another product revolution made my portfolio even simpler. Vanguard introduced its suite of asset allocation ETFs, including VEQT – my new one-ticket investing solution. 

The next change to my investment portfolio was in January 2020 when I moved my RRSP and TFSA from TD Direct Investing over to Wealthsimple Trade to take advantage of zero-commission trading. 

I opened a Corporate Investment Account at Questrade that summer to invest the retained earnings in my business.

I had to open a LIRA in 2020 after leaving my public sector job and receiving the commuted value of my pension. I opened the LIRA at TD Direct for simplicity. The trading fees made no difference since I invested the entire amount into VEQT and didn’t plan to make any changes (and you cannot contribute to a LIRA).

*I’ve since moved this LIRA to Wealthsimple Trade (Feb 2024) when the platform recently made the LIRA, LIF, and RRIF account types available.

Finally, at the beginning of 2022 I sold all of the units of VEQT in my TFSA and transferred the proceeds to an EQ Bank TFSA. It wasn’t about market timing or avoiding bad returns – we built a new house and I used the proceeds to top-up our down payment.

I started contributing to my WS Trade TFSA again this year (2024) and have been buying VEQT.

How I Invest My Own Money

I’ve written about personal finance and investing for nearly 15 years. Over that time I’ve done an incredible amount of research on banks, discount brokerages, robo-advisors, ETFs, index funds, and investment strategies. I’ve read extensively about behavioural finance and evidence-based investing. I’ve determined that investing in a simple, low cost, globally diversified, and automatically rebalanced portfolio will lead to the best long-term outcome.

I eat my own cooking, so to speak, and invest my own money this way. Here’s what it looks like:

I recognize there is no “one-size-fits-all” investing solution. Investors need different products depending on their risk tolerance and stage of life. They use different account types depending on what they do for a living, their tax bracket, cash flow, and available contribution room. They may need to use multiple investing platforms to save in an employer-sponsored plan, to reduce fees, or to open a new account type.

Why Three Investing Platforms?

I’ve banked with TD for my entire life and so it made sense to open my first discount brokerage account there in 2009 at what was then called TD Waterhouse. That’s where I first established my RRSP, TFSA, and my kids’ RESP account.

I moved my RRSP and TFSA over to Wealthsimple Trade when the no-frills self-directed platform added these account types to its line-up. I was attracted to the zero-commission trades and was tired of paying $9.99 per trade at TD Direct. As I mentioned, I recently moved my LIRA from TD Direct to Wealthsimple Trade when that account type recently became available on the commission-free platform.

Wealthsimple Trade still does not offer RESPs or Corporate accounts.

I kept my kids’ RESP at TD Direct, and invested in commission-free TD e-Series funds until January 2024. This year I switched my RESP portfolio to mirror Justin Bender’s RESP approach for a family RESP, basically separating out each child’s share by putting my oldest daughter’s contributions, grants, and growth into VEQT and VSB, and my youngest daughter’s funds in XEQT and XSB.

I’m a big fan of Questrade and what they’ve done for self-directed investors over the past 20+ years. I wanted to try out the platform for myself and had the opportunity to do so when I decided to open a Corporate Investment Account.

ETFs are free to purchase on the Questrade platform and since I planned to add new money regularly it made sense to use Questrade. 

Final Thoughts

I write a lot about investing and my philosophy is all about building a simple, low-cost, globally diversified investment strategy. I’ve explained how I invest my own money and apply this thinking to my unique situation. But my situation is not the same as yours.

You may not have the time, desire, or temperament to open a self-directed brokerage account and buy your own ETFs (even if it’s just one ETF). You may feel more comfortable with a digital or robo-advisor guiding the way.

Some of you may not feel comfortable at a robo-advisor and want to remain at your bank. There’s a solution for you, too, in the form of bank index mutual funds.

Some of you may be highly motivated to optimize your ETF portfolio even more by holding U.S. listed ETFs in your RRSP to save on costs and foreign withholding taxes. 

The point is that there’s a solution for everyone in today’s investing landscape. I hope that by sharing these strategies, and how I invest my own money, you’ll be able to apply this thinking to your own investments to simplify your portfolio, reduce your costs, and ultimately lead to a better long-term outcome.

Arguably no one has done more to educate Canadian do-it-yourself investors than the PWL Capital teams of Dan Bortolotti and Justin Bender, and Benjamin Felix and Cameron Passmore.

It began more than a decade ago with Dan’s incredibly popular Canadian Couch Potato blog and podcast. Since then, Dan teamed up with PWL’s Justin Bender, who has his own Canadian Portfolio Manager blog in addition to a podcast and YouTube channel dedicated to helping DIY investors.

More recently, PWL’s Ottawa team of Felix and Passmore launched their own successful Rational Reminder podcast, which complements Ben’s Common Sense Investing YouTube channel (which now boasts nearly 200,000 subscribers).

It’s an incredible amount of content dedicated to helping Canadians become better investors. 

Their advice at its core is to follow an evidence-based investing approach that starts (and usually ends) with a low cost, globally diversified, and risk appropriate portfolio of index funds or ETFs. Simplify this even further by investing in a single asset allocation ETF that automatically rebalances itself.

Indeed, Justin Bender says,

“These simple one-fund solutions are ideal for the majority of DIY investors.”

Dan Bortolotti says, 

“Since their appearance in early 2018, asset allocation ETFs have become the easiest way to build a balanced index portfolio at very low cost.”

And, Ben Felix says,

“Total market index funds are the most sensible investment for most people.”

Keeping it Simple

Dan’s writing was influential in my own journey from dividend investing to full-fledged indexing. But I took a long-time to switch to indexing because the product landscape was less than ideal.

In the early 2010’s, Dan’s model portfolios often consisted of six to 12 different ETFs. All one had to do was look at the comments left on his articles by investors who agonized over whether to add 5% to REITs, 2.5% to gold, or put an extra tilt to their U.S. holdings. Meanwhile, these were often new investors with less than $10,000 in their portfolio.

Then Vanguard introduced a groundbreaking ETF called VXC (All World, except for Canada). Now a Canadian investor could set up a low cost, globally diversified portfolio of index funds with just three ETFs (VCN for Canadian equities, VAB for Canadian bonds, and VXC for global equities).

I took the plunge and sold my dividend stocks to purchase a two-fund (all equity) portfolio consisting of VCN and VXC. Ben Felix said that, “back in 2017, the simplest portfolio around was Robb Engen’s four-minute portfolio, which consists of only two equity ETFs.”

Then, in 2018, Vanguard again changed the game when it launched a suite of asset allocation ETFs designed to be a one-fund investing solution. That’s when I switched my two-fund solution over to my new one-fund solution with Vanguard’s VEQT.

Tangled up in Plaid

It would be great if the debate ended there, but this is investing and many of us are wired to look for an edge to boost our returns. Accepting market returns is difficult because we’re constantly distracted by shiny objects, and doom & gloom forecasts, not to mention the notion that when markets are booming or crashing we feel like we need to do something.

Index investors are not immune to this. Not content with a total market, all-in-one solution, some indexers look to reduce their fees even more by holding U.S. listed ETFs and performing the currency conversion tactic known as Norbert’s Gambit.

Justin Bender’s model portfolios include ‘ridiculous’, ‘ludicrous’, and ‘plaid’ options designed to squeeze out some extra return by reducing fees. 

Bender’s Ludicrous Model Portfolio

Bender’s Plaid Model Portfolio

Again, the idea here is to reduce the cost of your index portfolio and reduce or eliminate foreign withholding taxes. The plaid portfolio takes into account your after-tax asset allocation, recognizing that a portion of your RRSP is taxable and doesn’t fully belong to you.

And it’s true. By selecting certain individual ETFs over the all-in-one asset allocation ETF an investor can save a not-so-insignificant 0.28% in an RRSP (VBAL’s MER + foreign withholding tax = 0.42% while the combination of individual ETFs in Bender’s model portfolio costs just 0.09% MER + 0.05% FWT).

WTF (What the Factor)?

The PWL team of Felix and Passmore use funds from Dimensional Fund Advisors to build their client portfolios. These funds target the five known risk factors used to explain the differences in returns between diversified portfolios.

The risk factors include market (stocks beat t-bills), size (small cap stocks beat large cap stocks), value (value stocks beat growth stocks), profitability (companies with robust profitability beat companies with weaker profitability), and investment (companies that invest conservatively beat firms that invest aggressively).

Since it’s not possible for a Canadian DIY investor to access Dimensional Funds, Ben proposed a model portfolio designed to target the five factors.

Felix Five Factor Model Portfolio

This factor-tilted portfolio is slightly more expensive than Bender’s ludicrous option but the main objective of Felix’s Five Factor model portfolio is to increased expected returns.

Ben does present a compelling case for indexers to tilt their portfolios towards these factors to potentially juice expected long-term returns.

What index investors need to determine is whether that juice is worth the squeeze. I’d argue that it’s not.

The Behavioural Argument To Avoid Complexity

I have a huge amount of respect and admiration for what Dan & Justin, and Ben & Cameron have done for individual investors. But I think these model portfolios should be locked behind a pay wall, only to be accessed by investors who can demonstrate the experience, competence, and discipline needed to execute the strategy. That includes:

• Having a large enough portfolio for this to even matter. 
• Using an appropriate investing platform that allows you to hold USD, perform same-day currency conversions, and keep trading commissions low. 
• Creating an investing spreadsheet that’s coded to tell you what to buy and when to rebalance.
• Being an engineer or mathematician who not only loves to optimize but who also understands exactly what he or she is doing (and why).
• Having the conviction to stick with this approach for the very long term, even through periods of underperformance.
• Being humble enough to admit that you’re probably not going to execute this strategy perfectly.

Beginner investors shouldn’t worry about U.S. listed ETFs or factor tilts when they first start building their portfolio. It’s only once your portfolio gets into the $250,000 territory that you’ll start to see any meaningful savings in MER and foreign withholding taxes. Focus on your savings rate.

The investing platform matters. Wealthsimple Trade offers commission-free trades but doesn’t allow clients to hold US dollars, making it expensive to buy U.S. listed ETFs. Questrade is a more robust trading platform for DIY investors, and allows for free ETF purchases, but it takes a few days to process Norbert’s Gambit transactions leaving investors exposed to opportunity costs while they wait. Some platforms, like RBC Direct Investing, allow for same-day Gambits but also charge $9.95 per trade.

A investing spreadsheet, like the one Michael James has created for himself, takes decisions like what to buy and when to rebalance away from the investor and replaces them with a rules-based approach. This is critical, as humans are not likely to make good decisions consistently over time – especially in changing market conditions.

“Statistical algorithms greatly outdo humans in noisy environments.” – Daniel Kahneman

Multi-ETF investing models were designed by incredibly smart people who put in the research to create an optimal portfolio. It certainly looks elegant on a spreadsheet to see such precise allocations to emerging markets, international stocks, or U.S. small cap value stocks. But that precision gets thrown out the window when markets open the next day and start moving up and down.

Your carefully optimized portfolio is now live and immediately out of balance. Behavioural questions abound. When to rebalance? Where to add new money? What happens when I run out of RRSP or TFSA room?

In the case of the five factor model portfolio, how will you react if this approach doesn’t outperform a traditional market weighted index portfolio? Small cap value stocks have been crushed by large cap growth stocks for many years. How long will investors wait for the risk premium to come through?

Final Thoughts

My own investing journey and experience reviewing hundreds of client and reader portfolios tells me that the vast majority should be invested in low cost, globally diversified, risk appropriate, and automatically rebalancing products. Today, the easiest way to do that is with a single asset allocation ETF or through a robo advisor.

Again, one just has to look at the comment sections of their blogs and videos to find that these complicated portfolios lead to many more questions than answers. Dan likely realized this and simplified his Canadian Couch Potato blog model portfolios to include just the single-ticket asset allocation ETFs or TD’s e-Series funds.

But it’s clear that inexperienced investors are trying and failing to implement the more complicated portfolios in real life. In fact, it’s possible we’ll see thousands of Bender and Felix investing refugees flocking back to a one-ticket solution in the years to come.

That’s why the ridiculous, ludicrous, plaid, and five factor model portfolios should have been kept under wraps. Index investors don’t need more complicated solutions when they can beat the vast majority of investors with a simple, single-ticket asset allocation ETF.