The latest episode of the Canadian Couch Potato podcast focuses on the relationship between cost and complexity in your investment plan.
You can often lower fees in your portfolio with a few simple changes that require no additional skill or effort. But there are times when accepting slightly higher costs in exchange for simplicity and convenience is actually a wiser choice. There’s no single solution: every investor needs to find their sweet spot along that continuum.
My guest on this episode is John Robertson, author of The Value of Simple, which has just been published in a revised second edition. John’s book does an excellent job of stressing these ideas. In the book—and in our interview—he discusses the various options available for investors looking to get started with indexing. These include the three options in my model portfolios, as well as a discussion of how robo-advisors fit into the landscape.
For those interested in comparing robo-advisors, John co-created a tool called AutoInvest.ca, which allows you to compare the all-in costs of the various options. This is not as straightforward as it might seem, as robo-advisors use different pricing models. I suggest clicking the “Advanced Filters” tab on the calculator to take full advantage of the tool. (You should also be aware that the site receives affiliate commissions.)
John has also adapted this material into an online course called Practical Index Investing for Canadians. It expands on the ideas in the book and includes step-by-step tutorial videos showing you how to open new accounts and build your portfolio at Tangerine, TD Direct Investing and Questrade.
Switching to Vanguard’s one-fund portfolios
In the Ask the Spud segment of the podcast, I take a detailed look at Vanguard’s newly launched asset allocation ETFs. These funds, which I introduced in an earlier blog post, have led some investors to suggest they have made all other options more or less obsolete.
Certainly these one-fund portfolios with a management fee of just 0.22% are among the most useful ETFs to come along in the last few years. But if you’re successfully using an option such as Tangerine or TD’s e-Series funds, make sure you understand the trade-offs. Using ETFs will always result in lower management fees, but these are not the only factor. Consider the following:
The size of your portfolio. Any time you compare annual fees, be sure to understand the differences in dollar terms, not just percentages. Lowering your fees from 1% to 0.25%, for example, makes a much bigger impact on a $100,000 portfolio than it does for someone who is still in the early stages of building wealth.
Here’s a rule of thumb you can use when considering whether to dump your index mutual funds in favour of the Vanguard ETFs: switching from the TD e-Series funds to one of the new ETFs will save you less than $2 a month for every $10,000 you have invested. Switching from Tangerine will save you closer to $7 a month.
Whether you make regular contributions. One of the best ways to build wealth is to save a little every month and to have those contributions invested automatically. Index mutual funds and robo-advisors allow you to set up plans that automate this process, which has value for those who prefer being hands-off. You can’t do this with ETFs, so your savings plan will not only involve more work, but also more potential to fall into behavioural traps. (“Should I really invest this month with all of the volatility in the market?”)
Your experience trading ETFs. Learning to invest with an online brokerage isn’t terribly difficult, but it can be intimating and confusing if you have no experience placing orders on an exchange. Do you know the difference between a bid price and an ask price? Between a market order and a limit order? If not, take the time to learn before you bail on your user-friendly index mutual funds.
The number and types of accounts in your portfolio. If you’re investing only in a TFSA or RRSP, or even both, then the new Vanguard ETFs are an excellent choice. But if you have a more complicated portfolio that includes multiple accounts for yourself and a spouse, then a one-fund solution is probably not ideal. More complex situations require more flexibility than a balanced ETF can offer. This is especially true if a significant amount of the portfolio is taxable, since the Vanguard asset allocation ETFs are not particularly attractive in non-registered accounts.
Your target asset mix. The new Vanguard ETFs are best suited to investors who want to hold either 60% or 80% equities: those are the targets for the Balanced (VBAL) and Growth (VGRO) versions. If your target allocation is 50% or 70% stocks, there isn’t an ETF with either of those asset mixes. And the Conservative version, VCNS, with 60% bonds, including a lot of U.S. and global fixed income, is not as attractive as the other two ETFs. If you’re a conservative investor, I’d suggest adding some GICs to your portfolio instead of holding 60% bonds.