One of the most important decisions you’ll make as an investor is your asset allocation. That’s simply how you divide your portfolio between different investments, such as stocks, bonds, and cash, as well as different geographic markets.
Your asset allocation plays a major role in determining both your potential returns and how much volatility you’ll experience along the way. A portfolio invested entirely in stocks might offer greater long-term growth potential, while adding bonds can help moderate fluctuations.
Fortunately, exchange-traded funds (ETFs) have made building a diversified portfolio much easier. Instead of researching dozens of individual securities, you can buy a handful of ETFs that collectively hold thousands of stocks and bonds.
But should you build your own portfolio using several ETFs, or buy a single all-in-one asset allocation ETF that handles everything for you? The better choice depends on how much control you want and how much maintenance you’re willing to do.
Source: Getty Images
Building your own portfolio with several ETFs
For the equity portion, I’d generally start with at least three index funds: one tracking the U.S. stock market, another covering Canadian equities, and a third providing international exposure.
This gives you access to different economies, industries, and currencies rather than relying entirely on the Canadian stock market, which is heavily concentrated in financials, energy, and materials.
Depending on your age, investment horizon, and risk tolerance, you might also add a fourth ETF holding bonds. Bonds can help reduce overall portfolio volatility and provide a source of relatively stable income, although they can still lose value when interest rates rise.
The advantage of this approach is flexibility. You get to decide exactly how much exposure you want to each market and asset class. However, that flexibility also creates additional decisions.
You need to determine the appropriate weights for each ETF and how to manage them moving forward. For example, you may need to rebalance by selling appreciated holdings to buy lagging ones, or direct new contributions toward the underweight funds.
None of this is particularly difficult, but it does require discipline. For beginners, the temptation to constantly adjust allocations based on recent market performance can become a bigger problem than the portfolio’s original construction.
Let an asset allocation ETF do the work
My preferred approach for most beginners is to outsource these decisions to an all-in-one asset allocation ETF. These products are generally structured as funds of funds, meaning a single ETF holds several underlying ETFs covering different markets and asset classes.
The fund provider sets the target allocation, manages the underlying holdings, and handles rebalancing automatically. You simply buy units and continue contributing. One example I like is the TD Growth ETF Portfolio (TSX: TGRO), which charges a relatively low 0.17% management expense ratio (MER).
Its underlying benchmark exposures include the following: 15% to the FTSE Canada Universe Bond Index, 25% to the Solactive Canada Broad Market Index, 40% to the Solactive U.S. Large Cap CAD Index, and 20% to the Solactive GBS Developed Markets ex North America Large & Mid Cap CAD Index.
What I particularly like about this structure is that you don’t need to manage the individual components yourself. TD handles portfolio maintenance, including rebalancing as market movements cause the underlying weights to drift. That removes much of the temptation to chase whichever market has performed best recently.
Ultimately, whether you choose one ETF or several, I’d focus on keeping costs low, maintaining an appropriate asset allocation, reinvesting distributions, and contributing consistently. A simple portfolio you can stick with for decades is often more useful than a complicated one you’re constantly tempted to change.
