Low Cost All-In-One Investing

Once in a rare while, something comes along that may make a real difference for you as an investor. Today is one of those days.

As we discussed in Investing is Easy and How to Invest, there are two main principles that good armchair investors will always follow:

One: Create a well-diversified global portfolio of equities (stocks) and fixed-income instruments such as bonds. The fixed-income component ensures you’re always getting paid, no matter what happens to equity markets, and it also serves to lower the volatility of your portfolio. A 60-40 mix of equities versus fixed-income has proven over time to provide good growth along with the ability to mitigate the immediate impact of financial storms.

Two: Keep your portfolio low-cost. Minimize the fees you pay by building a passive portfolio of very low cost exchange traded index funds (ETFs), or alternatively a low-cost passive or actively managed balanced fund with a good track record.

Vanguard Investments Canada Inc. has introduced three new Asset Allocation ETFs that provide investors with a one-stop, easy and incredibly inexpensive way to create a globally diversified, balanced portfolio that re-balances automatically. They actually began trading on the TSX today, February 1, 2018.

As products, they are essentially a weighted mix of underlying Vanguard ETFs, providing exposure to U.S., Canadian and world equity and bond markets. You can find more information and some nice pie graphs showing the target asset allocations here.

This is exciting news!! Well it is for us, as finance and investment geeks, but it should be for you as well. At an MER of only 0.22 per cent, investors in the Vanguard asset allocation portfolios will be paying far less than balanced mutual funds one might buy through a bank or an investment firm – many actively managed Canadian funds are still charging an astonishing 2 to 2.4% as an annual MER. And don’t get us started on the those dreaded deferred sales charges (DSCs) that many products still carry to lock investors into six or seven years of servitude in the mutual fund industry’s own Purgatory of Early Redemption Penalties.

The cost that Vanguard is charging is even less than you would pay if building your own diversified portfolio of passive index funds (think Coach Potato) that you’d have to re-balance yourself periodically. And quite a bit less than the robo-advisors as well, who generally add anywhere between 0.4 to 0.6% as a management fee up and above the MERs on the ETFs they use in building you a portfolio. Granted, their fees do include re-balancing and sometimes access to other services that you may or may not find worthwhile, want or need.

Here are the new offerings:

The Vanguard Conservative ETF Portfolio (VCNS) seeks to provide a combination of income and moderate long-term capital growth by investing in equity and fixed income securities. It uses a  strategic allocation of 40% equities and 60% fixed income.

The Vanguard Balanced ETF Portfolio (VBAL) seeks to provide long-term capital growth with a moderate level of income, using the classic and time-tested allocation of 60% equities to 40% fixed income.

The Vanguard Growth ETF Portfolio (VGRO) seeks to provide long-term capital growth by investing in equity and fixed income securities with a more aggressive mix of 80% equities and 20% fixed income.

So what’s Armchair’s take on these? In all honesty, any one of these could easily fulfill the role of a one-stop, core holding for any DIY investor who uses a discount brokerage account. The majority of folks in their wealth accumulation years should find the Balanced portfolio (VBAL) just dandy. Younger investors with a long time horizon and more aggressive investors will like the Growth (VGRO), and people in a wealth preservation or wealth decumulation period have the Conservative (VCNS).

The Conservative portfolio (VCNS) with 40% equities and 60% fixed income may be considered by traditionalists to be a little heavy on the equities side. With people living longer lives and solid fixed income instruments providing lower than historical returns, we tend to think that the Vanguard mix is bang-on. Time will tell, but even using a traditional draw-down of 4% in retirement, the mix this portfolio offers should be sustainable and even enable you to preserve a good portion of your investment to pass on through your estate. If a more conservative DIY investor wanted to adjust the fixed income portion, they could always do so by adding some laddered GICs, preferred shares or REITs into the mix. It’s not difficult, but it does add a layer of complication, so if you’re in this situation you may be venturing outside the parameters of simple, easy armchair investing. You might want or need to seek the advice of a fee-based advisor that specializes in retirement planning and wealth decumulation.

As an added bonus, Vanguard does provide DRIP eligibility for these new products, so re-invest away any of the quarterly distributions issued, an especially handy and effective tool in building and growing your RRSP and TFSA.

The market for investments in Canada is changing, and it’s never been a better time to be an armchair investor. Still like the coach potato or robo-investing approach? Both great choices. If it’s working and you like it, no need to change anything up. But this new Vangaurd offering throws a whole new option into the mix that could be a) cheaper and b) even easier and less work than ever before to be properly invested and globally diversified.

So Bob’s your uncle, and Fanny’s your aunt. What could be better than that?

Armchair

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