Passive Investing Solutions
Passive Investing is in many ways a slow and steady investment strategy. A balanced portfolio of low cost ETFs and a re-balancing strategy takes the emotions out of investing. This solution ensures you get the returns of the market at a low cost.
In my article Mutual Fund Fees: Who's stealing your retirement, I discuss the effect of high fees on your portfolio. I also talk about the mounting evidence that over the long term, the majority of active investing do not consistently beat passive investing after fees. For these reasons, I steer my clients towards a passive investing portfolio of Index ETFs, which hold a broad selection of investments at a relatively low cost. The aim of these Index ETFs is to track the 'market' or their benchmark as closely as possible. If you would like to understand a bit more about why I like ETFs, go to my article: "The ETF: A giant box of assorted LEGO".
There are 2 options to holding a passive, globally diverse, balanced, and low cost portfolio of ETFs.
1) Buying Index ETFs
- This consists of opening up a brokerage account (like BMO Investorline or TD Waterhouse), then buying ETFs in a specific asset allocation similar to my Model Portfolios. This passive investing is very low cost (MER roughly 0.2%) but there is a learning curve to be able to buy and sell ETFs on the market. There are also trading fees any time you buy or sell investments, typically $10 per transaction. This transaction fee makes it a bit difficult to add to your investments in smaller amounts like in a pre-authorized payment plan (PAC). This solution also requires that you keep track of your portfolio and re-balance on your own every few months.
2) Using a Robo-advisor service which will buy ETFs for you and re-balance for you.
- Robo-advisors are relatively new to Canada but are making a lot of waves in the industry as investors seek low cost solutions. Robo-advisors will take your portfolio and invest it into a pre-determined mix of index ETFs based on your goals and risk tolerance, and do all the re-balancing for you. These accounts are easy to set up and relatively low cost. For example, with Wealthsimple, their MER is 0.5% (plus 0.2% ETF MER). Having a service re-balance for you, helps take the emotional pitfalls of investing out of the hands of the investor. For more information on Robo-advisors, go to my article "Robo-advisors: Rise of the Machines".