Blessed by the Potato

Making the case for investing is relatively easy — investing is what gives you growth beyond your own savings, so that you can save at a reasonable rate and meet your goals. Investing through index funds is also not a hard sell: control your costs, get the market return, keep it simple. Where people sometimes get stuck though is deciding which indexes they should invest in. There are, after all, numerous indexes to follow (and funds to invest in), especially if you include sector funds.

In The Value of Simple I present a simple portfolio of just four funds¹ that will meet the needs of pretty much any investor out there, with a simple rule-of-thumb to determine the main split:

• Bonds (your age less 10), e.g. 25% if you’re 35 years old (which could be for example TDB909, VAB, XBB, or XQB)

And three equity classes, split roughly evenly with what’s left:

• Canadian Equities (e.g. TDB900, XIC, or VCN)
• US Equities (e.g. TDB902, XUS, VUN, or VTI)
• International Equities (e.g. TDB911, XEF, or VIU). [Or, use VXC to cover US and other International in one step — especially helpful for those who pay commissions to buy/sell ETFs]

And that’s it. This is the Canonical Portfolio, a generally agreed-upon mix that will serve you well^2,3.

However, there are lots of different points of view and thoughts on what should be in an index fund portfolio, and I had to do a fair bit of thinking on the various options when writing the book. Everyone has their own thoughts on what a passive index-based portfolio should look like (or even multiple such portfolios), and what rules of thumb should help determine the asset allocation (with many using fixed allocations and the usual “adapt as needed” disclaimer), and how fine the distinctions and allocations should be cut.

My guiding principle was that I wanted it to be easy to follow, simple, and not confuse readers while still capturing the kinds of investments that it needed to. Basically, to make it as simple as possible but no simpler. It’s also important to be able to explain in clear, simple terms why someone should pick one option over another when there are choices to be made. So in the case of covering the spectrum of Tangerine through TD e-series to Questrade I could do this: there is a clear trade-off between complexity and cost. But for asset classes beyond the basic four I could not come up with such a rule, and did not feel that the Tangerine or e-series methods were lesser portfolios for their lack of emerging markets or other asset classes⁴.

The top categories in investing — the unanimously agreed-upon eigenvectors of investing — are the ur-classes of stocks (risky stuff) and bonds (safe stuff). There are many sub-divisions and combinations of these, which we’ll get to, but clearly having some of each is a vital part of a decent portfolio. Precisely how much is a tricky, individual question of risk tolerance and time horizons, but the simple age-based rule-of-thumb should get you close.

Then for risky stuff the first complication is that we need to get international diversification: nearly⁵ everyone writing from a Canadian point-of-view agrees on this point. How much to weight the US, rest-of-world, and Canada is again tough: some home-country bias makes sense, but we are only a tiny part of the global economy. An even split is a compromise that’s easy though, so that’s what I recommended, and some Vanguard research seems to back that up as coming within a reasonable range (and still more broadly diversified than the typical Canadian investor).

The US is an obvious choice for international diversification, with the rest of the developing markets tracked by the FTSE Developed Ex-North America (formerly MSCI EAFE) index as well-accepted options. And this is indeed what I have included, and products to invest in each of these categories are available through each of the methods I cover in the book: Tangerine, TD e-series, and ETFs.

Beyond that it gets increasingly grey.

In the next post, we’ll go through a few of the other asset classes I considered mentioning in The Value of Simple but ultimately decided that they would not sufficiently serve the readers to include.

1. Or just one fund at Tangerine with the four classes contained within. And Vanguard also introduced it’s all-in-one ETFs.

5. Larry MacDonald being the main Canada-only holdout.