I ditched my financial advisor about a decade ago and started investing on my own. I was fed up with paying high fees for underperforming mutual funds. Dividend-paying stocks were growing in popularity so I decided to take the plunge and build my own portfolio of blue-chip companies.
Several years later I realized my folly; it’s hard to pick winning stocks. It’s even more difficult to consistently pick winners and avoid losers over the long term. Overwhelmingly, the academic research showed that passive investing using mutual funds or exchange-traded funds (ETFs) has a much better chance of outperforming active investing that focuses on stock picking and market timing.
I bought into the research, sold my dividend stocks, and set up my new investment portfolio using two low-cost, broadly diversified ETFs.
Today investors have many more choices available to build an investment portfolio on the cheap. I’ll show you three ways to lower your investment costs, diversify your portfolio, and reduce the time you spend worrying about investing.
1). Use a robo-advisor
A traditional financial advisor or wealth manager might cost an investor between 1.5 to 2.5 per cent in management fees each year. Then along came robo-advisors to disrupt the portfolio management model and drive down costs to less than 1 per cent.
A robo-advisor helps you build a portfolio based on your risk tolerance, experience, and time horizon. Once your model portfolio is built all you have to do is make regular contributions and the robo-advisor will allocate your cash into the appropriate investments.
The robo-advisor takes care of rebalancing your money whenever the portfolio drifts away from its original allocation (due to market movements or from your own contributions).
Competition is heating up in the robo-advisor space with the likes of Wealthsimple, Nest Wealth, Justwealth, ModernAdvisor, Questwealth, and WealthBar all vying for your investment dollars. BMO SmartFolio has been around for a while and more recently RBC launched its own robo-platform with RBC InvestEase.
2.) Invest in index funds
An index fund tracks a stock or bond market and aims to deliver market returns minus a very small fee. All of the big banks offer index funds, typically at half the cost (or lower) than their traditional equity or bond mutual funds.
One popular set of index funds is TD’s e-Series funds. These funds can only be purchased online but they offer tremendous savings over their actively managed mutual fund cousins. Investors can find e-funds for Canadian equities, Canadian bonds, as well as U.S. equities and International equities all for fees of about 0.50 per cent or less.
Another solid set of index funds comes from Tangerine’s Investment Funds. These are one-fund solutions that come in five flavours; with the traditional 60 per cent equities, 40 per cent bonds balanced portfolio being its most popular. The expense ratio on Tangerine’s funds comes in at 1.07 per cent: higher than TD’s e-Series funds, but still a bargain compared to the industry average.
Investors who use dollar cost averaging and make regular contributions throughout the year should consider index funds over ETFs. That’s because investors can buy and sell mutual funds without incurring any commission charges or fees, whereas ETFs may be subject to trading fees, depending on your broker.
3.) One-ticket ETF solutions
It’s never been easier to build an extremely low cost and globally diversified portfolio with just one investment product. The one-ticket ETF solution was first introduced to Canada last year by Vanguard. Since then, Horizons ETFs, iShares and BMO have all launched their own suite of all-in-one balanced ETFs.
Vanguard offers five of these ETFs, each with a management fee of 0.22 per cent. The most conservative allocation is 20 percent equities and 80 percent fixed income, while the most aggressive has 100 per cent allocation to equities.
Horizons lists two balanced ETF portfolios; one with a 50 / 50 split between stocks and bonds, and the other with 70 percent equities and 30 percent bonds. The MER on these funds is 0.17 and 0.18 percent respectively.
iShares launched two of its own one-fund ETF solutions; one with a traditional 60 / 40 split between equities and fixed income, and the other with 80 per cent equities and 20 per cent fixed income. Finally, in late February 2019 BMO announced three one-fund-solution ETFs that are similar to the original three from Vanguard (and with similar sounding ticker symbols!): ranging from ZGRO (80% equities to 20% fixed income) to the middle-of-the-road ZBAL (60 equities to 40% fixed income) and, the most conservative, ZCON, which is 60% fixed income to 40% stocks).
Final thoughts
I wish these options would have been available to me back when I first started investing. Now it’s easy to build an investment portfolio on your own. You can invest on the cheap, too, if you know where to look. Hint: It’s not with the big banks and investment advisors who sell you on their expertise picking stocks and timing the market.
Indeed, you can build a hands-off portfolio for less than 1 per cent a year with a robo-advisor. Or, with slightly more effort, open a discount brokerage account and buy a one-ticket ETF solution for less than 0.25 per cent a year.
In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on Feb. 8, 2019 and is republished here with his permission.
