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.