Weekend Reading: Embracing Simplicity Edition

Weekend Reading: Embracing Simplicity Edition

Do-it-yourself investors face a number of behavioural hurdles when it comes to building an investment portfolio.

We look to past performance to guide our future investing decisions – ignoring evidence that yesterday’s winners often become tomorrow’s losers. 

We disregard decades of research that shows how low cost investing through passive index funds beats active stock picking strategies over the long-term.

We build needlessly complicated portfolios when simple, automatically rebalancing solutions exist.

We tend to panic when markets go down or sideways for a period of time, instead of accepting that volatility is the price of admission.

Put up your hand if you added a technology tilt to your portfolio after the NASDAQ returned more than 48% in 2020. Same goes for cryptocurrency or the latest meme stock. 

Who increased their equity allocation after markets roared back to life last spring?

Which part of your portfolio did you tinker with to help hedge against higher inflation?

We can’t help ourselves.

I’m here to remind you to embrace the simplicity that comes from holding a single asset allocation ETF (or a robo advisor portfolio for those who don’t want to self-direct).

You’ll own 13,000 global stocks and 17,000 bonds inside of just one product. For that incredible simplicity and diversification investors pay as little as 0.20% MER.

Asset allocation ETFs help deal with a number of behavioural limitations. One, because they roll-up 4-7 underlying ETFs into one product, investors are less inclined to fuss over an asset class or region that is underperforming at the moment. Two, they automatically rebalance daily with new fund flows to maintain their target asset mix. That saves DIY investors from trying to exercise their own judgement and decision making.

Related: Why indexing doesn’t mean settling for average returns.

Some investors have a hard time embracing the simplicity of a single fund solution. I’ve seen portfolios that hold multiple asset allocation ETFs from different fund providers, which defeats the purpose of a single-ticket solution.

Maybe they’re trying to avoid putting all their eggs in one basket, but it’s helpful to remember that these products actually contain 4-7 underlying ETFs that represent thousands of stocks and bonds from around the world. It’s a big basket!

I get it. Investing doesn’t seem like it should be this easy. But it can be. Open a brokerage account, open the appropriate account types, fund the account(s), and purchase a single, risk appropriate asset allocation ETF. Then do nothing. 

Your future self will thank you for generating the most reliable investment outcome. Heck, your current self will thank you for saving time and stress over managing your portfolio. Win-win.

This Week’s Recap:

We reached the halfway mark of 2021 and I shared my mid-year net worth update.

A reminder to check out my last weekend reading post where I shared some juicy new welcome bonuses from American Express. I’m well on my way to building back my Aeroplan balance.

From the archives: Why you should stop asking $3 questions and start asking $30,000 questions.

Thanks to Darcy Keith and Larry MacDonald for including my takes on leveraged investing in their Globe and Mail piece (subs):

“It reminds me of 2006-07 when the Smith Manoeuvre was getting a lot of uptake. Investors see strong market returns plus low interest rates and feel like they can dial up their risk with a leveraged loan,” Mr. Engen said. “Of course, the financial crisis put an end to that idea.

“Now a new batch of investors are looking at leveraged investing as a way to juice their already strong recent returns. I don’t think it’s a good idea. I’d ask anyone who is seriously considering a leveraged investment loan how they felt in March, 2020, when their non-leveraged investments were down 34 per cent and it looked like we were in for a prolonged bear market,” he said.

Promo of the Week:

DIY investors have two terrific options when it comes to saving money on trading commissions.

Wealthsimple Trade is Canada’s first and only zero-commission trading platform where investors can trade stocks and ETFs for free in an RRSP, TFSA, or non-registered account. Sign up for Wealthsimple Trade today and get a $10 cash bonus. I manage my RRSP and TFSA at Wealthsimple Trade.

For most robust investing needs, including for LIRAs, Margin, and Corporate accounts, Questrade is still the king of low-cost investing in Canada. You can purchase ETFs for free and trade stocks for as little as $4.95. Take your savings further with a registered account at Questrade.

Weekend Reading:

For those of you who aren’t interested in travel rewards, our friends at Credit Card Genius have compiled the best cash back credit card offers right now.

Great piece by A Wealth of Common Sense blogger Ben Carlson about how doing nothing is hard work.

Collaborative Fund’s Morgan Housel explains the casualties of perfection:

“Cash is an inefficient drag during bull markets and as valuable as oxygen during bear markets. Leverage is the most efficient way to maximize your balance sheet, and the easiest way to lose everything. Concentration is the best way to maximize returns, but diversification is the best way to increase the odds of owning a company capable of delivering returns. On and on, if you’re honest with yourself you’ll see that a little inefficiency is the ideal spot to be in.”

Read why young Canadians are dropping their do-nothing financial advisors salespeople for DIY investing.

Retiring from full-time work leaves a void. How will you fill it?

How is it okay that we’re meant to work a 9-5 for 40+ years and then retire? Maybe we’ve been bamboozled.

Jason Heath explains what you need to know if your retirement is riding on your rental property income.

Here’s Ben Carlson again with 16 unbelievable facts about the markets.

Professor Moshe Milevsky explains the difference between retirement and decumulation using an excellent example from Australia.

Some young clients fear missing out, while older ones may be sitting on unexpected gold mines. Here’s how advisors are rethinking their approaches with clients looking to get into, and out of, the housing market.

My Own Advisor Mark Seed looks at the role of an Executor when it comes to estate planning.

Finally, Millionaire Teacher Andrew Hallam explains how to become a digital nomad. Sounds tempting!

Have a great weekend, everyone!

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  1. Michael James on July 4, 2021 at 4:45 pm

    Milevsky implies that Australians need to spend more in retirement, but the data is recent (< 30 years), and stock market performance has been well above average over this period. Perhaps Australian retirees have just been reasonable in the face of uncertainty about longevity and stock market performance, and they simply got lucky with the returns they received.

    As for "decumulation is an extraordinarily complex mathematical optimization problem for which insurance, risk management and stochastic control is the proper apparatus and modeling lens", I have less patience for academics talking about retirement insurance products than I used to have. After reading many papers, I'm starting to see a pattern. They generally assume that insurance companies offer various annuity-type products on terms that don't seem to exist. If payout rates split the difference between insurance company interests and consumer interests, then ordinary people could benefit greatly from retirement insurance products. But whenever I look at the details of such products, I can't find any evidence of splitting the difference.

    • Robb Engen on July 5, 2021 at 10:32 am

      Hi Michael, I agree there seems to be a love for annuities in the academic / retirement planning community that doesn’t quite match up with product availability in the real world. Deferring CPP and/or OAS is likely “good enough” when it comes to guaranteeing an indexed-to-inflation and paid-for-life income stream.

      • Jim R on July 5, 2021 at 10:46 am

        Yup, deferring CPP seems to be the least expensive way to achieve the equivalent of a (modest) gold-plated annuity. It’s my plan, although I know many of your readers will disagree with this approach.

  2. joe on July 5, 2021 at 7:14 am

    Hi Robb: first off, I’m most enjoying your blogs and site overall…thank you for giving us so much useful information as consistently as you do.

    I recently just got back into investing and have taken out some of these asset allocation funds; and additionally I and have also signed up to Wealthica and Passiv (hope you’ll do more on aggregate apps: so far i’m finding them pretty useful). Passiv, as you probably know, is free for Questrade subscribers and contendsthat their app can provide useful, ongoing recalibration of your portfolio, so you’re not locked into an asset allocation ETF’s holdings…esp as your financial goals change as you move thru life when you need to rebalane. They instead suggest (and of course it’s a bit self serving) to just hold the various funds your self individually and use their app to recalibrate once needed. Have a read please and share your thoughts:

    • Robb Engen on July 5, 2021 at 10:51 am

      Hi joe, thanks for the kind words. I’m a big fan of automation and simplicity, so if Wealthica and Passiv are helping you along that path then that’s a great thing!

      I have read the Passiv vs. asset allocation ETF posts and do find them pretty self-serving. When I think of the barriers facing DIY investors from getting started, it’s hard enough to get people to leave their bank to open a discount brokerage account and buy a single all-in-one ETF. Linking a third-party to your brokerage account would be a non-starter, even if they did understand the benefits.

      Finally, I take issue with the notion that an all-in-one fund is somehow for novice investors – as if you need to ‘graduate’ to a more complicated solution to improve your outcome. You’re complicating the process just to try and squeeze an extra 10 basis points out of your portfolio.

  3. Rob Lavery on July 5, 2021 at 7:21 am

    thanks for doing all that reading Robb – I’m going to have a full day catching up!

  4. Rick on July 5, 2021 at 9:09 am

    Hi Robb,

    Great article and kudos to your piece on leverage investing in the Globe. Actually very timely as I am looking to lock into a 250k (5Y variable, 1.38%) loan via my Heloc (I am free and clear on my home plus no other debts). Planning on leverage investing the 250k long-term (5Y at the least=term duration) into either VEQT or VXC (avoiding home bias as I’ve already got a bulk of family RRSP, TFSA into VEQT ~30% Canadian market exposure).
    I realize the 13,000 globally diversified equities risk a 20-30% correction (250 then becomes 175 plus interest paid on the term) but I forecast another 8-10 years to self-retire (37 year old today).

    What are your thoughts on this approach?


    • Robb Engen on July 5, 2021 at 10:55 am

      Hi Rick, I’m fine with leverage if you have a well thought out plan and go into it with eyes wide open to the possible outcomes (especially the bad ones).

  5. Steve B. on July 5, 2021 at 1:21 pm

    Great article and reminders, Robb!

    For some reason, we want to believe that investing has to be hard and complicated. Plus, some people make money out of making investing seem hard and complicated.

    Cash flow and other aspects of financial planning should care far more attention and time that they currently do.

  6. David @ Filled With Money on July 6, 2021 at 5:27 pm

    Doing nothing is one of the hardest concepts to grasp. I think people think that if you’re doing nothing, it means that you don’t care or that you’re not really actively seeking out opportunities to better yourself.

    Nope. In investing, doing nothing IS actively seeking out opportunities to better the portfolio. It’s the hardest concept for so many investors to grasp.

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