Invest Like the Best: The Badass ETF Portfolio for Canadian MDs

Here’s where the rubber meets the road.  It’s time to stop overpaying for underperformance!

In this article, I’m going to show you the Exchange Traded Funds (ETFs) that I use in my investment portfolio and explain why I chose them.

First, let’s talk about the criteria used to create the best stock & bond (in our case, owned via ETFs) investment portfolio:

  1. Low Cost: The fees you pay for an investment are the single biggest determinant of how well that investment will perform.  Period.  (See my post on the rationale for indexing for the details.) This factor becomes even more important as the size of your portfolio grows. So, minimizing fees is definitely a priority. To be clear, for the purposes of this discussion, I’m mostly referring to the Management Expense Ratio (MER) when I talk about the fees.  However, despite what you may have been led to believe by your mutual fund salesperson, that isn’t the only cost associated with stock & bond investing.  Nope, not by a long shot.  Here are some of the other categories of fees (yes, there really are so many that they need to be categorized!) that most people have no idea they’re paying and are really cutting into their returns: Transaction Fees, Tax Costs, Cash Drag, Soft Dollar Costs, and Advisory Fees (See “The Shocking Truth About Mutual Fund Fees” for more details).  These are likely to cost you somewhere in the range of 2-3% IN ADDITION to the MER (which, according to a 2013 Morningstar report, averages about 2.42% in Canada!).  For those of you keeping track, we’re up to about 5% per year in fees, which is likely to be more than half of your portfolio’s gains each year!  Contrast this with the MERs you could be getting with the ETF portfolio below to see why this matters so much.
  2. Low-Maintenance: This isn’t something I want to have to think about and tweak regularly.  I prefer to set it and forget it (for a year at a time anyway).  In other words, instead of devoting my time and energy to CNBC & BNN (and yes, I used to watch these two religiously – what a waste of time!).  In fact, once I got things set up, I suspect I spend only about 30-60 minutes PER YEAR on my investments.
  3. Convenience: You shouldn’t have to work hard to construct a great portfolio or to rebalance it.

There’s one small catch, though – there are thousands of ETFs out there.  So how to decide?

Well, fortunately the wealth gods have chosen to smile down on us by giving us one Dan Bortolotti (MoneySense Consulting Editor, investment advisor with PWL Capital, and all around Canadian indexing Rockstar), the creator of the Canadian Couch Potato (CCP) approach to index fund and ETF investing.  The CCP is, in my opinion, all you really need to know in order to ensure that you’re making the best investing decisions for yourself and your loved ones.  I’m hitting the highlights here but, for more details, here’s the link in case you’re interested in learning more: http://canadiancouchpotato.com

I really, really, REALLY love this approach and I have been using it myself for the better part of the past decade.  It is evidence-based and, in my opinion, by far the best approach for virtually all Canadian MDs (see my post where I run the numbers for you comparing actively managed mutual funds to ETFs – coming soon). My returns handily trounce those of nearly all of the actively managed funds out there and the CCP frees up my time to do things I actually care about.

Canadian Couch Potato Model ETF Portfolio

The name of each security is listed on the left and its corresponding ticker symbol (i.e., the stock exchange code that represents that particular security) is listed next to it.  To the right of those is the allocation of each security to hold in your portfolio, depending on your choice of risk tolerance*, ranging from “Conservative” (70% in bonds) to “Aggressive” (10% in bonds).  For instance, if you have $100,000 to invest and you choose the “Aggressive” option, you’ll buy $10,000 worth of ZAG (BMO Aggregate Bond Index ETF), $30,000 of VCN (Vanguard FTSE Canada All Cap Index ETF), and $60,000 of XAW (iShares Core MSCI All Country World ex Canada Index ETF).  Doing so would mean you would pay an annual fee (the Weighted Average Management Expense Ratio, MER) of 0.16% (or only $160).  The returns for each choice of risk tolerance are listed below the MERs for periods ranging from 1 to 20 years with the measures of the Annual Standard Deviation and Lowest 12-Month Return (which, in each case, occurred during the last major bear market of 2008-2009) for each.

*A popular way to come up with a starting point for an appropriate risk tolerance is to take your age, (or your age minus 10 if you’re a bit more aggressive), and then make that the percentage of bonds in your portfolio. For example, a 35 year-old might hold between 25-35% of her portfolio in bond ETFs (e.g., ZAG) and the rest in stock ETFs (e.g., VCN & XAW).

If all of this makes your head spin a little, don’t worry.  I’ll take you through everything you need to know when it comes time to actually executing the steps involved in buying your portfolio.

The reason that this approach is called the “Couch Potato” is because it has, at its center, the whole notion of set it and forget it. This approach is provenIt will work over the long term as long as you don’t screw it up. I’ll say it again because this part is so important: once you’ve got things set up, FORGET ABOUT IT.  No, don’t get cute. Don’t fiddle. It will only end up costing you money.  (According to the data, next to paying high fees, you are the next most likely thing to hinder your portfolio’s performance.)

With the CCP, all you have to do is buy the 3 ETFs in the proportions corresponding to your choice of risk tolerance and then do nothing until it’s time to rebalance (Click here to learn about rebalancing).  Most people rebalance their portfolio once every 6-12 months using new money that they’ve set aside (we’ll talk about how to automate this in another article too – coming soon) every month since the last rebalancing. They then forget about it until the next 6-12 months, when they do it again.

By the way, if you take a look at the CCP website, you’ll note that there are alternative portfolio options including purchasing only a single balanced fund from Tangerine (which you can only buy via a Tangerine brokerage account; MER=1.07%) and TD e-Series Index funds (which you can only buy via a TD Waterhouse account but have the lowest fees of any index funds in Canada; MER=0.41-0.47%).  While these are technically easier to buy (i.e., you don’t have to wait for the markets to open in order to buy & sell), relatively easy to automate, and don’t involve transaction fees, buying ETFs really is quite simple (and, in my experience, setting up the TD Waterhouse account is a significant PITA.). For the dollar amounts that we’re talking about with Canadian MDs’ investments, the financial gains with ETFs more than make up for the tiny bit of extra work involved.  Besides, in another article I’ll walk you through everything you’ll need to do in order to get a system set up using the discount brokerage Questrade, so it’ll be a snap for you.

Action Steps (0 minutes total)

  1. This article is a precursor to the article where I walk you through the steps to take in order to acquire the Badass ETF Portfolio.  When you’re ready, please go and check out that article.

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