Last week I shared a questionnaire designed to test your course of action when it comes to portfolio management. I think the majority of Canadians who are willing to put in a bit of effort and discipline themselves can do very well managing their own investments. No one cares more about your money than you.
If you are suited to managing your own investments, how should you proceed with designing your own portfolio?
The easiest way to start is categorizing investment options. You should always invest using low-cost ETFs, but the options within ETFs are still plentiful and confusing. However, they can still be lumped into two main categories: growth ETFs and protection ETFs.
Growth ETFs are the engine of your investment portfolio. These ETFs will provide the long-term growth for your portfolio. They are also more volatile and can realize substantial shorter-term losses.
The growth portion of your portfolio should still be focused on broad indices. Although they may seem appealing and can provide higher returns in periods, stay away from ETFs that focus on fad sectors: tech stocks, marijuana stocks, momentum stocks, small-caps, etc.
You should also focus on balance in your portfolio. Measured diversification is the only "free lunch" when it comes to investing. Choose a portfolio that balances Canadian stocks, U.S. stocks, European stocks, Emerging markets, etc.
Limit each component to no more than 50% of your portfolio. Typically U.S. stocks should form the largest part of your growth ETFs as the U.S. economy is the biggest, most diversified economy in the world.
Don't let yourself get distracted by taxes, but choose your placement with an eye for tax efficiency. See my comprehensive guide on Tax Efficient Investing.
The options I share are chosen for their low fees, trading volume, and tax efficiency. Other than tax reasons, it doesn't really matter which ETF you choose within each category. Tax guidance is provided in italics.
Good Options for Growth ETFs
XIC.TO - iShares Core TSX Capped Composite Index
VCN.TO - Vanguard FTSE Canada All-Cap Index
HXT.TO - Horizons TSX 60 Index (Total Return): Best in Cash/Margin accounts for high income individuals
XUU.TO - iShares Core S&P U.S. Total Market Index: Best in TFSA/RRSP accounts
VTI - Vanguard U.S. Total Stock Market Index: Best for US Dollar based RRSP accounts
HXS.TO - Horizons S&P 500 Index (Total Return): Best in Cash/Margin accounts
Developed International Stocks
VIU.TO - Vanguard Developed All-Cap ex-NA Index: Best in TFSA/RRSP accounts
XEF.TO - iShares Core MSCI EAFE IMI Index: Best in TFSA/RRSP accounts
HXX.TO - Horizons Eurostoxx 50 Index (Total Return): European only, best in Cash/Margin accounts
Emerging Market Stocks
VEE.TO - Vanguard FTSE Emerging Markets All-Cap Index: Best in TFSA/RRSP accounts
Real Estate Stocks
VRE.TO - Vangaurd FTSE Canadian Capped REIT Index
CGR.TO - iShares Global Real Estate Index: Best in TFSA/RRSP accounts
Combined Global Stocks
XAW.TO - iShares Core MSCI All Country ex-Canada Index: Combines U.S., Developed International, and Emerging Markets, good for easy portfolio management
The protection ETFs are the brakes built into your portfolio. They are used to limit portfolio volatility and potentially provide fuel for your growth ETFs following a market downturn.
Protection ETFs are intentionally chosen for their low correlation to growth ETFs. Bonds and gold are not correlated to stocks. Preferred shares have low correlation to stocks.
In general, protection ETFs do not need to be as diversified as your growth component. Short-term bonds in Canada will perform comparably to short-term bonds in the U.S. What matters more in your choices is cost and tax efficiency.
If you choose gold miners in your protection component, limit your exposure to a maximum of 10% of your total portfolio value. Gold stocks don't correlate to other stocks, but they are notoriously volatile. They are a great "fear asset".
Good Options for Protection ETFs
ZAG.TO - BMO Aggregate Bond Index: Best in RRSP accounts
ZDB.TO - BMO Discount Bond Index: Good in Cash/Margin accounts
HBB.TO - Horizons Select Universe Bond Index (Total Return): Best in Cash/Margin accounts
VSB.TO - Canadian Short-term Bond Index: Good for minimal interest rate risk/volatility
ZPR.TO - BMO Laddered Preferred Share Index: Good for stable, tax efficient income in Cash/Margin accounts
ZIC.TO - BMO Mid-Term US Corporate Bond Index
HAB.TO - Horizons Active Corporate Bond
ZGD.TO - BMO S&P Equal Weight Global Gold Index
XGD.TO - iShares S&P Global Gold Index
In the next post, we will look at how to use these components in designing and managing a portfolio whether you are younger and looking for growth, or retired and looking for stability.