Building an Investment Portfolio if you Don’t Want to Buy Individual Stocks – Part 1

There are lots of people out there who don’t want to risk buying individual stocks because they don’t have time to study them or because they fear individual stock risk. This is understandable because of all the time constraints that we face (jobs, children, errands, school, etc…) and because of the need to appropriately diversify.

I like studying and picking individual companies. However, in one of my retirement accounts, I own only ETFs. ETFs are investment funds that trade on stock exchanges (like stocks). Generally, ETFs hold assets such as stocks, commodities, bonds, other indexes or other ETFs. ETFs are rapidly becoming a popular choice because they can replicate the returns of mutual funds (or do even better) and have much lower fees.

The things that I look for when investing in ETFs are:

  • What underlying assets make up the ETF? Is it individual stocks, bonds, or REITs? Does it track an index?
  • A low management expense ratio. A low expense ratio reduces the ETFs fees which can increase your returns over time.
  • The ETF is issued by a reputable institution (e.g., Vanguard, BlackRock – iShares, State Street Global Advisors). You don’t want the institution that issued your ETF to go belly up.
  • I like to find ETFs that are liquid meaning there is enough daily volume to purchase or sell shares in a timely manner and at your desired price.

Due to my long investment time horizon (30+ years) and aggressive investment style, my ETF portfolio consists 100% of equity ETFs – these are ETFs that own stocks or own indexes that track stocks. I also own some REIT ETFs which I’ve included as equity ETFs. This post covers what ETFs I would own if I constructed a 100% equity based ETF portfolio.

My favorite US based stock ETFs (listed in US$) are listed below. I would probably buy these if I lived in the US or wanted some US$ exposure.

Figuring out the allocation of funds between the ETFs above is tough but I may hypothetically consider allocating 15% to the ETFs in the first bullet, 60% to the ETFs in the second bullet, 15% to the ETFs in third bullet, and 10% to the ETF in the last bullet.

My favorite Canadian based ETFs (in C$) are listed below. I would probably buy these if I lived in Canada or wanted some C$ exposure.

Figuring out the allocation of funds between the ETFs above is tough but I may hypothetically consider allocating 30% to the ETF in the first bullet, 10% to the ETF in the second bullet, 30% to the ETF in third bullet, and 15% to the ETFs each in the last two bullets.

Buying ETFs diversifies risk because the ETFs themselves own a basket of stocks or they own an index which then owns a basket of stocks. So only owning a handful of ETFs should not be inherently risky unless the Company issuing the ETFs goes under.

In the next post, I will consider some ETFs that may be relevant if I wanted to set up a portfolio that consisted of 60% stocks and 40% fixed income (i.e., 60/40 portfolio) – something I may consider as I get closer to retirement. A 60/40 portfolio is much less volatile than a 100% equity (stock) based portfolio because when stock markets go down, the 40% fixed income portion picks up the slack and generally increases in value. The result with a 60/40 generally is that it increases less than a 100% equity based portfolio when stock markets are up but it falls less than a 100% equity based portfolio when stock markets are down.

Disclosure: I own shares in Vanguard REIT ETF; iShares S&P/TSX 60 Index ETF; iShares S&P/TSX Capped REIT Index ETF; Vanguard S&P 500 Index ETF; and iShares Core MSCI EAFE IMI Index ETF.

Note: The ETF examples above are only hypothetical and are not recommendations to buy any of the above listed ETFs or use the above noted ETF allocations.

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