Canadian DIY Investors: How to Build a “Lazy” Portfolio Using Just 3 ETFs
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I may be an avid investor, but I’m not a fan of stock picking. Personally, I find it long, complicated and stressful. The boredom of parsing annual reports and tracking earnings calls can really add up over time. For most new investors, the thought of having to track every stock in their potential portfolio can be daunting.
For this reason, I’m a fan of “lazy” investment portfolios using exchange-traded funds (ETFs), ones that anyone can create in minutes, automate contributions, and spend no more than 15 minutes, four times a year to manage. Keeping investing accessible, simple, and consistent is key to success here.
Why a lazy wallet?
For most investors, consistently beating the market over the long term is extremely difficult. Even professional fund managers often fail to outperform a simple index fund. Once you accept that, you can instead aim to match its returns with as little effort and cost as possible.
The goal here is to find the best ETFs that maximize broad market exposure and offer the lowest management expense ratios (MERs). This reduces the sources of risk that are controllable – under-diversification and high fees. In the long run, keeping your holdings diverse and inexpensive will dramatically increase gains and reduce risk.
The Canadian Three-Fund Lazy Portfolio
The Canadian three-fund lazy portfolio literally takes 15 minutes to set up and an additional 15 minutes each quarter to rebalance. It costs 75% less in fees than a mutual fund from a financial advisor and will match market performance. It consists of three assets:
- A global equity ETF, excluding Canada, covering US, international developed and international emerging markets
- A Canadian equity market ETF covering large, mid and small cap stocks across all sectors
- An aggregated Canadian bond ETF containing both government and corporate bonds
We want to keep the Canadian portion of our portfolio overweight relative to its actual weighting in global market capitalization (3%). This is known as the “country of origin bias”. It reduces fees and taxes, reduces volatility and protects against currency risk.
Which ETFs to use?
My choice to follow the Canadian stock market would be Vanguard FTSE Canada All Cap Index ETF (TSX:VCN). VCN tracks 182 large, mid and small cap stocks at a low MER of just 0.05%. For the rest of the world, you can buy BlackRock iShares MSCI All Country World Ex Canada Index ETF (TSX:XAW), which contains a total of 9,440 global stocks of all market capitalizations for an MER of 0.22%.
Depending on your risk tolerance, investment objectives, and time horizon, you may want to consider adding a bond allocation to reduce volatility and drawdown, between 20% and 60%. I recommend BMO Total Bond ETF (TSX: ZAG). ZAG tracks the broader investment-grade fixed income market by holding federal, provincial and corporate bonds for an MER of 0.09%.
How to manage this portfolio?
Once you have purchased these three ETFs in your desired allocation, you only have two tasks left:
- Every month, deposit money into your brokerage account and buy equal amounts of each ETF
- At the start of each quarter, rebalance your portfolio by buying and selling stocks until each asset returns to its original percentage.
That’s it. You need to resist the urge to tinker with it by overweighting sectors, trying to time the market, or buying hot stocks. Think of your lazy wallet as a piece of soap – the more you handle it, the more it shrinks. If you want entertainment, go to the casino. Otherwise, put your investment on autopilot and enjoy life!