With these ETFs, investors could now access a globally diversified portfolio of stocks and bonds in various proportions at low expense ratios of 0.24% and below.
With the launch of asset allocation ETFs in Canada, investing and portfolio management became as simple as periodically buying more and reinvesting distributions. That said, Canadian investors willing to sacrifice simplicity can obtain additional cost savings and diversification by building a customized portfolio of ETFs. Here’s a handy step-by-step guide.
Determine your investment policy statement
Investing experts usually recommend the services of a fee-only Certified Financial Planner (CFP) when it comes to formulating an investment policy statement (IPS) and throughout the portfolio construction process. A fee-only CFP has expertise that can help DIY investors avoid common mistakes (such as high fees, poor tax-efficiency and under-diversification), optimize for their personal goals and risks, and provide a healthy degree of ethical assurance. Compared to financial advisors who charge based on a percentage of assets under management (AUM), fee-only financial planners are less incentivized to prioritize sales or push unsuitable investment products.
However, Canadian investors venturing out on their own can still create an effective IPS. Think of this as a living, breathing document that defines your investment portfolio’s overall objectives and constraints. There’s no universal template for what an IPS should entail but, in general, it should include:
What accounts do you have? You can open a tax-free savings account (TFSA), registered retirement savings plan (RRSP), registered education savings plan (RESP), locked-in retirement account (LIRA) among others, which are all registered accounts. You can also have non-registered accounts, too. In your asset overview, you will list all your investing accounts, their respective amounts and your plans for contributing yearly. Also list your liquid assets, such as an emergency fund in a high-interest savings account. And don’t forget to add a workplace defined contributions or defined benefits plan, if you have these.
Understanding these three considerations will help determine your asset allocation and the type of investments that will work for you.
- Your objectives: Are you saving for retirement, a down payment on your first home, your child’s tuition? Include your goals here.
- Your time horizon: This is when you need the money to be accessible. It’s essentially the target date for your objectives.
- Your risk tolerance: You need to consider how much volatility and unrealized losses (a loss in market value of an asset that isn’t yet sold) you are willing to bear.
This is a breakdown of what asset classes you want in your portfolio (this isn’t a wish list, so be realistic). It can be a mix of stocks, bonds, cash or alternatives. You also log which accounts you’ll hold them in. For example, you may want to keep bonds in an RRSP due to their tax-inefficiency. And, lastly for asset allocation, include your preferred proportions relative to each other (e.g. 60/40 portfolio mix of stocks and bonds).
Your rules: This is a list of dos and don’ts for how you want to manage your portfolio. Note when you want to rebalance your portfolio, and when you want to make contributions or reinvest dividends. You will also want to include types of funds you’ll be avoiding, such as assets with fees above a certain level or riskier ones like cryptocurrencies. And to keep yourself in check, write out any behaviours to avoid, such as panic-selling or timing the market. Add your fee-only advisor’s contact info here, too, as a gentle reminder to check in when you feel you might be sliding into those actions.