Let's start with what instruments to invest with, Mutual Funds are still very popular among the general population but they are dinosaurs, on their way out...albeit slowly since my preferred instrument the ETF requires a Discount Brokerage platform. This is a bit more complicated to setup and trade. Two huge reasons to go with ETF's are huge savings (see Ex. 1 below), especially over the long run and much more variety to choose from (more precise, Mutual Funds are more blunt instruments).
Example 1: Say you managed to create a solid retirement portfolio that averaged 10% return per year using ETF's, even if you managed to do the same thing with a Mutual Fund portfolio you would definitely have lost 2% a year or more on MER! So some simple compounding interest calcs show
the growth of $100,000 over 30 years in the 2 scenarios (one at 10% per year, the other at 8%).
Amnt_30y_ETF = $100,000 * (1.10)^30 = $1,744,940 (Yay!)
Amnt_30y_MutFund = $100,000 * (1.08)^30 = $1,006,265 (Boo!)
So from here on I will focus on ETF's but I do realize as I said many people will have to use Mutual Funds so my two recommendations are find ones like TD's E-Series (lower MER's -- equivalent to an expensive ETF) and try to find as close a match as possible to the ETF's I'll recommend here.
A very old rule of thumb was, 60/40 Equity to Fixed Income, made for a well diversified portfolio with little given up in return. While that was true and worked great say starting from 1980's when Interest Rates spiked up to 20% and then over 30+ years fell down to nearly 0%...it's going to be much less true in the next 10-15 years as IR's rise from 0% to potentially 20% (this is because Bond prices are inversely proportional to IR's moves). This is partly why I'm going to go with something more like 90/10, there's many more reasons but the other one I'll state is because Warren Buffet says so!
So where are we, we'll use ETF's (if we can) and go 90/10 Stocks vs. Bonds. However, I know from my External Manager days that even most Asset Managers in the world (except the very best) have trouble beating the Indices so I won't even try and build my own Index with stocks (1 company I've been right about even before they went IPO in 2004 is Google but it'd be risky to just go with Google though maybe not haha). So we will be buying Index ETF's and not Stocks. I should also mention that my own personal portfolio is a bit more sophisticated (only time will tell if it's better), I won't be going into 90% Equity Index ETF's but instead a combination of Equities and what I call Alternative Assets such as Water ETF's, Infrastructure ETF's, Gold, etc. All I will say here (maybe I can expand on this in a future post) is that I found some great Alt's that I really believe in as future investments and so far they've had great returns of their own while having very low Beta & Correlation to S&P 500!
Until an investor gains much more knowledge about say what Regions of the world (e.g. Developed vs. Emerging) or Sectors (e.g. Tech vs. Consumer Staples) will outperform in the next few years, my recommendation is to just stay at Benchmark weight (the Benchmark I use is this -- I will give some reasons shortly). This isn't as easy as it sounds as the Indices (i.e. Benchmarks) are rebalanced once or twice a year so you'd have to decide if it's worth the commission costs, if it's not then you will have been at benchmark weight at the beginning then drifted away, is this good or bad? Nobody knows for sure!
If you are OK to have your long-term retirement portfolio in USD (opens up much more choices for ETF's like the Benchmark I mentioned, the ETF called VT) then we're almost done as I'd say buy 90% VT to keep things simple, and if you want to learn more of the finer details over the years, great after that you can refine things but if not then just stick with VT. I'm however very skeptical of the prospects of the USD in the long-term, for example the Innauguration today! So over the next 30 years I wouldn't be shocked if a Black Swan event like USD losing it's place as the World's reserve currency played out (with Trump in power, I wouldn't be shocked if this happened in the next 4 years! haha). So if you are like me you'll want to have your portfolio in CAD, this means there is no equivalent to VT available in CAD today, that means we need to recreate it with what's available.
Probably the 2 most famous ETF creators are iShares & Vanguard, I prefer the latter for many reasons...the 2 main ones are that they tend to be way cheaper (MER) and usually smarter (that's a longer explanation and perhaps a touch subjective). So in Canada we could get close to VT by using this iShare ETF but it has a few issues, doesn't include Canada so would need to buy (in the correct proportion) a Canada ETF but worse than that is that you will be underweighing Small Cap stocks (except in the US). There's a long standing market premium associated with 2 factors in Equities, Small Caps and Value, this is a very important idea to understand!
It's a good idea to try and keep the portfolio as small as possible but still be able to express all of your investment views (I have many views but the 2 key ones are that in the next 30y I'll be betting on Emerging markets to outperform Developed ones and the Tech sector to continue it's growth over all others!). If you have no views, then we can create your long term portfolio with just 3 ETF's!
Roughly we can put 85% of our Portfolio into VXC below, this low MER ETF represents all Cap sizes (Large, Mid, Small) and as far as I can tell doesn't bias towards Growth (over Value which would not be what we want!). This gives us exposure to Emerging stocks as well, only thing missing is Canada but that's an easy fix.
https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9548&assetCode=EQUITY##portfoliodata
Next, we can put ~5% into Canada (I've never seen Canada weight relative to the World go out of the 3-5% range). Again as above, this has all Caps and not biased towards Growth.
https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9561&assetCode=EQUITY##portfoliodata
For the final 10% unallocated, if you want to keep things very simple, could invest it in XBB DEX Universe Bonds (the widest variety of investment grade CDN bonds). If you want to make things a bit more interesting you could do something like ZGI 4%, ZRR 3% and IAU 3% (this is a USD Gold ETF, long story but the CAD version was delisted and I have yet to find a suitable alternative). I would wager over the next 30y that ZGI, ZRR & IAU outperform XBB (won't list the long line of reasoning now). Also, ZRR & IAU provide inflation protection...to some degree ZGI might as well.
So there you have it, a very cheap and well rounded portfolio is just 85% VXC, 5% VCN & 10% XBB!
Two final items, first, when is a good time to put this portfolio into action? This is very hard to answer other than to say next time Equities correct. What I'm going to do is wait till the VIX get's to 40 (VIX is the Volatility Index -- when the VIX get's in the 30's...will need to monitor this very often, I'm talking intraday). At that point Equities should have corrected quite nicely...but will it be a smooth ride to retirement?Unfortunately not...take a look again at that 10y rolling returns chart from Part I, even in Secular Bulls there are quite a few huge downturns so you'll have to brave the roller coaster!
Finally, what happens if this Secular Bull is much shorter than expected (or even if it's not)...where do we put our money then? Well it's not Equities...I've found Gold to be an excellent place and Real Estate, Long Bonds potentially as well especially if IR's are high at that point but not if they are low!
The links for Gold and Long Bonds are below and I found an amazing chart that sums up the Real Estate question nicely (focus on 2000-2010 as most of that was a Secular Bear).
http://goldprice.org/gold-price-canada.html
This is a great resource, for our purposes here focus on Long Bonds (L.Bond) returns in the table from 2000 to 2009, you can see how great they did (can also look in the 70s during that Secular Bear). As a final note on this, I tend to like Provincial Long Bonds a lot!
PeriodicTableofAnnualReturns
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