Selecting which Vanguard asset allocation ETF to purchase can be intimidating – especially if you ask friends, family, or colleagues what they think you should do. You’ll probably not only receive conflicting recommendations, each one will be sure they’re right, even if it’s a much riskier and aggressive asset mix than you’d select on your own.
Easy for them to say; it’s not their money at risk. My advice on seeking advice is to ignore what your peers are doing with their money. This money is yours; you’re the one who should decide how much risk makes sense for you. Fortunately, I’ve got three rational determinants to help you figure this out: They are your willingness, ability and need to take on market risks in pursuit of market returns.
So how do you start to quantify these components of quality decision-making? By completing an investor questionnaire, of course. Vanguard Canada has provided a decent online form, which I’ve linked to in the model portfolios section of the Canadian Portfolio Manager blog. It includes 11 questions, to help you consider your personal risk profile, as well as your investment circ*mstances.
Before you proceed, let’s look at each component involved.
Your Ability To Take Risk
Your ability to take risk depends on your investment time horizon and the stability of your income (or human capital). If you have many years to invest and a stable income, you should be able to take more risk.
For example, if you’re 30 years from retirement, and/or a tenured professor with a pension, you have the ability to invest in an asset allocation ETF with a higher stock allocation (more risk). On the other hand, if you’re a few years from retirement, and/or working less-reliable freelance jobs, you may want to consider an asset allocation ETF with a higher bond allocation (less risk).
Although Vanguard’s questionnaire is a good starting point, it’s not without its issues. For example, the first few questions relate to when you’ll need your money back. If you indicate that you plan to withdraw your money in 2 years or less, but you answer the remaining questions as aggressively as possible, the suggested asset mix will be 50% stocks and 50% bonds. This strikes me as way too risky for an investment horizon of under 2 years.
As a general rule of thumb, you shouldn’t invest in any of these ETFs if you require the cash back in less than 5 years. I analyzed hypothetical Vanguard asset allocation ETF performance over the past 20 years ending June 2019, and here’s what I found:
- The worst 1- and 2-year periods were negative for all five ETFs.
- The worst 3-year period was negative for all ETFs except the Conservative Income ETF Portfolio (VCIP), which holds 80% in bonds; even still, VCIP only returned 1%.
- The worst 4-year period was negative for all ETFs except VCIP and the Conservative ETF Portfolio (VCNS). But these only returned 2.2% and 0.2% respectively.
Looking further out:
- If you need the cash in 5–9 years, VCIP or VCNS should be the only Vanguard asset allocation ETFs on your radar. Even the Balanced ETF Portfolio (VBAL), which allocates 60% to stocks, returned only 0.3% over its worst 9-year period.
- If you won’t need the cash for 10–14 years, VBAL could be an appropriate choice, as even its worst 10-year return during this period was around 2%.
- If you don’t need the cash for 15–19 years, you could look at a more aggressive ETF, like the Growth ETF Portfolio (VGRO).
- If you’re investing for 20 years or more (and you are comfortable dialing up your portfolio risk to eleven), the All-Equity ETF Portfolio (VEQT) might be right up your alley.
Your Willingness To Take Risk
Now, just because you have the ability to take risk, doesn’t mean you’re willing to remain level-headed during a severe market downturn. Even if you know you have 20+ years before you require the funds, can you keep your cool when your ETF’s value plummets (which it most certainly will from time to time)?
There are five questions in Vanguard’s investor questionnaire that address this concern. But when I completed them to be as conservative as possible (while still indicating a high ability to take risk), the suggested asset mix was 60% stocks and 40% bonds. This is probably too aggressive if you have a low tolerance for staying put during stock market declines.
To guesstimate your willingness to take risk, I suggest imagining what you’d do if the stock allocation in your portfolio dropped by 50%. While any ETF investment could theoretically drop to $0.00, this should be a reasonable worst-case percentage decline to consider.
So, if you’re considering VGRO, with an 80% stock allocation, assume the fund’s total value could drop by 40% in a severe market downturn. Now take the dollar amount of your portfolio, and visualize it dropping by 40% immediately after investing the cash. If you have $10,000, it drops to $6,000. If you have a $100,000, it drops to $60,000. Would you truly be willing to ride out that roller coaster, or (more likely), would you feel like you’d just made a huge mistake?
Be honest – are those temporary setbacks going to completely freak you out? Go through the same process with other Vanguard asset allocation ETFs until you’ve identified one you can stomach. By going more conservative, you may leave some extra returns on the table over time. But in my opinion, that’s a fair trade-off for avoiding the incredibly expensive mistake of trying to flee to a more conservative ETF (or, worse, cash) in the middle of a market panic, when you’d be forced to sell your holdings at a deep loss.
For this reason, I believe your willingness to take risk should take priority over your ability to take risk.
Your Need To Take Risk
The final consideration – often forgotten in all the excitement – is how much risk you need to take. Could you meet all your financial goals by simply investing in guaranteed investment certificates? If so, you may not need to put your savings at higher risk by allocating any of it to stocks.
If you’re a young investor – and not offspring of the rich and famous – you can probably assume you do need to take some market risk, which means you can mostly ignore this component for now. Out of the three, it’s simply a given.
As you build a more substantial portfolio, you can work with a financial planner to determine whether you can afford to take less risk over time.
Your Investment Experience
Before I let you go complete your questionnaire, I’d like to reemphasize the relationship between your willingness and ability to take on risk – and how your willingness should probably be the one driving the bus – especially when you’re still gaining investment experience.
As a young investor, you may often hear that time is on your side, so you can go aggressive, with risky investments.
If we’re talking about ability to take on risk, this is true. But if you only have a modest amount to invest, think about how excruciating it will be when the stock markets head south on their periodic “vacations,” taking your seed money along for the ride. Until you’ve personally had the chance to ride out some up and down markets, I would suggest opting for a more conservative or balanced ETF, rather than a growth-oriented or 100% equity ETF.
There’s nothing wrong with starting off with a more conservative asset allocation ETF, even if you’re very young, have a long-term time horizon, and a stable income. I’ve yet to meet an investor who failed to meet their financial goals because they invested in a balanced asset allocation, rather than a more aggressive one. So, don’t feel like you need to fake a high risk tolerance to fit in. You can go with a more conservative or balanced asset allocation ETF to start, and use all your youthful energy to embark on a highly aggressive savings plan. This is likely to literally pay more dividends over the long term.
Keep in mind, if your portfolio size is modest, say $10,000, you’re not giving up much dollar return by investing in a more balanced portfolio. For example, a 60% stock/40% bond portfolio like VBAL is expected to return about 3.9% annually going forward. On the other hand, a 100% equity portfolio (like VEQT) is expected to return around 5.5% per year – or 1.6 percentage points more. On a $10,000 holding, this is only $160/year. Think of it as purchasing “sleep better at night” insurance, well worth the cost.
Let others call you chicken. As you gain more experience, you can always decide to sell your VBAL holdings and repurchase VGRO or VEQT. Besides, you’ll get the last laugh 30-some years from now when your nest egg is well-rounded.
Hopefully you’re now feeling more confident about choosing the right asset allocation ETF for you. Before you run off to place your trades, do a quick reality check on what returns you can expect from these Vanguard Asset Allocation ETFs. Spoiler alert: It’s not anywhere near 10%.
By Justin|2021-10-07T12:53:29+00:00August 29th, 2019|Categories: ETFs|53 Comments
53 Comments
ZamoralisOctober 24, 2022 at 3:16 pm - Reply
Some people love holding VBAL and only VBAL. While that’s fine for them, it’s not for everyone – especially those who rely on living off the dividends of investments, during retirement.
The 2.5%? div.yield is far too low for generating decent dividends. No, I’m not interested in selling off VBAL to generate income. That’s not a reliable tactic.Summary: It’s NOT all about total return. Not by a long shot. It’s about determining your cash flow needs, followed by total return – that is secondary.
—-
JustinOctober 25, 2022 at 10:49 am - Reply
@Zamoralis – This blog post is about choosing a suitable asset allocation (let’s try to stay on topic).
TobyJuly 14, 2022 at 4:49 pm - Reply
great article,
If one was willing to take all the risks etc and went 100% VEQTHow would you approach de risking as one gets closer to retirement…
Would it just be a case of for example on your 40th birthday selling all and rebuying VGRO or whatever? Or would it be better to incrementally transition?Thanks!
JustinJuly 14, 2022 at 4:55 pm - Reply
@Tony – It would depend on your specific situation. If there were no tax consequences (and you were ready to make the switch), selling VEQT and buying VGRO could be a good first step. Or you could add a second bond position to VEQT (like VAB) and gradually transition to your preferred asset mix over several years.
JesseFebruary 19, 2022 at 6:16 am - Reply
Hi Justin,
Had a question with regards to multiple saving goals.
If I have a goal to save for a short term goal (downpayment) – 5-9 years and a 2nd goal for a long term goal (retirement), would it make sense to invest into 2 Asset Allocation ETFs (such as VCIP for the short term and VGRO for the long term)?
Not sure if this would make sense or if it’s better to just stick with one Asset Allocation ETF.
Thank you and I’ve enjoyed a learned a ton from your videos and content.
JustinMarch 2, 2022 at 12:25 pm - Reply
@Jesse – I’m glad you’ve found the videos/content helpful :)
In this situation, I think having two asset allocation ETFs would make sense (it would certainly keep things straight in your head when viewing the holdings).
NormLJanuary 5, 2022 at 7:09 pm - Reply
Hi Justin,
Excellent article, so much to think about.
As a retiree with a RIF, TFSA and Non-Registered accounts I would like to switch to ETF investing in all accounts. With my small pension and CPP & OAS i use the withdrawal from my RIF to add to my income.
Would VBAL be suitable for a TFSA at this stage? Would VCNS or VCIP be suitable for a non-registered account.
Thanks.NicolasDecember 14, 2021 at 9:28 pm - Reply
Hi Justin,
I would love to hear your take on asset allocation ETFs in a (potentially) raising rates environment.
VBAL, for example, has an average bond maturity of 11 years.
Wouldn’t that be problematic in the event of a potential slow grind-up for bonds yields?
I always heard that one should go for shorter duration bonds in a high inflation/rising rates environment.
Thank you!
JustinDecember 14, 2021 at 10:12 pm - Reply
@Nicolas – I’m not overly concerned with the short-term price impact of potential bond yield increases. Over time, this could be a good thing for bond investors (as maturing bonds and coupon interest will be reinvested at higher rates).
If this is still a concern, an investor could instead hold a combination of VEQT/VAB/VGAB + 1-5 year GICs.
AlisonJuly 4, 2021 at 9:22 pm - Reply
Hi Justin,
Thanks very much for all the work you put into these posts. My question is if I want to buy an all in one portfolio such as VGRO, do I buty it for my RRSP, my TFSA, and my non-registered account? Or is it better to buy the individual ETFs in the correct proportion I want, like the bond fund in my RRSP and VEQT in my TSFA and _____ in my no-reg. account? I hope that makes sense.- See AlsoStriking a balance with strategic asset allocation | Vanguard UK ProfessionalAsset Allocation Funds - Types, Benefits and TaxationUnderstanding Blend Funds: A Comprehensive Guide to Balanced Investment Strategies
JustinAugust 25, 2021 at 11:06 am - Reply
@Alison – It’s much easier to simply buy the same asset allocation ETF across all accounts. However, for investors who want to complicate their portfolio management for potential incremental benefits, they could engage in more advanced asset location strategies (I’ll be releasing more videos on this topic shortly).
AmyMay 29, 2021 at 1:20 am - Reply
Hi Justin,
I am new DYI investor and really appreciate your videos. I am wondering when you invest in index fund such TD e-Series (suggetsed by couch potatoe), do you get taxed on foreign investment just like ETF?
Thank you
JustinMay 31, 2021 at 10:05 am - Reply
@Amy – I’m glad you’ve been enjoying the videos :) Index funds (like the TD e-Series) are taxed in a very similar manner to ETFs (they also have similar foreign withholding tax implications).
SamNovember 23, 2020 at 7:20 pm - Reply
Hi, very interesting article thanks. I have a lump sum to invest at the moment and a couple questions if you have a moment. I have an investment time frame of about 20-25 years and am committed to weathering any storm that comes with putting the majority in a VGRO/XGRO fund. 1-Would putting say, 30% in VBAL/XBAL make sense to have some of my money slightly more secured and less volatile? 2- Should I put it all in at once? Feels like markets are sketchy AF at the moment with COVID. When I had a lump sum a few years ago my financial advisor put 25% in every month for a couple of months. Not sure if this is the best course of action. Thanks!
JustinDecember 2, 2020 at 12:59 pm - Reply
@Sam – In your first comment, you mention that you are “committed to weathering any storm that comes” with putting the majority of your lump-sum cash into VGRO/XGRO. But in your follow-up question, you ask whether you should have 30% in a balanced ETF, like VBAL/XBAL.
From your additional comments (i.e. desire to have your money “more secured and less volatile”, “feels like markets are sketchy AF at the moment with COVID”), it doesn’t sound like you’ve quite figured out your risk tolerance. I would start there – decide on an asset mix that you can stick with, even when markets plummet (because they will again and again and again).
InteligencyJune 12, 2020 at 9:00 pm - Reply
I liked the post, very interesting and well written, I really needed to know about what can i do with my money. Thanks :)
NicolasMay 25, 2020 at 5:01 pm - Reply
Hi Justin, thanks for the time and effort you put into helping us.
I’m about to buy about 20,000 shares of VCNS, and roughly the same amount of VBAL.
Now, 20,000 shares of VCNS is about 50% of the daily average volume for this ETF.
That sounds like my transaction can move the price in and of itself?
Would you recommend I go the stealth route, channel my inner wannabe Warren Buffett, and instead buy 5,000 shares a day for 4 days instead?
Thank you!JustinMay 25, 2020 at 5:51 pm - Reply
@Nicolas: I personally just use limit orders at the current ask price (or slightly below) and place the entire order. If you’re uncomfortable with this, you could buy 5,000 shares a day for 4 days (although this will introduce an opportunity cost, either positive or negative, relative to purchasing all 20,000 shares at once).
DeeMay 14, 2020 at 8:19 pm - Reply
Hi,
If I am looking to buy a home within the next 1-2 years and am not sure if I will need to use my RRSP’s first time home buyer loan would any of the options presented be wise?
Assuming I would need to use it within the next couple of years what would you suggest as it stated that none of these are options?Thanks!
JustinMay 14, 2020 at 8:59 pm - Reply
@Dee: If you’ll need to funds in 1-2 years, liquid cash investments (like guaranteed investment savings accounts or regular savings accounts) are your best option. You could also consider 1-2 year locked-in GICs (if you know exactly when you need the funds), or cashable GICs (if you don’t).
BillApril 22, 2020 at 9:06 am - Reply
Hi Justin,
Greatly appreciate all the work you put in to these detailed posts. You explain in your posts that expected returns for VEQT could be around 5.5% while VBAL could be expected to return around 3.9%. I have some questions in regards to this:
1) If someone plans to simply pick an All in one and the contribute to it monthly or quarterly for 20+ years, why wouldn’t they pick the all equity VEQT ETF?
2) If someone chooses the VEQT, couldn’t they switch to VGRO or VBAL once they got closer to retirement to help protect themselves from volatility?
3) Is the 5.5% return rate for VEQT conservative? It seems somewhat low for an all equities portfolio. Would someone be better off picking individual stocks from great companies such as Amazon, apple, Enbridge, Boeing, Johnson-Johnson, etc?
Thank you for all your help!
JustinApril 23, 2020 at 1:20 am - Reply
@Bill: In regards to your questions …
1) Probably for the same reasons we all don’t work out and eat healthy everyday – we just can’t seem to stay disciplined. A balanced portfolio of stocks and bonds helps investors stick with their long-term investment strategy better than if they had a 100% equity portfolio.
2) Yes – although there could be tax implications of doing so. I discuss this topic on a recent podcast: https://canadianportfoliomanagerblog.com/podcast-4-shedding-light-on-the-light-model-etf-portfolios/
3) It might be a bit low, as stocks took a hit in price this year (which generally increases their future expected returns). But I wouldn’t expect more than ~6% after fees/foreign withholding taxes. Someone might get lucky (probably not though) picking individual stocks, but they would be less diversified and taking unnecessary single security risk. The companies you mentioned are all top holdings in broad-market ETFs, so you’ll already be invested in them (as well as thousands of other companies).BillApril 23, 2020 at 4:47 am - Reply
Thanks Justin! So as long as someone is committed to staying invested in VEQT through the downturns, it is a great option as long as you have a long time frame? To me, I’m willing to lose a substantial amount over a short period of time if it gives me the best opportunity of maximizing my return over the long run.
Also, any idea how much is withheld for foreign withholding tax through VEQT? Is it better to go VCN/XAW to avoid these fees?
Greatly appreciate the information!
JustinApril 23, 2020 at 4:40 pm - Reply
@Bill: Sure, if you’re willing to lose 50-60% of your portfolio overnight without any concerns, and you don’t require any of the cash for a couple decades, a 100% equity portfolio could be appropriate. If you’ve never invested before, you may want to focus on your savings rate first (as this will determine your success as an investor).
I’ve posted a Foreign Withholding Tax Calculator that should help answer your other questions: https://canadianportfoliomanagerblog.com/calculators/
RodApril 19, 2020 at 3:09 pm - Reply
Hi Justin,
I find your blog to be very educational and often refer back to articles and re-read. Thank you.
I’ve used the Vanguard questionnaire to see my results but have a couple questions about asset allocation:
1. In the above article, when you discuss appropriate asset allocations for different time horizons, how should one apply that to retirement? Do you think about it in terms of when retirement will start? E.g. if one intends to retire in 10 years, but be retired for 25+ years, what is the time horizon?
2. Do you have any specific guidance on how a defined benefit pension should be factored into one’s asset allocation? E.g. Treat the future income stream as an annuity and calculate the present value which can then be considered part of the fixed income allocation of your current portfolio? I’ve only ever heard of general rules of thumb when DB pension is part of one’s portfolio (I.e you could take more risk).
Once again, appreciate the great content.
Rod
JustinApril 19, 2020 at 3:51 pm - Reply
@Rod: You’re very welcome – I’m glad you’ve been enjoying the blog!
In regards to your questions:
1. These general asset allocation rules are more relevant for accumulators. As you approach retirement, you should work with a financial planner to ensure you have enough safer cash and fixed income investments to fund your portfolio withdrawals (having 10-15 years of safer capital is not unreasonable, like guaranteed cash equivalents, GICs and bond ETFs). Although your time horizon in retirement could be 25 years or more, you will be withdrawing from the portfolio, so you will need to adjust the asset mix (more conservative) to account for this fact.
2. I don’t think you need to overcomplicate things if you have a DB plan. This would simply reduce the amount you need to withdraw from your portfolio each year (causing your required cash/fixed income holdings to decrease automatically). For example, if you wanted to ensure you had 15 years of safer portfolio assets at retirement, and you needed $48,000 from your portfolio each year (without considering the pension), you would target ~$720,000 in cash/fixed income investments. If you had a DB pension that provided you with $24,000 per year, you could cut the required cash/fixed income holdings in half, to around $360,000.However, these decisions also have to be weighed against your willingness and need to take risk. As I mentioned in the blog post, your ability to take risk is probably the least important of the three. Many investors have blown up their investment plan by simply focusing on their ability to take risk, while ignoring the other two components of this very important decision. Again, a good planner can help you make a more informed decision for your specific situation.
deanApril 13, 2020 at 6:38 pm - Reply
What if I have no timeframe in mind? How can I allocate? Should I get different all-in-one ETFs? E.G. 10k on VCNS, 10k on VBAL, 10k on VGRO.
thank you for your time.
JustinApril 13, 2020 at 6:43 pm - Reply
@dean: No – you need to determine your approximate time horizon before making your asset allocation decision (buying random ETFs is not a solution).
Steve BridgeFebruary 27, 2020 at 11:24 pm - Reply
Hello Justin,
Great article, thank you very much! Easy to read, straight forward, no jargon.Any idea what a theoretical 5-year return of VBAL ending in 2019 would be? I realize it hasn’t been around that long and Vanguard is not allowed to publish this information, but I am curious as it would be a helpful comparison for mutual fund owners out there.
Thank you,
SteveJustinFebruary 27, 2020 at 11:30 pm - Reply
@Steve Bridge: I’ve included hypothetical returns for VBAL in my Light Model Portfolios:
https://canadianportfoliomanagerblog.com/model-etf-portfolios/
https://canadianportfoliomanagerblog.com/canadian-portfolio-manager-introducing-the-light-etf-portfolios/
SDDecember 11, 2019 at 5:46 pm - Reply
A lot of pf bloggers use a couch potato portfolio combined with dividend stocks. But index funds and ETF’s give dividends too. Is there a rationale behind this strategy? Other than perhaps a slightly lower MER since there is no MER fee for individual stocks. Would you recommend this strategy too?
JustinDecember 11, 2019 at 5:57 pm - Reply
@SD: I don’t recommend the strategy, but I also wouldn’t judge an investor who split their Canadian equity allocation between a low-cost, broad-market Canadian equity ETF and a low-cost, diversified, higher-dividend paying Canadian equity ETF. If they stick with their strategy and keep their costs low, I’m sure they’ll do just fine over the long-term.
I wouldn’t recommend buying individual Canadian stocks though, as it just increases the number of decisions you need to make (i.e. How many stocks do you buy? How should you weight the stocks? When should you rebalance them? Should you DRIP their dividends? When do you sell a stock? When do you buy more of a stock? When do you add another stock to your portfolio? etc. etc. etc.).
Julius and J.September 25, 2019 at 7:46 pm - Reply
@Justin: When you say, “the asset allocation ETFs are more suitable for individuals in the accumulation stage…” then what about those who are already retired? I don’t “accumulate” anymore, which means I “decumulate” (and it’s harder than you thiink, after having spent +40 years or putting money away for my golden old days!) No kids, no debt, no house (renters here, got more freedom!)
Let’s say our couple has $1M portfolio and needs $60K (before tax) /yr to live on. $25K is coming from OAC-CPP, and we need to get $35K from all accounts (taxable, RRSP, LIF, TFSA).
If I read your article correctly, I would keep about 2 years in cash ($70K in an HISA), get a 5 year GIC (~ $175K), and put all the rest ($755K) in VBAL until I turn 75 yrs old, and switch to VCNS, to be “safer” (my wife’s idea!)
Does that match your line of thought?
What other changes should I make?JustinSeptember 25, 2019 at 8:56 pm - Reply
@Julius and J: I think you’ve answered your own question ;) I generally feel that most individuals should seek professional advice once retired (perhaps a fee-only planner, or a reasonably priced planner/investment advisor). I cannot provide specific cash flow, asset allocation, financial planning, or investment advice for my readers’ personal situations.
Julius & J.September 25, 2019 at 9:54 pm - Reply
Thanks for your (quasi) reply :))
Indeed, I know about the “fine print” where a financial blogger is not supposed to hint, suggest, give advice, etc.
The situation I exposed was purely for “educational” purpose (my own and my wife). My actual portfolio is not quite as I described it. I was simply trying to understand some of your key points.Always, for educational purposes, since I love to learn :))
JustinSeptember 26, 2019 at 12:46 am - Reply
@Julius & J: In that case, the best general advice I can offer (certainly not applicable to everyone), is to have 1-2 years of cash (investment savings accounts), 1-5 years of laddered GICs for expenses, along with bond and equity ETFs for the mid to long term (either through individual bond and equity ETFs, or bond ETFs and asset allocation ETFs).
This is not very different than how investors should have been managing their retirement portfolios before asset allocation ETFs were released.
Nathan BradySeptember 9, 2019 at 2:32 pm - Reply
Question, say I do the standard ‘balanced’ 60/40split. Wouldn’t I be better off doing an all equity ETF and all bond separately? So if ‘needed’ (hopefully I wouldn’t touch anything) during say… a downturn, i could sell bonds while waiting out equities to recover.(or vice versa). If all in one, you have to sell bonds And stocks
JustinSeptember 9, 2019 at 3:04 pm - Reply
@Nathan Brady: If you feel that you may need some of the funds, you should keep this amount separate from your VBAL holdings (so hopefully you wouldn’t find yourself in this situation).
If you still end up in this situation, you could always sell the entire holding and repurchase a more aggressive asset allocation ETF with the remaining funds, like VGRO (or a combo of VBAL and VGRO), to ensure you still have the same dollar amount of stocks.
Or, as you said, you could invest in a VAB/VEQT combo (which may be easier to visualize when rebalancing).
AFDSeptember 4, 2019 at 1:00 pm - Reply
@Justin: Fantastic topic. In regards to comment “…the asset allocation ETFs are more suitable for individuals in the accumulation stage of their lives…” can you expound further in what you really mean? From everything I have read retirement can be, if one is lucky, a long time (30+ yrs) and if an investor has been successful during the accumulation stage why would they change course/strategy at 65? Under that scenario, one might assume that a successful retiree portfolio where 2-3% provides their basic needs could drop by 50% for a number of yrs (retire would need to tap their portfolio by 6% to make up the difference). But would recover in the fullness of time.
JustinSeptember 4, 2019 at 1:10 pm - Reply
@AFD: To clarify, the asset allocation ETFs are ideal for accumulators, as they generally do not have to worry about rebalancing their portfolio or drawing down their assets. They simply contribute to their accounts, invest the cash, and get back to living their lives.
A retiree’s portfolio is generally more complicated to manage. They would likely have a portion of their portfolio in investment savings accounts (cash), 1-5 year GICs, and bond ETFs. With the remaining assets, they could still use an asset allocation ETF (perhaps even an aggressive one, like VEQT, for the long term portion of their portfolio). The main point is, they would need to exert more effort to manage their portfolio (relative to an accumulator). But their overall portfolio could still include an asset allocation ETF.
JamieSeptember 2, 2019 at 1:21 pm - Reply
Hi Justin,
When you state that “a higher stock allocation (more risk)” and “a higher bond allocation (less risk)”, are you referring to short term risk?
Over long periods (20-30 years in a flat or rising interest rate environment) isn’t the opposite true if one considers inflation?
JustinSeptember 2, 2019 at 3:23 pm - Reply
@Jamie: Even over longer periods (i.e. 20 years), stocks can be more volatile than bonds, but still not outperform them (just look at the last 20 years of returns and standard deviations in my model portfolios):
https://canadianportfoliomanagerblog.com/model-etf-portfolios/
EllenAugust 31, 2019 at 8:04 pm - Reply
Hi Justin,
thanks a lot for your blog. Really interesting. I currently have VGRO in my RRSP and TFSA because I didn’t know in what to invest and wanted something simple. Now I’m ok to rebalance myself.I just incorporated as a contractor and I’ll be able to invest more than 50% of my income in my “corporate taxable margin account”. I was thinking of following your 33% VCN and 67% XAW. (or maybe 20% VCN and 80% XAW to reduce home bias but I don’t know this impact on taxes)
VEQT looks really similar to yours with slightly less Canadian. Do you see any reason to do it with your 2 ETF instead of VEQT? I’m wondering if I’m missing something. Will it be easier to do my taxes with VEQT?
My plan/goal is to be Financially Independent in 12-15 years when my mortgage will be paid. I bet I’ll still be working but maybe part time (I’ll be around between 53 and 55)
thanks a lot
JustinSeptember 1, 2019 at 5:25 pm - Reply
@Ellen: VEQT would be very similar to VCN/XAW (other than slight home bias differences). Other than slightly lower fees, I don’t see any huge benefits of opting for VCN/XAW over VEQT.
With VEQT, you would only have to track a single adjusted cost base (ACB), so for tax purposes, it would be marginally easier than tracking the ACBs of two ETFs.
EllenSeptember 1, 2019 at 7:14 pm - Reply
Thank you Justin.
I heard about ACB only yesterday reading other articles. So simplicity will be the best for sure.
(It looks like the TD e series calculate it for us but I haven’t had time to read more. Putting cost of share on an excel doc once a month when I buy more VEQT doesn’t look too difficult)JustinSeptember 2, 2019 at 3:25 pm - Reply
@Ellen: You’ll also have to track the return of capital and reinvested distributions for VEQT each year. Here’s our white paper with step-by-step instructions you can follow:
Jean-FrancoisAugust 31, 2019 at 6:04 pm - Reply
Hello Justin!
Thank you for another great article!
I’d like to have your opinion Justin :
I have about 4 years of investing my own TFSA money and RRSP with ETFs and index funds and have read a ton about investing during that time. I have studied in mathematics -actuarial science, so I understand all the underlying calculations, annuities,valuation of a stock, yields, market efficiency, standard deviation, etc.
I’ve seen countless times through my readings that investors often overestimate their risk tolerance, especially when all you’ve known are great years in the stock markets, as is the case with me. So I am trying to figure out my real risk tolerance, although I am 35 years old with a recession proof job, educated, no debts, I feel I can never really know how I will react when seeing for example my 90% equities portfolio go from $120,000 to $65,000 in matter of a few months. I currently would say that I’d consider stocks to be on discount and would want to buy as much as possible, even considering leveraging at a drop around 30-35%, but is there a risk I could be wrong and panic instead ? I’ve gone through December 2018 just fine with absolutly no intention of selling or changing course.
Is it reasonable to go 90% or 100% equities considering this ? Am I afraid to be afraid ?! hehe
Thanks for your continued support to the investment community Justin, it is truly appreciated.
Best regards,
JFLDJustinSeptember 1, 2019 at 5:22 pm - Reply
@Jean-Francois: I think it’s safe to say that most investors overestimate their risk tolerance (especially if they’ve never experienced a significant market downturn – December 2018 does not count).
If you’re still asking yourself the question of whether you’re comfortable with a 90% or 100% equity allocation, this could indicate that you are not as risk-loving as you may think ;)
Jean-FrancoisSeptember 1, 2019 at 8:02 pm - Reply
Thank you Justin for the quick reply! :)
James BAugust 31, 2019 at 3:57 pm - Reply
Hi Justin, great article thank you. Your writing (and your colleague Dan’s) seem to mostly refer to the Vanguard asset allocation ETF families of products. With Vanguard’s competition having launched similar asset allocation ETF products (ishares and BMO) is there a reason that Vanguard is typically used in the examples and discussion? Are the Vanguard products considered superior? As a DIY investor I have decided to switch from a 3ETF portfolio to a single AA ETF for simplicity, and am currently evaluating which ETF provider to select. I note that the Vanguard ETFs have a slightly higher MER (few basis points) than their competitors, but otherwise only subtle differences between the AA ETF for each asset mix are visible from a “laymen’s” perspective. For example I am comparing VGRO vs XGRO vs ZGRO. I have combed your blog history and the CCP blog and don’t see any articles that conduct a direct comparison of the AA ETFs from each provider. I’m wondering if this is a topic of future discussion, or if you’ve seen any comparison articles from other authors that you would recommend. Hopefully I haven’t simply missed it:).
Thanks again for your work, and the time you spend to educate the masses. I can truly say that as a DIYer I am a dedicated follower who has learned so much reading and listening to both you and CCP. Much appreciated!!!!!JustinAugust 31, 2019 at 4:36 pm - Reply
@James B: You’re very welcome – thanks for reading and commenting :)
You’re right with your assumption that there are only subtle differences between the asset allocation ETFs from Vanguard, iShares and BMO – some of which I discuss here:
https://canadianportfoliomanagerblog.com/breaking-news-familiar-ground-ishares-asset-allocation-etfs/
You really can’t go wrong with any of these ETF providers. I like the Vanguard AA ETFs the most, for a number of reasons (these are mostly personal in nature):
– I was introduced to index investing through John Bogle, so this blog wouldn’t exist without Bogle and Vanguard.
– Vanguard Canada was the first provider to launch these ETFs for investors (while the other ETF providers just followed the leader after they witnessed Vanguard’s success). I commend them for their actions.
– I prefer Vanguard’s index construction methodology over the others – it is extremely well thought out, disciplined and transparent.
– The difference in fees is minor, in my opinion.
BrianAugust 30, 2019 at 2:32 pm - Reply
Would you think VBAL is good for a recently retired person, with a small pension, moderate risk, but needs money to live on, or do you suggest something else
JustinAugust 30, 2019 at 2:43 pm - Reply
@Brian: If a retiree requires funds to live off of from their portfolio, they should generally have some money in an investment savings account (to supplement at least a year’s worth of expenses) and perhaps a GIC ladder and bond ETF for future year’s expenses (for the next ~10 years). VBAL or another asset allocation ETF could be considered for the remaining portfolio, depending on the investor’s specific financial and personal situation.
In my opinion though, the asset allocation ETFs are more suitable for individuals in the accumulation stage of their lives.
