Factors That Make Things Easier / Better or Not: what are the trade-offs to consider in deciding which approach is best for yourself?
- Securities to Buy - the fewer there are, the less work it is to manage but it is often at the sacrifice of diversification
- Diversification & Asset allocation - most of the portfolios take a balanced view using something between 60/40% to a 40/60% split between the two major asset classes of equity and fixed income, though some are a bit more unbalanced. A few of the funds of funds are able to include a very broad variety of other types of assets such as real estate, commodities, gold, foreign bonds and emerging market equities.
- Rebalancing - how automated and frequent is the rebalancing - in some cases you must do it once a year yourself (is 30 minutes work too much?) or it is done for you by the fund company. Most use an annual rebalancing schedule.
- Deposits and withdrawals - can you set up automated regular purchases for additional investment, or automated withdrawals?
- Reinvestment of dividends/distributions - can dividend income be automatically reinvested for you or does it sit around idle?
- Active vs passive investment strategy - does the ETF/fund passively follow an index or does the investor attempt to do better through active security buying and selling?
- Tax tracking - if investments are held in a registered account this factor doesn't matter, but in a taxable account one must report the different types of income like dividends, interest and capital gains - is the tracking done for you or do you have to it yourself?
- Fees and commissions - how much does the portfolio cost in management and trading commissions? Higher costs can make a huge difference in net results over the long term. In the case of ETFs, broker trading commissions will be incurred whenever money is added to the portfolio and purchases must be made, or when rebalancing is to be done. If the commission is $10, then adding money to or rebalancing a $10,000 portfolio with three securities will cost $30 (3 x $10), which amounts to a 0.3% annual cost
- Couch Potato - created originally by journalist Scott Burns in the USA with results and fancier versions here, there is a Canadian version described on the Canadian Business MoneySense magazine website. It has a pretty good performance record, beating the TSX stock index from 1976 to 2008.
- One-Minute RRSP - journalist Larry MacDonald's version, the only one to attempt active management using a couple of simple rules for the bond vs equity allocation
- Simple Recipe - McMaster University finance prof Richard Deaves proposes this portfolio in his book What Kind of Investor Are You?
- Easy Chair - this one is from University of Toronto finance Professor Eric Kirzner and is described in a Toronto Star article and again here
- Lazy Investor - author Gail Bebee describes her version in her book No Hype: The Straight Goods on Investing Your Money.
- Balanced Mutual Funds - a selection of several hundred is available through the GlobeFund filter for either equity balanced or fixed income balanced funds. Most companies offer either a Canadian or an international/global balanced fund and it would be necessary to combine at least two but one example of an all-inclusive fund is ING Direct's Streetwise Balanced Fund.
- Portfolio ETFs - both iShares Canada and Claymore Canada now have a couple of ETFs which contain a variety of other ETFs within e.g. iShares' Growth Core Portofolio Builder and the Claymore Balanced Growth Core Portfolio. CanadianFinancialDIY compares and rates the two.
Table 2 Compares the ING Balanced Mutual Fund, Claymore Balanced Growth CorePortfolio and iShares Growth Core Portfolio Builder
How well do these simple portfolios perform? As the above links to commentary on the ones that have been around for some time attest (like the Couch Potato and the Easy Chair), they perform quite well with no spectacular gains but no huge declines either. Whether that suits your personal investing goals and attitudes is a matter for you to decide.
Disclaimer: this post is my opinion only and should not be construed as investment advice or recommendations.