Weekend Reading: Model Investment Portfolio Edition

My investing philosophy is pretty straightforward. Invest in a low cost, globally diversified portfolio of index funds or ETFs. Add bonds to help smooth out the volatility in your portfolio. Contribute regularly to meet your savings targets. Ignore everything else.

This approach comes from the belief that investing has become largely commoditized. Index tracking ETFs can be purchased and held for close to zero dollars. Furthermore, the academic research and empirical evidence clearly suggests that active management (stock selection and market timing) does not add value after fees. 

I’m crystal clear about my philosophy to readers of this blog and to the clients in my fee-only financial planning service. Still, there’s more than one way to build a diversified portfolio of low cost index funds or ETFs.

I need to understand my clients before I can make an appropriate recommendation. I want to determine the client’s current needs and future goals, the rate of return required to achieve those goals, their ability and appetite to invest on their own, and their desire for simplicity versus cost savings.

I’ll use that assessment to recommend one of three investment strategies and model investment portfolios that align with my indexing philosophy and meet clients where they’re at based on those factors.

1.) The Low Cost DIY Approach

Some investors feel confident investing on their own and want to cut fees to the bone. In this case, a simple solution is to open a discount brokerage account at Questrade, which offers free ETF purchases, and then set-up a model portfolio of ETFs. That might look like this:

• BMO Aggregate Bond Index ETF (ZAG) – 40%
• Vanguard FTSE Canada All Cap Index ETF (VCN) – 20%
• iShares Core MSCI All Country World ex Canada Index ETF (XAW) – 40%

*Source: Canadian Portfolio Manager model portfolios

One alternative low cost DIY approach is to simplify your portfolio and purchase one of the asset allocation ETFs offered by Vanguard (VBAL, VGRO), iShares (XBAL, XGRO), or BMO (ZBAL, ZGRO). 

Clients using this approach can expect to pay around 0.25% in annual management fees.

2.) The Robo-Advisor Approach

Some investors understand they’re paying too much in fees for their current managed portfolio of mutual funds. They still want a managed solution, but they want to save as much as they can on fees. It makes sense to match these investors up with a robo-advisor.

These online portfolio managers take the guesswork out of investing, putting clients into a portfolio of index funds and ETFs and automatically rebalancing whenever markets move too far or when client’s add new contributions.

But which one to pick? They all have their own strengths and weaknesses, but here’s a quick summary based on fees:

• Wealthsimple is best for portfolios under $250,000
• Nest Wealth is best for portfolios greater than $250,000
• Justwealth is best for RESPs

Clients using this approach can expect to pay between 0.50 and 0.70% in management fees.

Worth noting is RBC InvestEase, which is best for RBC clients who want to switch out of more expensive RBC mutual funds. That’s a good segue into the next approach.

3.) The Stay-At-Your-Bank Indexing Approach

I want clients to save as much as possible, but some investors don’t have the time or skill to become a DIY investor, and some aren’t comfortable with a robo-advisor. That’s okay – there’s still a low cost solution that allows you to stay at your existing bank.

All of Canada’s big banks offer index mutual funds. TD has the most popular and cheapest set of index funds, called TD e-Series funds. Investors who switch to e-Series funds can expect to pay roughly 0.45% for a portfolio containing Canadian, U.S., and International equities, plus Canadian bonds.

RBC clients have the InvestEase option I mentioned earlier, or they can invest in RBC’s suite of index funds for a cost of less than 1% a year.

Scotia, BMO, and CIBC also carry index mutual funds that cost 1% or slightly higher. Still better than their actively managed (or closet index) funds that come with MERs of 2% or higher.

Clients who opt for this approach may need to meet with a bank advisor and demand to switch their mutual funds to these index funds. Expect all the typical rebuttals from your advisor, but stand your ground and insist on the index portfolio.

This Week’s Recap:

On Wednesday, I wrote about my life insurance mistake – not taking out a private policy before leaving my employer group plan.

I published two posts over at Young & Thrifty:

1. An ETF vs. Index fund comparison
2. A look at five investment strategies for active traders

From the archives: Coping with stock market losses.

Finally, on Rewards Cards Canada, what happened to my credit score when I applied for 13 credit cards last year?

What I’m Listening To, Reading, and Watching:

In this new segment I’ll share what podcasts I’m listening to, which books I’m reading or have read, and what I’m watching on TV or YouTube. 

Here’s my current weekly podcast lineup:

• Animal Spirits with Michael Batnick and Ben Carlson
• Rational Reminder with Ben Felix and Cameron Passmore
• Freakonomics Radio
• Solvable
• Throughline

Published less often, but still on my list:

• Against The Rules with Michael Lewis
• Mostly Money with Preet Banerjee
• The Knowledge Project with Shane Parrish
• Revisionist History with Malcolm Gladwell

Books I’ve read this year and recommend include Range by David Epstein, Talking to Strangers by Malcolm Gladwell, and Thinking in Bets by Annie Duke. 

My favourite personal finance book of the year was Happy Go Money by Melissa Leong.

With two kids (10 and 7) it was a given we’d subscribe to Disney+ when it launched last week. My kids have surprisingly been enjoying the National Geographic content more than the Disney / Pixar content. That’s cool.

My wife and I watched the first three episodes of Star Wars: The Mandalorian – and it’s excellent. I kind of like the release of one episode a week to build the anticipation.

Weekend Reading:

What’s better than a no-fee credit card with up to 4% cash back bonus? It’s stacking a free $75 Amazon.ca e-gift card on top.

Dale Roberts at Cut the Crap Investing looks at living off the dividends and that 4% rule. 

Dan Kent at Stock Trades put together a monster post on the 2019 Canadian Dividend Aristocrats List.

Why thinking you’re ‘bad with money’ can become a self-fulfilling prophecy.

Should you roll the dice with an all stock portfolio in retirement?:

“But in retirement the order of stock market and portfolio returns do matter. That’s called sequence of returns risk. A bad year or a few bad years early in retirement can permanently impair your portfolio and your retirement.”

As many as one quarter of Canadians are finding that retirement is not all it’s cracked up to be. It’s so important to ‘find your why’ in retirement. 

Rob Carrick says parents are increasingly willing to help their children with the cost of post-secondary and says, don’t blame parents for the student debt problem in Canada.

Nick Maggiulli on Renaissance Technologies and the Medallion Fund: The greatest money making machine of all time.

In his latest Common Sense Investing video, Ben Felix explains why some home country bias is a good thing for Canadian investors:

My Own Advisor’s Mark Seed and PlanEasy’s Owen Winkelmolen do a retirement case study for a couple with $1.2M invested and no pensions.

Tim Cestnick offers five ideas to reduce the clawback of OAS benefits.

Canada’s rental costs are climbing due to strong demand and lack of new supply. This is leading to an increasing affordability problem in Canada’s major cities.

Finally, Scotiabank refused to honour two decades-old GICs until CBC stepped in.

Have a great weekend, everyone!