The One-Fund Solution

September 12, 2013

What’s the best way to get started with index investing? That’s the question Justin Bender and I ask in our new white paper, The One-Fund Solution. In our opinion, if you’re new to self-directed investing and you have a relatively small RRSP or TFSA, the place to begin is ING DIRECT’s Streetwise Portfolios.

I’ve written about the Streetwise Portfolios before, and I often get pushback from readers. They point out these balanced index funds carry an MER of 1.07%, which is expensive compared to my ETF model portfolios, and even the TD e-Series funds. But most of this criticism comes from experienced do-it-yourselfers who forget that reading this blog means they’re among a small minority who consider investing something of a hobby. Most Canadians are not like them. Most people, even if they are good savers—and that’s the most important characteristic of a good investor—would rather watch Say Yes to the Dress than use a rebalancing spreadsheet.

My point is, rather than comparing the Streetwise Portfolios to the optimal solution, let’s compare them to the typical investor’s situation. There is more than $900 billion in mutual funds in Canada, and the average MER of a balanced fund is 2.15% (according to Morningstar’s 2013 Global Fund Investor Experience Report). It’s true this figure includes a trailer fee for advice, something you won’t get with a Streetwise account. But the sad truth is investors with five-figure portfolios typically get either dreadful advice or no advice. And in many cases they don’t need to pay for professional help. If you’re just tucking away a couple of thousand dollars a year in tax-sheltered accounts, it’s tough for an advisor to add value.

That describes the majority of investors in Canada. According to recent report from Advocis, the average client of a mutual fund advisor in Canada has an account between $64,000 and $75,000. What percentage do you think have globally diversified, regularly rebalanced portfolios that cost less than 1.07%? And if those investors are paying a 1% trailer fee, how many are receiving good advice? I’d suggest at least three out of four would be better off simply socking away money in a Streetwise Portfolio.

Justin and I fully explain the advantages of this simple solution in the white paper, but I’ll summarize the main points here:

Easy account setup. If you already have a chequing or savings account with ING DIRECT, opening a new investment account can be done online in about 10 minutes. Even if you’re not already a client, the application process is still almost entirely online.

No need to learn how to trade. Making ETF trades is often intimidating for novices, and mistakes can be expensive. With the Streetwise Portfolios you make all your contributions and withdrawals through the ING DIRECT website, which is much more user-friendly.

A single monthly contribution. Making preauthorized monthly contributions is generally not possible with ETFs, and adding small amounts to an ETF portfolio can be inconvenient and costly. ING DIRECT clients can set up a single weekly, biweekly or monthly Automatic Savings Program with a minimum of just $25.

Automatic rebalancing. If you use multiple ETFs or index mutual funds, rebalancing requires you to monitor your portfolio and make calculations with a spreadsheet. It also means you need the emotional discipline to sell assets after they have gone up and purchase others that have fallen in value. The Streetwise Portfolios make all that unnecessary, as they are automatically rebalanced quarterly.

Client support. Some discount brokerages—including Questrade and Virtual Brokers—have enticed investors with commission-free ETFs. I’m aware many readers are pleased with these bargain brokerages, and that’s fine. But they would not be my first recommendation for investors with small portfolios and no investing experience. I’d rather send them to ING DIRECT, where the mutual fund reps have been specifically trained to answer questions about index investing.

If you’re happily investing with a portfolio of ETFs or TD e-Series funds, keep up the great work. But if you’ve never invested on your own before—or if you have a friend or family member in that situation—download our white paper and learn how you can get started in indexing investing with a simple 0ne-fund solution.

{ 75 comments… read them below or add one }

Canadian Couch Potato October 18, 2013 at 4:28 pm

@Matt: There is a lot more to diversification than large-cap US stocks. It may not be an issue with a very small portfolio, but at some point a mix of Canadian, US and international stocks and bonds becomes necessary for proper diversification.

Leslie November 7, 2013 at 12:08 pm

Doing some comparison shopping for index mutual funds I came across your website and recommendations. Not shown in your post review is BMO index funds which I understand are just their ETFs wrapped up in a product that can be sold by MF dealers–correct? So my first thought was: isn’t the MER for an “index fund” (i.e., BMO Growth ETF Portfolio Class BMO492 MER 1.75) on top of the MERs for the underlying ETFs (ZDM, ZAG, etc.)? I’m understanding that correctly? Is that why you didn’t include them? TD e-Series look like the best solution so far for beginning investor who doesn’t want to get tripped by account minimum fees of brokers.

Canadian Couch Potato November 7, 2013 at 12:16 pm

@Leslie: When a “fund of funds” reports its MER, that includes the MER of the underlying holdings, so there is no double dipping. The reason I have never recommended the BMO “funds of ETFs” is that these are designed to be sold by advisors, so they tack on an additional trailer fee. As a do-it-yourself investor, paying a fee as high as 1.75% defeats the purpose of index investing.

If BMO were to come out with a mutual fund that held a diversified portfolio of its ETFs and defeat closer to 1%, then I would take a close look at it.

Jamie November 28, 2013 at 4:43 pm

Hi there, I am looking to move my RESPs and RSPs from Investors Group (MER 2.59%), to more reasonable indexed funds. (That I’m tied up with Investors Group should tell you I’m not overly financially astute!) I’m only starting (less than 20k invested), so it sounds like the Streetwise might be a better play for RSP, and easier to set up. However, they won’t do RESP. Can you recommend a simple fund as an alternative to the McKenzie Canadian Balanced equity? I need to make a 5k deposit before end of December, and really don’t want to commit any more to Investors Group.

Canadian Couch Potato November 28, 2013 at 7:19 pm

@Jamie: No, unfortunately ING Direct can’t do RESPs. Have you already opened a self-directed RESP at an online brokerage. If so, you can just make your $5,000 deposit in cash and figure out an investment plan later.

The TD Balanced Index fund is a decent choice for an RESP: it’s 50% fixed income, 30% Canadian equity and 20% US and international equity, with an MER of 0.89%. It’s not an e-Series fund, so it’s available from any discount brokerage.

Jamie November 28, 2013 at 7:41 pm

I know I’m asking a lot here, but I’m going to give it a shot….assume (correctly – I’m new to Canada) that I know nothing, I stumbled across the couch potato blog, but I’m motivated and want to get started with self-directed investing. What should I read? Who should I contact? With my relatively small investment cap (20k), what is a good replacement for my self-serving Investors Group ‘financial advisor’, to field specific investment questions?

I think my plan is to put a hold on my Investor’s Group accounts (RSP, Spousal RSP, RESP), and start up better equivalents using something like the TD e-series. I will then look to transfer the IG funds, assuming the penalties aren’t prohibitive. But I am concerned about my ability to navigate the various tax implications , investment strategies etc, without a financial advisor. Any advice, tips, links welcome!

David November 28, 2013 at 8:00 pm

Jamie, the best thing you can do is to get ahold of Dan’s book “Guide to the Perfect Portfolio”. It will give you everything you need to know as a new investor in Canada.

Canadian Couch Potato November 28, 2013 at 9:40 pm

Thanks for the recommendation, David.

@Jamie: My suggestion would be to look for a fee-only financial planner who does not sell any investment products. That pretty much eliminates anyone who works at a bank or large investment firm like Investor’s Group. MoneySense has a list here:
http://www.moneysense.ca/directory-of-fee-only-planners

A planner can answer all of your questions without trying to solve your problems with crappy products. You will likely to have to manage the investments on your own, but your investment strategy is really not very important at this stage. Just keep things very simple for now and focus on saving.

Good luck!

Brian November 28, 2013 at 11:08 pm

@Jamie, I want to encourage you to not give up control of your money or give up learning. You can do it. I’ve been there and I learned how to invest and you can too… it’s really not that hard if you don’t make it hard.

My advice; to start, don’t get complicated. Work out the simplest, low cost indexing investment strategy that you understand and then do it. Try to keep the number of accounts you hold to a minimum… don’t have it split all over the place. Remember, when you start keep it simple, simple, simple. You can always change it later when you learn more and can save a few extra percentage points on fees.

For example, you could open all your accounts at Questrade and then buy a Mawer Balanced fund in each account and be done with it. Or slightly more complicated you could have your two RSP’s in Streetwise Funds and have the RESP somewhere else in one fund. Don’t take this as advice… it’s just an example of how simple you can go.

If you’re not 100% comfortable, take a stab at a plan and then take your proposed investment plan to a fee based adviser and have them review it and give you feedback. Being organized when you meet with an adviser should save you time and thus money.

One last thing, the most important things to saving for retirement is 1) a portfolio strategy that will compound/grow in the time you have, 2) time, 3) regular contributions. Portfolio construction is where most people spend their effort but starting early and setting up and making regular contributions at every paycheck are just as, if not more critical.

Jamie November 30, 2013 at 10:04 am

Thank you Brian, David, & CP for your excellent responses. Brian, thanks for your encouragement; your examples are pretty close to what I’ve been planning.
Here’s my plan for the next few months: please let me know if you think I need anything else.
1. Open a Questrade RESP family account before year end, with balanced growth fund (Mawer looks as good as any Brian!) and put in minimum 5k which is also max. amount for last year to get all grants. (My understanding is I can receive RESP grants for previous calendar year, no earlier.)
2. Get hold of the following books: 1) Millionaire Teacher (Index investing), Dan’s book on Perfect Portfolio, and Holman’s RESP book. I will look into TFSA too and LEARN.
3. Open Streetwise accounts at start of new tax year, to mirror my RSP and a RSP Spousal.
4. Sack my IG financial planner!

Quick question: Am I correct in thinking RSP room carries over each tax year and accumulates if you do not put money into an RSP. If so, I will simply put a stop to my monthly IG payments, until I’ve got the Streetwise set up.

I see this simply as the start of a rewarding hobby; the more I learn, the more I’ll profit!

Canadian Couch Potato November 30, 2013 at 2:48 pm

@Jamie: All sounds good to me. To clarify a few points:

- Technically RESP grant eligibility (normally $500) can be carried forward more than one year, but the maximum grant you can receive in any one year is $1,000. You can receive that $1,000 grant for several years in a row if you have lots of carried-forward room built up. But you are correct that it doesn’t usually make sense to contribute more than $5,000 per year.

- Yes, RRSP contribution room can be carried forward indefinitely, so you are not permanently losing anything by stopping RRSP contributions to your current IG plan. You will get a smaller tax refund this yer, but you can make up for it next year.

Good luck!

Andrew December 4, 2013 at 3:42 pm

Hi Dan,

I wonder what your thoughts are about building similarly simple portfolios with Index mutual funds at the branch level of some of the other banks. Let’s assume the scenario for which the Coach Potato strategy recommends index funds (less than 50,000 to invest, small regular contributions, etc), where the fees associated with trading ETFs might not make sense. You’ve pointed to RBC’s Index funds as decent options, for example. I’m wondering if it wouldn’t make the most sense for investors who were existing RBC customers just starting out to build their portfolios at the branch level with the index mutual funds available to them there.

I guess I’m asking if there’s maybe a skipped step when approaching the Couch Potato strategy; the starting point as far as I’ve been able to decipher it is to open up an account with a discount brokerage, and then decide whether index funds or ETFs are the right choice. But it seems to me the first question might be whether or not a discount brokerage is even the right first step for a lot of average investors, when they might have cheaper options via their bank, or as this post suggests, through ING (or perhaps TD). Are there any discount brokerages that wouldn’t end up costing more in fees for a small portfolio, even if one was investing in Index funds and not ETFs, for example? Or maybe I’m missing something. Curious to hear your thoughts.

Canadian Couch Potato December 4, 2013 at 3:59 pm

@Andrew: I agree completely that it is often possible to get started with index mutual funds without opening a discount brokerage account. Opening a TD Mutual Funds account and using the e-Series funds is probably the best option, even for accounts well over $50,000. But once you get past TD and ING Direct the options dry up immediately. I’m not sure what kind of luck you would have if you went to an RBC branch and told them you wanted to use their index funds. My guess is they would hook you up with one of their mutual fund advisers who almost certainly would give you the song and dance about how index funds are inferior to their managed products. That is the usual experience, even at TD:
http://canadiancouchpotato.com/2010/08/05/would-you-like-fees-with-that/

You do need to be aware of account fees at discount brokerages: a $100 annual fee on RRSPs is typical on small accounts, but this usually waived at about $25,000. TD Direct Investing has a Basic RSP that costs just $25 and gives you access to the e-Series funds but not ETFs.

Hope this helps.

Lew December 16, 2013 at 12:01 pm

What about PH&N Lifetime portfolios — a bit higher MER’s on the ones that have mor equities, but they rebalance as you get older, and they have more diversification, even on bonds. It’s one fund essentially for life!

Sandra January 8, 2014 at 10:31 pm

I’ve just purchased one of your recommended index funds through my RBC on-line bank account. Granted I already had made previous mutual funds purchases so had the RRSP, etc. set up. I think if you want a non-registered account you have to set up an investor’s account with trade fees, but as a starting point it works for me. I’m going to stop my automatic contributions to standard mutual funds and replace them with index options. I think you have to make a minimum contribution for the auto contribution to remain without fees, but I believe it’s a modest $100 a month. Entry point requirement for funds seems to be $500 for initial purchase, then $25, so you do have to have a lump sum available initially. It looks like I can do it all through my existing account, no talking to actual humans required.

Love your blog!

Vicky January 15, 2014 at 12:08 am

Hi Dan,

I’m about as novice as they come, so this blog, this post, and the white paper have been really helpful. I literally started here and have now placed a few holds at the library for your recommended resources.

I fit the profile well of someone with less than $50,000 and plans to make regular contributions category. I already have accounts with ING Direct, TD Mutual Funds, and TD Waterhouse. There’s minimal set up for me to go down either the One Fund route or the Global Couch Potato Portfolio route.

My question is (and it may be a dumb one), but do I really need to rebalance if I go the Global Couch Potato route? It sounds like you recommend the Streetwise fund for those who want to set it and forget about it, but I’m wondering how advisable (or unadvisable) it is to take the same approach with the Global Couch Potato.

Canadian Couch Potato January 15, 2014 at 8:22 am

@Vicky: I don’t think it makes sense to build a portfolio of individual funds if you have no desire to rebalance them occasionally (once a year is enough). In a year like 2013 (bonds down, stocks way up) it will quickly be thrown off target, and you need the discipline to get it back to desired allocations. This can by behaviorally difficult too: you would be selling red-hot stocks and buying despised bonds today, for example.

The Streetwise Balanced Portfolio has the exact same asset mix as the Global Couch Potato and it is automatically rebalanced quarterly, which is one of the big benefits. The TD e-Series offer lower fees, but you do need some commitment to maintaining the portfolio.

Vicky January 15, 2014 at 10:54 am

Hi Dan,

That makes sense. I am interested in learning more and I think could handle an annual rebalancing. That can probably wait until I better understand how to do it.

Plus, with the amount I’d be investing, the difference in fees wouldn’t be a big deal. The white paper compares Streetwise Balanced Portfolio vs a Balanced ETF Portflio, but I’m guessing it would be pretty similar to a portfolio of index mutual funds.

Thanks for the advice!

Rob January 16, 2014 at 11:20 pm

I too am considering both TD and Streetwise… I think that if you’re investing relatively small amounts (under $20K) the MER differential between the two is negligible… maybe a few hundred dollars over the course of a 5 year investment window. Correct me if I’m wrong…

Right now I am leaning toward the Streetwise. I plan to invest with my wife about $8000. We are hoping to place this amount within registered accounts (both TFSA and RSP) so as to take advantage of tax sheltering.

Don Pooley February 11, 2014 at 8:57 pm

It seems to me there’s a progression or evolution you go through to maximize your investment returns. Initially you’re a victim who believes in the offerings of the nice mutual fund agent. who seem so helpful to you. But allow for the fact that most of them have been brainwashed to believe they are actually helping you.

The next phase is when you realize that the fund fees really reduce your return significantly. Many people never get to this point because a 2% to 3% annual charge for the agent’s service seems so insignificant. These people do not understand compound interest.

The third stage is when you discover there are online answers to improving your investment returns, one of which is the Couch Potato. Others are the low-fee funds offered by some fund providers. My favourite is TD’s e-fund US Equity with a fee of about 0.35%. Then you discover ETFs and a new world opens up!

Round about now, if you’ve lasted this far you realize that your investments need tracking and recording in some way. You can leave this to a broker, or Ing, but that’ll cost you, which is okay for most people who get this far.

But, if you do your own tax return (possibly with help from TurboTax) you’ll probably want to record and track your investments yourself. That’s where I’ve been for at least a quarter of a century (just had my 90th birthday) and my most useful tool has been a good spreadsheet program such as Excel.

If you’ve got this far start to look at DRIPs.

Don Pooley

p.s. My current income fare exceeds anything I earned before retiring, so keepimg track of my investments really paid off for me.

Nick T February 19, 2014 at 8:34 pm

I was very excited about finding a potential investment opportunity when I read about your ING Streetwise Portfolio suggestion. I’m 34 years old and saved $15,000 that I’d like to invest. Too little for serious investing, too much to have sitting in the bank doing absolutely nothing. How will Scotia’s acquisition of ING impact their offerings? Do you anticipate a RBC/Ally type situation? Also, are there any similar products you’re willing to endorse? I just want to put my money into something, ANYTHING!

Cheers,

Nick

Brian G February 19, 2014 at 10:34 pm

@NickT, Dan may chime in with a definitive answer to your questions but here are a few of my thoughts. If you look up top there is a tab called Index Funds. In there Dan has quite a few good options listed if you don’t limit yourself to the one-fund solution. TD e-Series probably being the best option.

If however, you do want the simplicity of the one-fund solution, besides the ING Streetwise funds you could also look at the TD Balanced Index fund. This fund okay but it has a slightly odd asset mix (high amount of Canadian stock) because it was created before the government lifted the foreign assets limits for RRSP.

If you are willing to step outside of the passive only funds but staying with low-ish fee funds, you could review the RBC and PH&N series D funds or maybe Steadyhand. However, these are not indexed funds and go against passive investing. That said, even people like John Bogle and Vanguard who made passive investing popular do sometimes point out that low fees go a long way.

All this said, the Streetwise Balanced fund is $500 million dollar fund, so you would hope that Scotia won’t mess with it when they switch over to their Tangerine brand. If you are set on a one-fund solution, maybe just go with that and see what happens. At worse, you can always change later if they do something you don’t like.

Brian G February 19, 2014 at 10:41 pm

@NickT, one other thing. You may want to consider setting up a Pre-Authorized Purchase Plan. It’s a much easier way to save going forward. This with a Couch Potato portfolio and TD e-Series funds would be a great way to save for retirement.

Canadian Couch Potato February 20, 2014 at 7:46 am

@Nick: With a $15K portfolio and no investment experience I would strongly encourage you to forget about more complicated solutions for now. The e-Series funds require a time-consuming account opening process, and other fund companies such as Steadyhand and PH&N have minimum investment amounts you may not even qualify for. You would seem to be the ideal candidate for the one-fund solution.

I jest received a notice from ING Direct that the Streetwise Portfolios will be carried on under the Tangerine name. There is nothing to indicate they are in jeopardy as a result of the new ownership, so don’t let a concern like that stop you from getting a plan in place as soon as possible.
http://canadiancouchpotato.com/2012/03/05/some-advice-for-new-potatoes/

Nick T February 21, 2014 at 6:32 pm

Thank you gentlemen! I took the plunge and signed up with ING.

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