It is common advice for DIY investing beginners to keep it simple. There is an excellent rationale for this. The very act of purchasing that first ETF is scary for many. More than two or three ETFs means more math.
Trying to juggle the complexities to match investment types across different account types – paralyzing and not worth it for most people.
It could cause them to take no action. A big factor in successful investing is time to allow the magic of compounding returns to work their magic.
They could give up on the DIY investing option and incur a significant fee drag on their returns. Those fees could be return-killers if in the 1.5-2.5% mutual fund range. Even a 1% assets under management fee can add up to tens of thousands of dollars per year on a large portfolio. Those fees compound in size along with the portfolio, as shown below.
The above illustration is using $10K invested per year. Imagine the effects if you are saving and investing more than that. This is not to say that an financial advisor is a waste of money. Finding a good financial advisor can have many benefits. However, it is important to understand the cost for you to consider whether it is providing good value for your money.
A DIY investor not only has the feeling of empowerment from taking control of their investing. They can also make more money per hour for doing it (via their savings) than just about any other job. Even compared to practicing medicine. That said, even DIY investors may want to use a fee-only advisor who charges an hourly rate or fee per task. Robocorp is a tool to make the DIY option easier and a great value since it is free!
Mission: Cut Through Webs & Reverse P obocorp’s aralysis
Robocorp helps DIY investors plan an optimized portfolio more easily than manually building a three-fund ETF portfolio.
Even though Robocorp aids with both the math and asset location issues, some are still intimidated by the number of ETFs. So, I have come up with two solutions.
One is that I have simplified the previously released Robocorp Rookie interface. It now only shows the funds that you are actually using (usually a 5 fund portfolio). It still locates one to five in each of your account types and allows extra options for $USD accounts.
This week I have also released Robocorp Cadet. A simple solution.
This a simplified version that only uses Canadian equity (VCN), World Equity (XAW), and a bond fund (VAB). That would be a regular three fund portfolio, similar to the famous Canadian Couch Potato ETF Model Portfolio. However, it does have a second more tax-efficient bond option (ZDB) for those who spill their bonds out into tax-exposed accounts.
Overall, it locates one to three funds in each account type you use. That was my justification for luring you into my web with “one to three funds” when it is arguably up to four across a portfolio.
“Don’t be afraid”The Spider To The Fly
To give it a try, you can click the icon in the right-hand sidebar (bottom of
What if I make a mistake starting out…
The main limiter of these accounts is their size. Once a high-income professional has these accounts maxed out and their debt under control, they will usually spill over into a taxable account. That could be a corporate investment account or a personal one.
Worrying now about what to do later when you expand into corporate or personal accounts is not actually worth it. When needed, you can re-organize within your RRSP and TFSA without worrying about capital gains or other tax problems.
You can also afford to make some mistakes, given how much you are saving in fees by doing it yourself. Remember the magnitude of the costs you are avoiding.
But, what about the money math…
It may seem surprising that highly educated people worry about this. However, it really is not. As professionals, we are trained to perform complex problem solving or procedures with people. For physicians, in particular, working with money is not covered in medical training and talking about it holds a degree of taboo. Mysterious. Forbidden. Possibly dangerous. Mildly inappropriate. Yet irresistible. Just like me 😉
Robocorp does that math. It is as easy as 1,2,3.
- Enter how much money you have to invest in each account type.
- Determine your risk tolerance & select your asset allocation (stocks
- Robocorp will then display a tab for each account type showing how much of each ETF to buy in each account.
That often translates to one or two funds in each account when you get into larger multi-account portfolios. It even hides funds that you aren’t using to keep the visual clutter down! Even though it is not logical, visual clutter can make things look more complex and intimidating than they really are.
Not only does Robocorp Cadet save you from doing the math that you’d have to do if trying to implement any three fund portfolio. It also does this across accounts in a tax-optimized way.
The Fab Four Funds
I am not qualified to, nor do I recommend specific funds. The funds used in Robocorp are for general illustration. You, as a DIY investor, need to make sure that any investment you buy suits your needs.
For a more fulsome discourse on what ETFs are and why they are used by Robocorp, visit the Robocorp ETF Arsenal. A quick description of the ETFs in the four fund portfolio is below.
Canadian Equity: Vanguard FTSE Canada All Cap Index (VCN)
Management Expense Ratio (MER): 0.06% Dividend Yield: 2.81%
VCN covers the breadth of the Canadian equity market. It pays tax-favored eligible dividends.
Foreign Equity: iShares Core MSCI All Country World ex Canada Index (XAW)
MER: 0.22% Dividend Yield: 2.15%
XAW is a Canadian-listed ETF that actually bundles a number of other ETFs together. The result is a single ETF that covers the world, excluding Canada. The exposure to the different markets of the world is proportional to their contribution to the world’s total market capitalization. The broad diversification provided is summarized in the chart below.
Bond ETFs (VAB & ZDB)
Vanguard Canadian Aggregate Bond Index ETF (VAB) tracks the Canadian Bond Index.
It is about 2/3 government bonds and 1/3 corporate bonds. The bonds are premium bonds.
MER: 0.13% Average Yield to Maturity: 2.7% Average Coupon: 3.2% Average Duration: 10 Years.
The BMO Discount Bond Index ETF (ZDB) tracks the Canadian Discount Bond Index.
MER: 0.09% Average Yield to Maturity: 2.61% Average Coupon: 2.2% Average Duration: 7.8 Years.
A quick note about bonds.
Don’t obsess about the interest payment of bonds. A bond’s value is a combination of both the interest (taxed heavily) and its capital value (taxed lightly). Also, income is a secondary consideration for bonds. We really want to make the big profits from equity.
The main role of bonds in a portfolio is to reduce volatility (price swings). Big price swings taunt the emotional investor beast that can cause us to behave badly. The more inversely correlated to stocks, the better a bond does this. Some bonds are better than others. The correlation of the bond ETFs used and their volatility is shown below. A broader and longer-range look at different bonds types is here.
What about rebalancing?
It is important to rebalance our portfolios periodically to keep our asset allocation where we want it. Otherwise, we may have more risk and volatility than we can stomach (causing a behavioral error) or less risk which usually comes with lower investment returns. Rebalancing also forces us to “sell high and buy low” when we sell some of the over-sized holdings to buy more of the laggards.
Some will simply hold a mix of the same assets in all of their accounts. Then, they rebalance within each account. It makes the math simple.
Trying to balance across different account types to get an overall portfolio asset allocation is more complicated. There is also the fear of incurring capital gains taxes from selling within a tax-exposed account. Again, it can cause deadly investor paralysis.
Rebalancing A Robocorp Cadet Portfolio Is Made Easy
The Robocorp algorithm and the fact that we are adding to our accounts during our accumulating years makes rebalancing much easier.
By adding money to our portfolios when rebalancing during our accumulating years, we usually minimize the selling.
We can usually add to the laggard positions rather than sell.