Building A Low Cost Indexed Portfolio For Canadians

In the Globe and Mail I wrote an article about how to build a portfolio of low cost indexes. 

It was geared towards Canadians, but the premise is similar for those of any nationality – the only two differences would be these: 

  • when I suggested a Canadian stock index, you would use your home country stock index;
  • when I suggested a Canadian bond index, you would choose an international bond index (or a home country bond index if you can find one).

Please read the article here.





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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18 Responses

  1. Nicolas says:

    Great post Andrew.

    For good measure, I added a dash of VFH? – Vanguard Financials ETF to my portfolio.

    Most people would sooner have weekly gum surgery than invest their money in US financial institutions.

    I hope it stays that way for the next 10 years, although I doubt it will…

    Cheers!

    Nicolas

  2. André says:

    Hi Andrew,

    Most of the stock portion of my portfolio is already in canadian and us low cost index funds. I do not own any so call international funds tho. To do so, I would have to sell some bonds. The same if I choose to move from holding bonds directly toward a short term index bond fund like vsb. What would you suggest? To move all my funds at once or move in gradually.

    Thanks again for your help,

    André

  3. Tyler Wolfe says:

    Hi Andrew,

    I just finished your book. What a great read! I will be recommending it to several of my coworkers who are in similar financial situations to myself. I have a couple questions that I could use some clarity on. Let me provide a snapshot of my current situation.

    I have approximately 29k in a Roth IRA with Edward Jones (26 in mutual funds and 2900$ in Vertex pharmaceutical stock). My wife has an Edward Jones Roth IRA with approximately 27k, all in mutual funds. I am 29 and work as a police officer with a guaranteed pension collectible at 50 years old. Wife is an RN at contributes the maximum matched amount to a 401k through her hospital. We are likely to receive a sizable inheritance from her family some day. We both contribute monthly to our Roth IRA to meet the yearly maximum. I have approximately 60k in outstanding student loans with 6% interest rates that I make monthly payments on.

    After reading your book, we want to move our investments out of mutual funds and into a more balanced, index fund based, portfolio. Now on to my questions regarding making these changes, and our investments going forward.

    1. I have read a great deal about “ETF’s”, but I’m not sure I have a full grasp of them. Are these similar to mutual funds or are they more along the lines of index funds? Do you still recommend the standard index funds above ETFs?

    2. Will I need to contact my Edward Jones agent in order to change my investments over to a Vanguard account? I can foresee a battle much like you described in the book with my current agent. Also what sort of fees, etc. are standard when transferring an account over to Vanguard?

    3. Considering our situation, I plan to hold our Vertex stock (approx 10%) (is this possible if I leave Edward Jones?). I’d like to put approximately 20% into a bond index, and split the remaining 70% (35% US index, 35% Int’l index). Does this sound reasonable to you? Also do you suggest any specific Vanguard indexes? I noticed that some cover the entire stock market, some cover only part of market (S&P 500,)

    I realize this is a very long post, but I just want to thank you again for your book. It has gotten me excited about saving and investing. I feel that I’ve learned invaluable lessons. I always felt that I wasn’t receiving what I deserved from my “financial advisor”, and this book confirmed it. I certainly appreciate any other advice or information you could provide! Thanks again! Sincerely,

    Tyler Wolfe

    San Diego, CA

  4. Yu Ting says:

    Hi Andrew,

    I am impressed with the way index investing has turn out for you so far. However I have a confusion which I hope you can help clarify.

    How do you decide which rebalancing method to choose?

    1) Transfer funds internally by selling outperforming index (bond/equity) and using the same cash to buy the underperforming index

    2) Inject more funds into underperforming index to bring it back up to the intended ratio.

    Cheers!

    Yu Ting

  5. Barry says:

    Hi Andrew

    On the back of the post by Yu Ting

    Whats the process in a scenario when your asset allocation gets out of balance by 10% (so you should sell high buy low and re-balance) but you also have additional funds to invest

    Should you do both (take some profits ) AND then top up your allocations with additional funds?

    I'm looking at a scenario where the index levels are as follows from initial investment

    1. Up 11% +

    2. Up 4.2%

    3. Down 0.06% (Bond Index)

    4. Up 4.75%

    I also have additional funds to add in as a top up from savings/contributions

    Barry

  6. Awesome article Andrew! 🙂

    I've started to buy more VTI for my RRSP. That said, I'm not selling any U.S. dividend payers like KO, ABT, PG, JNJ. Those guys continue to pay dividends and increase them as well.

    I can't see myself becoming all indexed, but I do believe my blended strategy of a few dividend stocks and indexing is going to work very well long term.

    Keep up the great work! I don't comment on every article, but I continue to read every one Andrew.

    All my best,

    Mark

  7. sgibbs says:

    As usual Andrew, great article!

    Stu

  8. Thanks so much Stu!

    Cheers,

    Andrew

  9. Thanks Mark!

    I think your blended strategy is going to do very well indeed.

    Cheers!

    Andrew

  10. Hi Yu Ting,

    If I can rebalance by purchasing the lagging index, I definitely prefer that to selling.

    Cheers,

    Andrew

  11. I like your thinking Nicolas! You're born to be an investor!

  12. Hey Andre,

    If you would like to add some, then do so. But don't sell any bonds to do it. Truthfully, if you are going to live in Canada your whole life, you could probably get away without any international exposure, beyond the U.S. I'm pretty easy going (philosophically) about whether people should have exposure beyond U.S. and Canadian equity (if they live in Canada).

  13. Hi Tyler,

    Thanks for the kind word about the book. And thanks for helping to pass on the word about low cost investing. To answer your questions:

    1. I have read a great deal about “ETF’s”, but I’m not sure I have a full grasp of them. Are these similar to mutual funds or are they more along the lines of index funds? Do you still recommend the standard index funds above ETFs?

    You live in the United States, so personally, if it were me, I would deal with Vanguard index funds directly, instead of ETFs. They're cheap, the statements are so clear (I love Vanguard) and you would never have to pay a commission.

    2. Will I need to contact my Edward Jones agent in order to change my investments over to a Vanguard account? I can foresee a battle much like you described in the book with my current agent. Also what sort of fees, etc. are standard when transferring an account over to Vanguard?

    Vanguard won't issue any fees. I doubt that Edward Jones will either. Contact Vangaurd first and tell them where your money is. Did you know that they may be able to move much of it without contacting the advisor at all? They might even be able to move ALL of it. Give it a try. You don't owe your advisor any favors, and he or she is paid to be very convincing. If you consider them a friend, then call them to let them know what you have done AFTER you move the money. That's considerate enough, I think.

    3. Considering our situation, I plan to hold our Vertex stock (approx 10%) (is this possible if I leave Edward Jones?). I’d like to put approximately 20% into a bond index, and split the remaining 70% (35% US index, 35% Int’l index). Does this sound reasonable to you? Also do you suggest any specific Vanguard indexes? I noticed that some cover the entire stock market, some cover only part of market (S&P 500,)

    I lay out the recommended indexes in my book, in the 6th chapter. And yes, you could keep your stock with Vanguard. They also have a brokerage that can piggyback onto your other account.

    A word of extra advice: max out your 401Ks each year, but don't invest any more than that until you clear that student loan. Paying off a 6% loan is like earning a GUARANTEED, after tax 6% gain. Nobody, anywhere, can guarantee you that. But your loan can, if you pay it off.

    Cheers,

    Andrew

  14. Just add to the bonds this month Barry, and don't worry about selling anything. If you drift from your allocation model a bit, it's not a big deal. Doing so could even be beneficial, under certain circumstances….circumstances that we'll never know until after the fact.

    • Barry says:

      Cool

      Will re-balance each 1/4 as I add to the funds

      I'm looking to sell off a rental art portfolio at 8% yield to put funds into the index strategy also

      Barry

  15. Andrey says:

    Hello Andrew,

    I would like to know your opinion on using Vanguard S&P 500 ETF (VOO) instead of Vanguard Total Stock Market ETF (VTI)?

    They show very similar returns, BUT the price per share for VOO is lower than for VTI. ($66 vs $74). The dividend distribution rate is almost the same ($0.343 vs $0.346).

    Therefore, I'm able to buy more shares of VOO for the same amount of money and get paid more dividends on that shares than on VTI.

    I appreciate your input,

    Andrey.

  16. Pratab Sivaprakasapi says:

    I find the ticker symbols you have given in your article: VTI.N, VGSH.Q, VEA.N and VWO.N – do not refer to anything availabe either in the TSX or in the TSXV. However, I can find VTI, VGSH, VEA and VWO on one of the US exchanges – either NYSE or Nasdaq. Do you rather mean the more or less equivalent Canadian ETFs from Vanguard – VCE, VSB, VUS, VEF and VEE ?

  17. marty says:

    Great article and book, Andrew! I am a full convert to your indexed investing approach. I'm Canadian and since reading your book I transferred all of my RRSP investments into the TD e-eseries indexes you recommended. I had a question about ETFs, though: in your book you compared the costs of e-series vs. ETFs and concluded that ETFs were better once investments reached about $120k. Given that many discount brokerages now offer free ETF purchases am I right in thinking that ETFs are now the way to go regardless of how much you have invested (I'm basing this on the assumption that portfolio rebalancing would primarily be done via purchasing the lagging ETFs)? I've been looking into ETFs of late (a little more daunting for a newbie like me) and then I came across this article and thought I'd ask. I see that you recommend getting three US ETFs rather than Canadian versions of them. Do you think that the lower MERs on these outweigh the costs associated with currency exchange and withholding taxes? I'm investing for about 25 years….

    Thanks for all your advice.

    Marty

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