I’ve always tried to stress that successful investing is about the right process, not the right products. But good products certainly help. In the latest episode of the podcast, my guest is Todd Schlanger of Vanguard Canada, who was one of the architects behind the firm’s asset allocation ETFs, launched earlier this year to great fanfare in the DIY investing community.
These globally diversified “funds of funds” are available in three versions: the Growth ETF Portfolio (VGRO) has a target of 80% stocks and 20% bonds, while the Balanced ETF Portfolio (VBAL) holds 60% stocks and the Conservative ETF Portfolio (VCNS) is 40% stocks. In each case, the underlying holdings are seven other Vanguard ETFs.
In our interview, Todd discusses the thought process behind the construction of these new funds. We discuss the decisions to include global bonds, to overweight Canada (home bias), to use currency hedging for the bonds but not the stocks, and how frequently the funds are rebalanced.
A few times in the discussion we mention a white paper that Todd recently co-wrote on this subject: the title is Vanguard asset allocation ETFs: A simple yet sophisticated approach to portfolio construction.
In the Bad Investment Advice segment, I question whether DIY investors can improve their skills by taking courses, either online or in classrooms. I’m all for self-study, but I argue that you need to be selective about investing courses, because there’s a significant risk that all you’ll learn are bad habits.
For example, the Canadian Securities Course is intended for investment advisors, but there’s a version for the general public, too. While there’s lots of useful material in the course, it’s inevitably biased towards active management and product sales, because these are bread and butter of the industry. Any DIY investor who takes courses like this is likely to come away with the impression that successful investing is stock picking, clever trading and making forecasts.
One online course that focuses on the right subjects is Practical Index Investing for Canadians, created by John Robertson, author of The Value of Simple and my guest on an earlier podcast. The course contains absolutely no material on segregated funds or how to buy put options.
In addition to learning practical knowledge and skills—such as how bonds work, and how to measure your rate of return—I think one of the best ways to become a better investor is to learn about the behavioural biases we all face when making financial decisions. Here are a few of my favourite books of the subject:
Your Money and Your Brain, by Jason Zweig. Why are we supremely confident about our investing skills despite evidence to the contrary? Why are we so inept at assessing risk? One of the best financial journalists in the biz takes readers on a tour through our lizard brains and explains why they’re ill-equipped to manage money.
Why Smart People Make Big Money Mistakes, by Gary Belsky and Thomas Gilovich. The best way to avoid mental accounting, anchoring and the endowment effect is to recognize these “cognitive biases” we all share. This is an entertaining and anecdotal guide to the most common pitfalls we face when making financial decisions.
Thinking in Bets, by Annie Duke. I can’t resist a book that includes insights into both investing and poker, both of which involve working with incomplete information and mastering your emotions. Duke is a champion poker player and a business consultant who specializes in decision-making research. This book is one of the best arguments for why you can’t judge decisions by their outcomes.
Finance for Normal People, by Meir Statman. Professor Statman is one of the key researchers in behavioural finance, and in this book he explains how we approach investing not simply for utilitarian reasons (to grow our wealth), but also for expressive and emotional reasons.
Thinking Fast and Slow, by Daniel Kahneman. Not an investing book per se, but a must-read-twice for anyone who wants to better understand how humans make decisions, by the Nobel-winning psychologist.
A fantastic podcast as always! Two questions: do you have a link for the study Todd discusses where balanced funds outperform the majority of pension/endowment funds even up to $1B. I gather many people may not have $1B themselves but some larger wealth management firms may have more than that in investable assets.
Also when you did your previous post (or maybe it was Justin) on 1/3 being optimal for home country bias, does that apply to people from other countries? (ie someone from Germany having 1/3 in German stocks). I imagine it would be hard to differentiate whether the time frame chosen for the study might have just been a lucky sample.
@Jon: Glad you liked the podcast! The findings Todd refers to regarding pension and endowment funds is on page 12 of the white paper linked above. The source is the NACUBO-Commonfund Study of Endowments.
That finding (that most large institutional funds underperform an index benchmark) is not that surprising. Beating the market does not necessarily become easier when you have more assets: in some ways it’s harder, because your good ideas may not be scalable to hundreds of millions of dollars. And pension and endowment funds often face the same behavioral hurdles that individuals do: they can be too focused on quarterly results and frequently fire asset managers who underperform over short periods rather than having a longer-term focus.
As for the home bias, this would be country-specific, and period-specific as well. I don’t think one can conclude that the same would be true in Germany or in any other specific country. As Todd mentions in the interview, the home bias decision is part science and part art. There is no optimal allocation that can be known in advance, and some of the decision involves behaviour and perceived risk, which is variable.
Here’s Vanguard’s infographic on home bias:
Loved the podcast. Very informative.
I am hoping to help my grown kids set up a simple investing program in their registered accounts and was looking for a target date fund. I can’t seem to find a fund offered in Canada with low cost management fees. If I can’t find one with low fees similar to what is available in the US., maybe these funds would be the best bet.
Any thoughts on this? I appreciate your comments.
@James: In Canada, low-cost target date funds are common only in employer-sponsored plans. Those available to individual investors tend to be poor choices. I would suggest they look at balanced funds with static asset allocations and then simply revisit this every five years or so.
Interesting products! I would like to know: Do the fees on these Asset Allocation ETFs include the fees of the underlying funds, or are they in addition to the fees of the underlying funds?
@Joe: The MER of the asset allocation ETFs includes the cost of the underlying funds: there is never any double-dipping on fees.
Another great podcast! This one really resonated with me as I discovered these three fund (specifically VGRO) a few months back and have been debating between moving my funds from WealthSimple over to my Questrade account.
I do have a question for you though. Given that VGRO is extremely diversified by nature, do you see any issues with having my RRSP, TFSA and RESP hold only VGRO in them? I’m 31 and my twins are 1, so I have no need for this money in the immediate future and will be regularly contributing to the accounts.
Thanks for all the great content you put out!!
Again an outstanding podcast and I really loved the white paper.
–VGRO ETF has a management fee of 0.22%, nor MER
–where VCN, VXC have management fee and MER. Ex: VCN has a management fee of 0.05% and an MER of 0.06%. So please correct me if I’m wrong:
MER=management fees + operating fees
@Kyle: The real question here is, “Is it appropriate for me to use an asset allocation of 80% stocks and 20% bonds for both retirement and education expenses?” If it is, then there is nothing wrong with using a single ETF in all these accounts. Adding more holdings just gives the illusion of more diversification.
@Ale: MER is a backward-looking number: it tells you what the fund’s expenses (generally management fee + taxes) were over the previous 12 months. That’s why new funds like VGRO don’t have one yet. They will publish the MER once the fund has a full year under its belt. Expect it to be about 10% higher than the management fee (that is, 0.22% becomes about 0.24%).
Wouldn’t purists say reducing the canadian allocation over time is a form of active management?
I just noticed they don’t stick to market capitalization for the international allocation either. No doubt this american company will continue to increase their american bias but i guess time will tell. Hopefully ishares or bmo will introduce something.
Hi Dan, I found your comments on investing courses very interesting, as I am looking into taking the CSC for interest’s sake. I recall a conversation I had several years ago with a person studying for a financial planning certification exam and she commented that if one was unsure what the right answer to a question was, the most-likely correct guess was the option that would be the most profitable for the management company.
Also, thank you for adding pagination to the blog posts page so that one can go back in time through every blog post. On page 63 is the very first post!
Really liked it, thank you!! And the book suggestions are much appreciated.
So glad to have this podcast publishing new content again! Thank you for the book recommendations!
To Tim Nov 17, 2018: I took CSC course in 2004 with passing grades and diploma. My time spent and $450 in course content was questionable. Do not waste your money. I felt sorry for bank employee’s who failed test at that time.
Keep strong, and follow your instincts. It’s your money involved.
Thanks for this amazing podcast. It have answered some question i had about rebalancing by buying. This is what i was doing with my spreadsheet that i use that tell me what i need to buy to keep thing in balance. With that, i might not have to rebalance for a while until the new purchase won’t be enough to rebalance the whole thing.
Also, very good info on when repaying the mortage vs investing.
What are your thoughts about XGRO etc? The iShare equivalent of VGRO and VBAL. Is there a reason to choose one over the other? Functionally? In terms of the breakdown of underlying holdings? Cost? What about being able to buy and sell them for free using QTrade?
@ Dan, I understand VGRO rebalances the portfolio automatically which I really want for my portfolio. In fact, I even don’t need to pay 0.5% additional fee to my current brokerage Wealthsimple. But, I am wondering how does Vanguard do it? Usually, Vanguard should only CREATE more units based on the excessive demand for the ETF. Only at that point in time, Vanguard can rebalance. Or, I am missing something?
@Ehsan: Any asset allocation ETF can simply buy and sell units of the underlying ETFs to rebalance, the same way you would do if you held the individual ETFs in your own portfolio. But as long as there is new money coming into the these ETFs, they will likely be able to keep the portfolio in balance simply by investing thee new cash in whatever is underweight.
Hey Dan, or anyone reading who can offer any insight,
I’m interested in getting started with the Growth ETF Portfolio (VGRO) from Vanguard. I love the appeal of the automatic rebalancing of the fund.
Here’s my issue: Currently, I’m comfortable with the risk tolerance of the 80/20 ratio of stocks/bonds. But in 15 years or so, I may wish to switch to the 60/40 ratio of stocks/bonds within the Balanced ETF Portfolio (VBAL). Is making that switch as simple as selling all of my holdings in the VGRO and immediately buying as much of the VBAL as I can afford?
Or would it be wiser to start now with the All-Equity ETF Portfolio (VEQT) and simply add a bond ETF over time while rebalancing my self?
Thanks in advance.
@Jon: I’d suggest a better plan would be to start with VGRO now. As you get older you can add the bond ETF (or GICs, or cash, etc.) then. This would allow you to take advantage of the automatic rebalancing for many years. And you can decrease your risk gradually rather than switching from 20% to 40% fixed income in one fell swoop.
In general, I’d encourage you not to worry about how this might play out 10 to 15 years in the future. By that time, the ETF landscape will have changed again, and this decision may become moot. So focus on getting started now, and on a pattern of regular savings. Good luck!
Hey, Dan. Thank you for your earlier response.
I have one more question I’m hoping you can shed some light on.
Wealth Simple explains their .5% fee exists because they do things like dividend reinvesting and tax loss harvesting. Does Vanguard’s asset allocation ETF like VGRO do that too? If not, would it be wise to enroll in a distribution reinvestment plan (DRIP)?
Lastly, I was wondering if you could share light as to why the iShare allocation ETF has a slightly cheaper (.18%) MER than Vanguard’s (.25%)?
Thanks in advance.
@Jon: You can certainly set up a DRIP with an asset-allocation ETF, so there’s little or no value-add from a robo-advisor in that respect. Tax-loss selling is a potentially significant benefit, but only for those with relatively large non-registered accounts. (It obviously has no effect in RRSPs and TFSAs.) I’d say a bigger advantage of robo-advisors is likely to be the automatic investment of regular contributions.
Regarding the fee difference between iShares and Vanguard, remember not to confuse management fees and MER. (MER = management fee + taxes.) The management fee difference is only 0.04%, which is trivial in all but the largest accounts. My guess is that iShares priced its funds lower because Vanguard’s came out first and they wanted to give people a reason to switch.
Is there a link to the research that Todd talked about for the 2 variables that determine portfolio returns? Management fee and turnover?
Would like to read it. Thanks
Do yo have a link or a calculator regarding adding more payments to mortgage vs adding more into RRSP vs how much income tax you’re paying etc?
Great podcast by the way, I’ve enjoyed listening to numerous ones as well as reading your website.
@Jasmine: Thanks for your comment. I don’t have a specific recommendations, but a quick Google search for “mortgage vs RRSP calculator” brings up a lot of options.
Dan, the bad investment advice touched upon emergency funds. And you mentioned the $ should be kept in simple savings account which is in line with all the advice I read before. Can you talk more on it? What type of investment would you recommend in different market (bear and bull)?
In the current market (with high inflation and crazy market crash), stepped GIC is giving decent returns, but it is locked. With combo of high bond index funds/GIC and low stock index fund, the investment might still be risky but it is liquid.
Some YouTubers said “put everything within index fund” and burn the emergency fund. I also debate if I should just put my emergency fund on TSFA and RRSP, as I can technically withdraw TSFA. I don’t really know the tax consequences, and my brain does not work well on those topics.
Thank you for all the efforts for the podcasts and website. And can you kindly work on audiobook of your new book? I also tried to suggest your book on Toronto public library system, but it doesn’t recognize it (not sure why).
@Karl: The advice about short-term savings doesn’t change based on market conditions. If you need money in less than three to five years, then stock and bond ETFs are not the right products. These ETFs are only suitable for ling-term investing, not savings.
In most cases, this means finding a liquid savings account, even if that means your can’t stay ahead of inflation, because the alternative is taking the risk you will lose much more than that. If you know you won’t need the money for a year or two, then a short-term GIC can also be appropriate.
It’s fine to keep emergency savings in a TFSA, as you can withdraw the funds tax-free, and you get the contribution back the following year. An RRSP is not an appropriate account for emergency savings.
The book is available at the Toronto Public Library, but there seems to be a long wait list for the 30+ copies.