Why It Would Be Ludicrous To Invest In These Model Portfolios

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

SecuritySymbolAsset Mix
Vanguard Canadian Aggregate Bond Index ETFVAB40.00%
Vanguard FTSE Canada All Cap Index ETFVCN18.00%
Vanguard U.S. Total Market Index ETFVUN8.27%
Vanguard Total Stock Market ETF (U.S. listed)VTI16.54%
Vanguard FTSE Developed All Cap ex North America Index ETFVIU12.44%
Vanguard FTSE Emerging Markets All Cap Index ETFVEE1.58%
Vanguard FTSE Emerging Markets ETF (U.S. listed)VWO3.17%
Total100.00%

Bender’s Plaid Model Portfolio

SecuritySymbolAsset Mix
BMO Discount Bond IndexZDB29.29%
Vanguard FTSE Canada All Cap Index ETFVCN16.85%
Vanguard U.S. Total Market Index ETFVUN10.71%
Vanguard Total Stock Market ETF (U.S. listed)VTI16.06%
Vanguard FTSE Developed All Cap ex North America Index ETFVIU19.60%
Vanguard FTSE Emerging Markets ETF (U.S. listed)VWO7.49%
Total100.00%

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

SecuritySymbolAsset Mix
BMO Aggregate Bond Index ETFZAG40.00%
iShares Core S&P/TSX Capped Composite ETFXIC18.00%
Vanguard U.S. Total Market Index ETFVUN18.00%
Avantis U.S. Small Cap Value ETFAVUV6.00%
iShares Core MSCI EAFE IMI Index ETFXEF9.60%
Avantis International Small Cap Value ETFAVDV3.60%
iShares Core MSCI Emerging Markets IMI Index ETFXEC4.80%
Total100.00%

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. 

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20 Comments

  1. Leigh on March 27, 2021 at 5:09 pm

    Great Article Robb. When the All in One Vanguard funds were released in 2018 they almost seemed too good to be true! I too invest All accounts in VEQT and can’t imagine a different product that would be released that would make me want to switch. The simplicity of these funds in my opinion are easily worth the slightly higher MER. Pair VEQT with WS Trade and it seems like a great recipe for success. I always enjoy the new content.
    Thank you,

    • Robb Engen on March 28, 2021 at 10:17 am

      Hi Leigh, thanks for sharing. I agree 100%.

  2. Joe M on March 27, 2021 at 5:11 pm

    Well said Rob. Could not agree more!!!

  3. Steve Oliver on March 28, 2021 at 4:46 am

    Well said Robb! Now how to get a retiree to give up my stock portfolio. I see 150 plus holdings across 8 accounts between my wife and I that I have to manage. With no backup should I become unavailable. I see $1500 in fees just to reshape it all. Maybe I just start with the TFSAs. Have you compared VEQT returns? I still think its got too much Cdn content. It seems so arbitrary or is it?

    • Robb Engen on March 28, 2021 at 10:24 am

      Hi Steve, I’ve worked with several clients who are in that situation. They see the value in a simple index solution but the legacy portfolio gets in the way (most often with a large taxable account). But it’s fairly easy to transition your RRSP and TFSA. Yes, you’ll rack up a bunch of trading commissions when you sell, but there’s no tax consequences and you only have to do it once. The taxable account can be tackled in pieces over time and as it makes sense with your tax situation. One client is in his third calendar year of selling off stocks in his non-registered account and transitioning to VBAL. Surely there are a couple of losers in the portfolio that can be sold to offset some gains.

      I’m not too fussed about the Canadian equity content in VEQT (29%) but if it’s too high for your liking then XEQT’s is slightly lower at around 23%.

      • Steve Oliver on March 28, 2021 at 11:00 am

        Oh on the Canadian content, if you saw my portfolio you would see that I am 90% Cdn, 10% US. Yet my adult kids I advised to go 75% US or higher and they are in that situation. I just havent swung that way as I prefer the dividend income and safety of Cdn banks and utilities. I just dont know the US companies and I cant buy them hedged, and as you know, Cdn dividend companies pay more than most US dividend companies and I dont have to worry about exchange rate losses should the Cdn dollar go up. My US content is all hedged US indexes and etfs. I havent looked closely at VEQT as to its dividend strategy and payout but if its close to equal US to Cdn, then its essentially hedging anyway. Thats the only reason I could see to have equally weight US to Canada in non hedged positions. I havent accounted for the other regional weight. But Cdn weight of 29% is fairly close to a hedge to non Cdn weighting in that portfolio. I just suddenly realized that.

  4. Darren on March 28, 2021 at 6:03 am

    I’m with Wealthsimple. Isn’t that basically the same as your above suggestion ?

    • Robb Engen on March 28, 2021 at 10:26 am

      Hi Darren, yes – absolutely. The idea is to invest in a low cost, globally diversified, risk appropriate portfolio that ideally rebalances automatically. You can do this with a single asset allocation ETF or through a robo advisor.

      • Darren on March 28, 2021 at 12:00 pm

        Thanks Robb. Love your blog. Always lots of great info!!!!!

  5. Cory on March 28, 2021 at 6:39 am

    “What ETFs should I use?” is a daily question in a financial independence Facebook group I’m a member in. A large amount of people aren’t willing to put the effort in to do their own research, and are willing to take advice from random strangers on where they should be investing their hard earned cash. For these people, doing a risk assessment and then picking whatever asset allocation ETF is in alignment with their risk tolerance is probably the best way to go.

    Personally, I had all of my money in VEQT for a couple years before deciding I was willing and able to take on more complexity via the Rational Reminder model portfolio.

    Two points I disagree with:

    I’m not sure having a paywall would do anything to ensure someone has the discipline to execute these strategies. Ability to throw money at a problem does not equate to discipline. See “Motley Fool” subscriptions.

    As far as having a spreadsheet to rebalance, that’s not necessary. Passiv is a free service available through Questrade that allows you to allocate percentages to ETFs of your choosing. It tells you how many shares of each ETF you need to purchase in order to rebalance with your available cash. I did create my own spreadsheet, but passiv works just as well if not better. You can choose to rebalance with available cash, or enable selling if things are really out of wack. Being as I’m in the accumulation phase, I just use new cash to buy whatever ETF is underweight, minimizing trading fees from selling.

    Cheers Robb, I enjoy the blog!

    • Robb Engen on March 28, 2021 at 10:30 am

      Hi Cory, thanks for your comment. The pay wall was a bit of hyperbole but it could stay behind the friendly confines of the Rational Reminder community without distracting or confusing regular investors who should just stick with an all-in-one. Even the disclaimer that ‘most people should not do this’ will be ignored by many because no one assumes they’re average.

      Agree that Passiv is a good choice to replace the spreadsheet if you don’t mind granting access to a third party.

  6. David S. on March 28, 2021 at 6:49 am

    Great article that provides me with reassurance and validation of the decision I made two years ago to abandon my portfolio of coach potato ETFs for a single fund solution. I made the switch to iShares XGRO (80/20) in Jan 2019. I love the simplicity of this and the other one-ETF solutions. And I especially appreciate that I no longer have to research, rebalance or stress about when to buy or sell. During the accumulation phase – I bought. Now that I am in the decumulation phase all I have to do is sell when I need cashflow.

    My only regret is that these weren’t available years ago when I switched from actively managed mutual funds. They could have saved me a lot of the pain and mistakes I made as a DIY investor, though those experiences truly allow me now to fully appreciate the value of these fantastically simple single-ticket asset allocation ETFs!

    Thank you for your thoughtful article, Robb.

    • Robb Engen on March 28, 2021 at 10:31 am

      Hi David, thanks for your comment. I also wish these were available years ago as it would’ve made it easier to make the jump from stock picker to indexer.

  7. Grant on March 28, 2021 at 7:22 am

    I agree that “simplicity is the master key to financial success” (Jack Bogle) and that the vast majority of investors will have a better outcome by sticking with total market index funds and the asset allocation funds are a great solution. Larry Swedroe estimates that only about 5% of DIY investors can stick with a small cap value tilt because of the tracking error – long periods of underperformance that can occur with these factors of return – small cap and value stocks.

    However tilting to small cap value is not just about a higher expected return. It’s also increases the reliability of the investment outcome by adding multiple sources of return. Factors (including market beta, the total market) do well at different times so there is a diversification benefit. Eg, from 2000-2002, the broad market fell about 50%, while small cap value went up quite a lot. So by diversifying across factors you are not relying on just one source of return. You could do a small cap value tilt with a less complex portfolio than Ben Felix suggests – VEQT, AVUS and AVDV. Not as simple as one ETF, but for those who have a deep understanding of factor investing and are sure they can stick with the plan, just 3 funds is not that complex.

    However for most of us, I’m with you Rob, keep it simple and stick with a single asset allocation fund in all accounts.

  8. Kathryn on March 28, 2021 at 3:21 pm

    Oh Robb,
    I could have used this article about a month ago. I’ve just completed Norbert’s gambit to convert Cdn dollars to US, but am now asking myself why I’ve made my life so much more complicated. Lifelong frugality has gotten me to this point – an adequate portfolio at the brink of retirement – but that same frugality has pushed me to try and save on fees and FWT and thus overcomplicate my life. Sigh.
    Throwing my hands and spreadsheets in the air and converting all to XBAL will probably happen, gradually, once I’ve had a chance to recover from kicking myself. Ouch.
    Meanwhile, I’ve got to decide how to allocate the US cash. Back to the spreadsheet…

  9. Mike on March 28, 2021 at 5:42 pm

    Hello Robb, I’ve been following your articles for some time, but this is my first time commenting, as I feel what you’ve written on this article is so crucial. I would go a little further to suggest that this article is truly a breath of fresh air, and should be read by any DIY investor.
    In my opinion, there are three things that make the one ticket ETF solutions by Vanguard and Black Rock the most sensible investment for most Canadians. They address the following; Human Nature, Time and Cost.
    Human nature: One of the inherent problems with DIY investors are those that do DIY investing. We are a curious bunch, we like to research, we might be a little over analytical, and these traits will often work against us in the long run. One of the biggest benefits of the one ticket etf solutions, is you choose the right investment, with a clear head, and leave it well alone. For those that are truly analytical egg-heads, look at how the fund is structured and ask yourself, honestly, can I come up with a better asset mix?
    Time: The other benefit with these one ticked solutions is you don’t have to worry about rebalancing. I know it’s only a couple minutes, but let’s be honest, the market is really only useful between 9:50 AM and 3:35 PM. I work during those hours and cannot rebalance my portfolio when I’m working. Do you have any idea how mad I was during the crash of March 2020 not to have the time to sell some ZAG and purchase the VCN & XAW. I would go even further to suggest that those just starting off, that don’t have a lump sum to invest would be wise to use a robo advisor, that way you can setup a PAC to match your pay date and leave it well enough alone until you have around $15,000.00 and then open a Direct Investing account.
    Cost: Yes you can lower the MER a little by holding the individual etfs, but you’re probably paying $10.00 a trade, which means rebalancing can run you $50.00, and then if you want to purchase additional etfs you’re dropping anywhere from $20.00 to $40.00 pending on your account setup instead of just paying the $10.00 for purchasing VBAL, XBAL, ZBAL etc… Doing the math isn’t hard, yes I could save a couple bucks in my account by holding individual etfs, but for reasons one & two above it just doesn’t make any sense.
    My fear, moving forward, is we (the collective we) will overthink something that works and jeopardize our futures chasing a higher return, which goes against everything index investing is about. Anyone who isn’t considered a high-net-worth individual would do well to stick to the simplest plan, a proven one that will work for them in the long term.
    Thank you for this article. It was quite timely too, as I just watch a new video from Benjamin Felix regarding the 5 factor model etf investing approach. I have the utmost respect for Benjamin Felix, but I think that this video may derail a few peoples already sensible index investing portfolios. Mainly because, most DIY investors are a curious bunch, like to research, and may chase the next thing. Instead of admitting… “I was clear headed when I made a decision to invest my money this way, I’m just going to hold fast and admit that I made a good decision”.

    Cheers & Thank you,
    Mike

  10. David @ Filled With Money on March 29, 2021 at 6:55 pm

    For the overwhelmingly majority of investors, a simple index like the S&P 500 will do just fine. Actually more than just fine, the best that they can ever possibly do in their lifetime. No need to get all complicated with playing around with the allocation percentages and such. Or the Fama French model.

    S&P 500 all the way.

  11. igra on March 29, 2021 at 7:09 pm

    Brilliant! This is a must read for any DIY investor!
    And while I also have a great deal of respect for Dan Bortolotti, Justin Bender, and Ben Felix, I think that more harm than good has come from their articles on Foreign Withholding Taxes and – now – factor investing. This is not their fault really. But unfortunately too many investors who are just starting or have small to medium portfolios are now agonizing about 0.06% of withholding taxes instead of focusing on their savings rate.
    Sometimes knowledge isn’t power but reason for analysis paralysis.

  12. Darby on March 30, 2021 at 7:30 am

    We currently hold the TD e-series Canadian, US, and International funds in an unregistered account. The value is close to 500K. Our RRSP and TFSA accounts are maxed out and we are in the decumulation stage of life which to us means moving RRSP/RRIF money into the unregistered account and maxing out our TFSA accounts annually. I am trying to decide whether moving to an all in one ETF would be beneficial or not in our unregistered account. With the TD e-series funds we do not pay a fee to buy or sell. We get accurate accounting of the ACB and we can recoup FWT. I know that our total MER costs are higher than they would be with an all in one ETF but we would incur fees to buy and sell, although we don’t do much of that.

    Could we recoup FWT in an all in one ETF? Is the ACB reported accurately in an all in one ETF or would we have to track it ourselves? My basic question is under our circumstances which is better for an unregistered account – TD e-series funds or an all in one ETF?

  13. Brian on April 3, 2021 at 10:04 am

    Hi Robb, If you’re going to be withdrawing money from a TFSA, I’m wondering if it’s more advantageous to have individual ETFs (e.g. VCN, VUN, VIU, VAB etc) rather than and all-in-one like VBAL? It seems to me that with individual ETFs, you can choose to sell the ones that are high rather than having to sell a single fund that contains everything. Does that make sense, or am I looking at this wrong?

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