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:
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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!
