Turning to an ETF portfolio when you have too much equity

The problem with having too much equity

The Silverbergs want to move their 100% equity portfolio into low-cost ETFs. Is it the right choice for them?


The Problem

Portfolio Makeover - Before For the past 18 years, Karine and Dave Silverberg of Milton, Ont., have managed their own portfolio of mutual funds. Neither has a company pension so the 38-year-old couple has been very aggressive with asset allocation. “Up to now, we’ve been 100% in equities,” says Karine, who oversees their six-figure portfolio to which they contribute $4,000 a month. All their investments are in index funds with fees of up to 1.1%. The couple now wants to switch to lower-fee exchange-traded funds (ETFs), but is starting to question their 100% equity position. “Is it right for the long term?” asks Karine. “We won’t need the money for years.”

The Fix

Even though the Silverbergs are willing to take a high level of risk with their investments, they don’t necessarily need to take this much risk, says Shannon Dalziel, a certified financial planner with PWL Capital Inc. in Toronto. “Since they’ve implemented a frequent savings strategy, they may find that an aggressive asset allocation, along with its higher risk, isn’t necessary to meet their goals.”

In fact, a more balanced portfolio with 70% equities and 30% fixed income holdings may enable them to meet their long-term goals and also provide a lot less volatility along the way. Still, if they’re comfortable with the market swings and don’t give in to panic and sell prematurely, “the 100% equity portfolio makes sense for them—for now,” Dalziel says.

At the same time, she advises that Karine and Dave focus on what they can control—their rate of savings, as well as the fees they’re keen to lower. The couple can build a low-cost, well-diversified portfolio using just two ETFs: the Vanguard FTSE Canada All Cap Index (which holds 230 Canadian large companies) and the iShares Core MSCI All Country World ex Canada Index (which holds 5,000 companies worldwide, half of which are U.S.).

“These funds will give them simplicity, and their fees will be a razor thin 0.17%,” says Dalziel. The expectation is that a higher-equity portfolio will give this couple higher returns, but Dalziel cautions that it’s important to continually reassess their asset allocation—especially closer to retirement.

The fix