One mistake I see a lot of newer investors make, especially those who started after COVID, is underestimating risk tolerance. It is easy to shrug off 3% to 5% daily swings when your account balance is still small. Once portfolios reach six or seven figures, those same moves translate into tens of thousands of dollars gained or lost in a single day. That feels very different.
During major market crises, drawdowns matter even more. A drawdown refers to the peak-to-trough decline in a portfolio. In events like the March 2020 COVID crash or the 2008 financial crisis, poorly diversified portfolios saw losses large enough to wipe out a significant portion of net worth in a short period of time.
That is why I am not particularly enthusiastic about 100% equity solutions for most investors. They can make sense for younger investors focused purely on growth, but many people are more concerned with preserving the nest egg they have already built.
If I had to pick one ETF I would feel comfortable holding for dear life through severe economic stress, it would be the BMO Balanced ETF (TSX: ZBAL) at an affordable 0.2% expense ratio. Here is how it works.
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ZBAL: 60% in stocks
ZBAL is an asset allocation ETF. It is designed as an all-in-one portfolio that balances three objectives: growth, income, and capital preservation. As a balanced solution, it does not try to maximize any single one of those. Instead, it aims to be reasonably effective across all three.
Growth primarily comes from the 60% allocation to equities. ZBAL is a fund of funds, meaning it holds other ETFs rather than individual stocks. The equity sleeve includes exposure to the S&P 500, the S&P/TSX Capped Composite, the MSCI EAFE Index, the MSCI Emerging Markets Index, and a smaller allocation to U.S. mid- and small-cap stocks.
Over long periods, stocks tend to rise because companies grow earnings, expand operations, reinvest capital, buy back shares, and pay dividends. There will be stretches where equities stagnate or fall, sometimes sharply. When you own thousands of companies across regions and sectors, those periods matter far less over a 10- to 20-year horizon.
ZBAL: 40% in bonds
The other half of the balanced equation is stability. ZBAL allocates 40% of the portfolio to bonds, which are primarily there to generate income and dampen volatility.
When you buy a bond, you are effectively lending money, usually to a government or a large corporation. ZBAL emphasizes investment-grade bonds, which carry higher credit quality and lower default risk.
The bond exposure is achieved through Canadian discount bonds and U.S. aggregate bonds. Discount bonds are structured to be more tax efficient in non-registered accounts, while U.S. aggregate bonds provide exposure to Treasuries, mortgage-backed securities, and high-quality corporate debt.
Bonds are not risk free. Rising interest rates can push prices down. Historically, however, they have held up far better than equities during major market downturns. Their role is not aggressive growth. It is portfolio ballast. That defensive role contributes to ZBAL’s roughly 2% annualized yield and helps smooth out returns when stocks struggle.
