How to Set Up (or review) A Diversified Low-Fee Investment Portfolio
How Canadians Can Construct a Low-Cost Diversified Investment Portfolio Using Exchange Traded Funds
This short article provides a specific portfolio of low-cost Exchange-Traded-Funds that can be used to almost instantly create a diversified portfolio. This can solve the problem of how to get started investing or how to achieve a diversified portfolio.
The information will also be useful in reviewing and making adjustments to an existing investment portfolio.
Before putting together an investment portfolio, you should first know something about where and how to get started investing including having a basic understanding of the main types of investments (“asset classes”) and the different types of advisers and do-it-yourself services. And if you are going to include individual stocks and bonds and Exchange-Traded-Funds (instead of or in addition to deposit accounts, Guaranteed Investment Certificates and mutual funds) then you need to have some knowledge of those investments.
We have two articles that cover the basics:
1. Where and How to Invest – Defines the major asset classes, discusses considerations in dividing investments across the major asset classes and across the world, discusses the types of advice available, and discusses active versus passive index investing.
2. How to Get Started Investing in Individual Stocks and ETFs – Discusses how to open a self-directed investment account, explains how investing in stocks differs from investing in mutual funds, explains how much money is needed to get started, and discusses the advice that is available.
For those who feel that they are ready to construct a basic investment portfolio using low-cost Exchange-Traded-Funds (or make changes to their existing portfolio), I have put together the following table.
This table is intended for Canadians who have already set up (or will set up) a self-directed investment account. For those who will stick with mutual funds the table may be useful to start a discussion with your advisor who should be able to do something similar with mutual funds.
A new investment portfolio could be very quickly set up using the following table as guidance. The appropriate allocations to each major asset category, the sub-categories and the regions of the world will differ greatly based on individual circumstances. I have provided some rough allocation percentage ranges that might be applicable to a “typical” investor but which may or may not be applicable to your particular circumstances.
|Major Asset Class||Sub-class||Country||Toronto Symbol||Fee||Current Yield||Risk||Typical Allocation||Comment|
|CASH||Actual cash in the investment account||Canadian||none||none||0%||no risk||normally 5 to 15%||There is no real substitute for cash in terms of lack of volatility and instant access when needed|
|Deposit accounts within the investment account||Canadian||Example TDB8150||none||about 1%||no risk|
|FIXED INCOME||Guaranteed Investment Certificates||Canadian||none||none||1.25% 1 year to 1.6% 5 year||very low||Normally 15 to 50% divided equally between short, medium and long term||Short-term bonds could be used in place of GICs|
|Short term Bonds 1-5 years||Canadian||XSB||0.11%||2.1% to maturity||very low|
|Medium Term Bonds||Canadian||XBB||0.11%||2.6%||low|
|Long Term Bonds||Canadian||XLB||0.20%||3.2%||medium||Higher risk of loss in value if interest rates rise|
|EQUITIES||Canadian Common||Canadian||XIC||0.06%||2.9%||high||10 to 40%||Broad Toronto stock index|
|U.S.A. Common||United States||IVV (New York) or XSP hedged to Canadian dollars||0.04% or 0.11%||1.8%||high||5 to 20%||S&P 500, the largest American publicly traded companies|
|Rest of Developed World Common||Rest of World||VIU or VI hedged to Canadian dollars||0.23%||2.0%||high||0 to 15%|
|Preferred shares||Canadian||CPD||0.51%||4.5%||medium||0 to 10%||Consider using in taxable accounts in place of some fixed income|
|High dividend||Canadian||VDY||0.22%||3.4%||medium||0 to 10%|
|REIT||Canadian||VRE||0.39%||4.0%||medium||0 to 10%||Consider using in non taxable accounts|
There are hundreds of Exchange-Traded-Funds to choose from. The above table provides a possible basic diversified low cost Exchanged Traded Fund portfolio for Canadians. This approach implicitly trusts that markets are efficient and does not reflect any judgement regarding the relative attractiveness of any particular country or asset class or any judgement regarding the timing of when to invest.
Dated September 27, 2017