Here is the article.
Part 1 - What is an Exchange Traded Fund
Part 2 - How do ETFs work
Part 3 - Why Invest in ETFs
Part 4 - How to Invest in ETFs
Part 5 - What are Stocks and Bonds
Part 6 - Best Mix of Stocks and Bonds
Part 7 - Best ETFs to Buy
Part 8 - Best Mix of ETFs
Part 9 - Balanced Portfolio Performance
Part 10 - Rebalance Your Portfolio
Part 11 - Reinvest Your Dividends and Interest
Part 12 - Best Trading Strategy
Part 2 - How do ETFs work
Part 3 - Why Invest in ETFs
Part 4 - How to Invest in ETFs
Part 5 - What are Stocks and Bonds
Part 6 - Best Mix of Stocks and Bonds
Part 7 - Best ETFs to Buy
Part 8 - Best Mix of ETFs
Part 9 - Balanced Portfolio Performance
Part 10 - Rebalance Your Portfolio
Part 11 - Reinvest Your Dividends and Interest
Part 12 - Best Trading Strategy
7 - Best ETFs to Buy
You only need three ETFs in your investment portfolio. You already know that the first ETF has the symbol VFV. It contains 500 of the largest companies in the United States, such as Microsoft, Google, Visa, Disney, and Walmart. The name of this ETF is the "Vanguard S&P 500 Index ETF", and it has a management fee of 0.08% every year. So what are the other two ETFs? We will introduce them to you now.
The second ETF has the symbol VDU. It contains 3,900 of the largest companies in developed economies around the world. This includes companies in Canada, Europe, and Asia, such as Royal Bank of Canada, Nestle, Adidas, Samsung, and Toyota. This ETF does not contain any companies in the United States. Therefore it will not repeat your investment in the first ETF. The name of this ETF is the "Vanguard FTSE Developed All Cap ex U.S. Index ETF", and it has a management fee of 0.20% every year.
Finally the third ETF has the symbol VAB. It contains 900 bonds in Canada. It includes mostly Canadian government bonds, such as Federal, Provincial, and Municipal bonds; and some Canadian corporate bonds. The name of this ETF is the "Vanguard Canadian Aggregate Bond Index ETF", and it has a management fee of 0.08% every year.
As you can see, all three ETFs have the phrase "Index ETF" in their names. Furthermore, they are all market-capitalization-weighted. Why is this important? Remember that most investors cannot outperform the index. Thus you should simply invest in the index. And these are the ETFs that let you do that.
You may wonder why all three ETFs are provided by Vanguard. This is because Vanguard charges the lowest management fee compared with other ETF providers. For example, BMO and iShares have also created ETFs that invest in the S&P 500 Index. Their ETFs also contain 500 of the largest companies in the United States. Unfortunately they have a higher Management Expense Ratio (MER).
Great work for completing the seventh part of our guide. Now you know which ETFs are needed to create your simple portfolio. Very few people realize that investing like a pro means to keep their investments simple. Thus you have gained a remarkably rare skill. Before you apply this skill, you need to know how much to invest in each ETF. Continue your journey by reading the next part - Best Mix of ETFs
The second ETF has the symbol VDU. It contains 3,900 of the largest companies in developed economies around the world. This includes companies in Canada, Europe, and Asia, such as Royal Bank of Canada, Nestle, Adidas, Samsung, and Toyota. This ETF does not contain any companies in the United States. Therefore it will not repeat your investment in the first ETF. The name of this ETF is the "Vanguard FTSE Developed All Cap ex U.S. Index ETF", and it has a management fee of 0.20% every year.
Finally the third ETF has the symbol VAB. It contains 900 bonds in Canada. It includes mostly Canadian government bonds, such as Federal, Provincial, and Municipal bonds; and some Canadian corporate bonds. The name of this ETF is the "Vanguard Canadian Aggregate Bond Index ETF", and it has a management fee of 0.08% every year.
As you can see, all three ETFs have the phrase "Index ETF" in their names. Furthermore, they are all market-capitalization-weighted. Why is this important? Remember that most investors cannot outperform the index. Thus you should simply invest in the index. And these are the ETFs that let you do that.
You may wonder why all three ETFs are provided by Vanguard. This is because Vanguard charges the lowest management fee compared with other ETF providers. For example, BMO and iShares have also created ETFs that invest in the S&P 500 Index. Their ETFs also contain 500 of the largest companies in the United States. Unfortunately they have a higher Management Expense Ratio (MER).
Great work for completing the seventh part of our guide. Now you know which ETFs are needed to create your simple portfolio. Very few people realize that investing like a pro means to keep their investments simple. Thus you have gained a remarkably rare skill. Before you apply this skill, you need to know how much to invest in each ETF. Continue your journey by reading the next part - Best Mix of ETFs
8 - Best Mix of ETFs
Remember that a simple portfolio, with a mix of 60% stocks and 40% bonds, can perform like the world's best investment portfolios. Therefore you should make your portfolio simple too with the three ETFs that we have mentioned. But how much should you invest in each ETF to create that same mix of stocks and bonds?
Let's start with bonds. Of the three ETFs that we have discussed, only one of them contains bonds. This is the one with the symbol VAB. Thus 40% of your portfolio should be invested in this ETF to create that same bond mix.
Stocks should make up the other 60% of your portfolio. There are two ETFs remaining, and they both contain stocks. The one with the symbol VFV contains stocks in the United States. And the one with the symbol VDU contains stocks in the rest of the world. So how much should you invest in each?
Remember that a market-capitalization-weighted index simply combines all the companies based on the size of each company. Furthermore, most investors cannot outperform the index. Therefore you should follow this simple method as well. The US stock market makes up about half of the global stock market. As a result, half of your stock mix should be invested in the United States, and the other half in the rest of the world.
Your investment portfolio should have 30% in VFV, 30% in VDU, and 40% in VAB. For example, if you have $1,000 to invest, then you should put $300 in VFV, $300 in VDU, and $400 in VAB.
This simple portfolio has an overall Management Expense Ratio (MER) of 0.12% every year. The MER includes the management fees and other expenses that Vanguard needs to operate its ETFs. For example, if you have $1,000 invested in this portfolio, then you will have to pay $1.20 every year to Vanguard.
This MER is very reasonable when you consider the number of investments that you have. In fact, your portfolio contains 4,400 of the largest companies in developed economies around the world. This includes companies in the United States, Canada, Europe, and Asia. In addition, it contains 900 government and corporate bonds in Canada.
Congratulations for finishing the eighth part of our guide. You have achieved something very important. Your simple portfolio only has three ETFs, but it is highly diversified and low-cost. What this means is that you are finally investing like a pro.
Is this the end of your journey? Not yet. You have finished building your new ship. Now it is time to set sail to your paradise island. This will be a long voyage, and you will encounter storms that can drift you off course. Thus staying invested can be a challenge. Fortunately we will help you prepare for those storms. Continue your journey by reading the next part - Balanced Portfolio Performance
Let's start with bonds. Of the three ETFs that we have discussed, only one of them contains bonds. This is the one with the symbol VAB. Thus 40% of your portfolio should be invested in this ETF to create that same bond mix.
Stocks should make up the other 60% of your portfolio. There are two ETFs remaining, and they both contain stocks. The one with the symbol VFV contains stocks in the United States. And the one with the symbol VDU contains stocks in the rest of the world. So how much should you invest in each?
Remember that a market-capitalization-weighted index simply combines all the companies based on the size of each company. Furthermore, most investors cannot outperform the index. Therefore you should follow this simple method as well. The US stock market makes up about half of the global stock market. As a result, half of your stock mix should be invested in the United States, and the other half in the rest of the world.
Your investment portfolio should have 30% in VFV, 30% in VDU, and 40% in VAB. For example, if you have $1,000 to invest, then you should put $300 in VFV, $300 in VDU, and $400 in VAB.
This simple portfolio has an overall Management Expense Ratio (MER) of 0.12% every year. The MER includes the management fees and other expenses that Vanguard needs to operate its ETFs. For example, if you have $1,000 invested in this portfolio, then you will have to pay $1.20 every year to Vanguard.
This MER is very reasonable when you consider the number of investments that you have. In fact, your portfolio contains 4,400 of the largest companies in developed economies around the world. This includes companies in the United States, Canada, Europe, and Asia. In addition, it contains 900 government and corporate bonds in Canada.
Congratulations for finishing the eighth part of our guide. You have achieved something very important. Your simple portfolio only has three ETFs, but it is highly diversified and low-cost. What this means is that you are finally investing like a pro.
Is this the end of your journey? Not yet. You have finished building your new ship. Now it is time to set sail to your paradise island. This will be a long voyage, and you will encounter storms that can drift you off course. Thus staying invested can be a challenge. Fortunately we will help you prepare for those storms. Continue your journey by reading the next part - Balanced Portfolio Performance
9 - Balanced Portfolio Performance
You have finished building your new ship. It is time to start sailing to your paradise island. This will be a long voyage, and you will encounter storms along the way. So you wonder how will your ship perform. It is difficult to predict the future, but we can look at how similar ships have performed in the past. Therefore we can get an idea of how your ship may perform in the future.
Now let's relate everything back to investments. You have finished creating your simple portfolio, which has a mix of 60% stocks and 40% bonds. This mix provides a good balance between growth and safety. As a result, it will help create a smooth journey to your retirement goal. This is why your simple portfolio is also called a balanced portfolio. But how will it perform in the future?
The future is difficult to predict, but we can look at how balanced portfolios have performed in the past. Therefore we can get an idea of how your portfolio may perform in the future. Historically, a balanced portfolio has a 5% annualized return over the long-term. This is based on economic studies* done by TD Bank, one of the largest financial institutions in Canada.
A 5% annualized return may sound small, but you will be surprised by how much your money can grow over the long-term. Imagine that you invest $1,000 and let it grow 5% every year. After 10 years, you will have around $1,630. And after 20 years, you will have around $2,650. As you can see, 5% can make a big difference over the long-term.
In reality, a 5% annualized return does not mean your portfolio will grow exactly 5% every year. For example, during the financial crisis in 2008, your portfolio would have lost around 20%. But right after the crisis in 2009, it would have gained around 20%. Thus the actual return each year can be very different. So how did they come up with that 5% number? Let's answer this with an example.
Imagine that you had invested $1,000 in a balanced portfolio in the beginning of 2008. By the end of 2018, it would have grown to around $1,630. So how did it perform?
Over that 10-year period, your $1,000 grew to $1,630. A quick way to summarize that performance is to calculate the annualized return. In other words, how much does your portfolio need to grow each year, for 10 years, to reach $1,630? The answer is 5%. That number quickly shows the performance of your portfolio from 2008 to 2018. The actual return each year was very different, but overall it had a 5% annualized return. Now you understand how that number was determined.
Furthermore, that 5% annualized return would only have been achieved if you had stayed invested for the long-term, even during a crisis. For example, imagine that you had invested $1,000 in a balanced portfolio in the beginning of 2008. This was right before the financial crisis. If you had panicked and sold your investments during the crisis, then you would have ended with around $800, a loss of $200. And you would have missed the gains in the following years that would have recovered more than your loss.
There is one last question that you may have. During the crisis, your balanced portfolio would have lost around 20%. And then it would have gained around 20% in the following year. How is that considered a smooth journey? Let's compare it with a portfolio that has a mix of 100% stocks. During the crisis, that stock portfolio would have lost around 40%. And then it would have gained around 30% in the following year. As you can see, your balanced portfolio would have created a much smoother journey for you.
Fantastic. You have completed the ninth part of our guide. Now you know what to expect during your long voyage. And when you encounter a storm, you will be prepared to stay invested like a pro. Therefore you can expect a 5% annualized return from your portfolio over the long-term.
Staying invested is the best way to reach your retirement goal. But you need to make sure that your ship does not drift off course. How can you do this? Find out by reading the next part - Rebalance Your Portfolio
* Burleton, D., Dolega, M., & Solovieva, M., CFA. (2016, January). U.S. Long-Term Financial Asset Returns: An Economic Perspective. Retrieved 2016, from https://www.td.com
Now let's relate everything back to investments. You have finished creating your simple portfolio, which has a mix of 60% stocks and 40% bonds. This mix provides a good balance between growth and safety. As a result, it will help create a smooth journey to your retirement goal. This is why your simple portfolio is also called a balanced portfolio. But how will it perform in the future?
The future is difficult to predict, but we can look at how balanced portfolios have performed in the past. Therefore we can get an idea of how your portfolio may perform in the future. Historically, a balanced portfolio has a 5% annualized return over the long-term. This is based on economic studies* done by TD Bank, one of the largest financial institutions in Canada.
A 5% annualized return may sound small, but you will be surprised by how much your money can grow over the long-term. Imagine that you invest $1,000 and let it grow 5% every year. After 10 years, you will have around $1,630. And after 20 years, you will have around $2,650. As you can see, 5% can make a big difference over the long-term.
In reality, a 5% annualized return does not mean your portfolio will grow exactly 5% every year. For example, during the financial crisis in 2008, your portfolio would have lost around 20%. But right after the crisis in 2009, it would have gained around 20%. Thus the actual return each year can be very different. So how did they come up with that 5% number? Let's answer this with an example.
Imagine that you had invested $1,000 in a balanced portfolio in the beginning of 2008. By the end of 2018, it would have grown to around $1,630. So how did it perform?
Over that 10-year period, your $1,000 grew to $1,630. A quick way to summarize that performance is to calculate the annualized return. In other words, how much does your portfolio need to grow each year, for 10 years, to reach $1,630? The answer is 5%. That number quickly shows the performance of your portfolio from 2008 to 2018. The actual return each year was very different, but overall it had a 5% annualized return. Now you understand how that number was determined.
Furthermore, that 5% annualized return would only have been achieved if you had stayed invested for the long-term, even during a crisis. For example, imagine that you had invested $1,000 in a balanced portfolio in the beginning of 2008. This was right before the financial crisis. If you had panicked and sold your investments during the crisis, then you would have ended with around $800, a loss of $200. And you would have missed the gains in the following years that would have recovered more than your loss.
There is one last question that you may have. During the crisis, your balanced portfolio would have lost around 20%. And then it would have gained around 20% in the following year. How is that considered a smooth journey? Let's compare it with a portfolio that has a mix of 100% stocks. During the crisis, that stock portfolio would have lost around 40%. And then it would have gained around 30% in the following year. As you can see, your balanced portfolio would have created a much smoother journey for you.
Fantastic. You have completed the ninth part of our guide. Now you know what to expect during your long voyage. And when you encounter a storm, you will be prepared to stay invested like a pro. Therefore you can expect a 5% annualized return from your portfolio over the long-term.
Staying invested is the best way to reach your retirement goal. But you need to make sure that your ship does not drift off course. How can you do this? Find out by reading the next part - Rebalance Your Portfolio
* Burleton, D., Dolega, M., & Solovieva, M., CFA. (2016, January). U.S. Long-Term Financial Asset Returns: An Economic Perspective. Retrieved 2016, from https://www.td.com
10 - Rebalance Your Portfolio
Your paradise island is far away. Fortunately you have a compass, and you know which direction it is in. You begin your journey by steering your new ship towards your island. This will be a long voyage, so your ship will drift off course over time. Therefore it is important to check your compass to see if you need to steer back in the right direction.
Now let's relate everything back to investments. Your balanced portfolio has a mix of 60% stocks and 40% bonds. This mix will help create a smooth journey to your retirement goal. Remember that this mix can perform like the world's best investment portfolios. As a result, 60% stocks and 40% bonds is the right direction to your paradise island.
In addition, remember that stocks and bonds tend to move in opposite paths. When stocks go up, bonds go down. And when stocks go down, bonds go up. This will cause your portfolio's mix to drift off course over time. For example, imagine that you created your portfolio one year ago. Stocks went up and bonds went down this past year. Thus its mix might now be 70% stocks and 30% bonds.
Your portfolio has drifted off course, and it needs to be steered back in the right direction. How can you do this? You need to sell 10% of your portfolio from stocks. And then use that amount to buy bonds. This will bring it back to 60% stocks and 40% bonds. This process is called rebalancing your portfolio.
Now you may wonder, how often should you rebalance. And what will happen if you never rebalance? According to research* done by Vanguard, you should rebalance once a year. Otherwise your portfolio may significantly drift off course over time. Let's illustrate this by using the same example from the previous part of our guide.
Imagine that you had invested $1,000 in a balanced portfolio in the beginning of 2008. If you had rebalanced annually, then it would have grown to around $1,630 by the end of 2018. And if you had never rebalanced, then it would have grown to around $1,530 by the end of the same year.
As you can see, you would have ended with $100 more by rebalancing annually. That difference may seem small, but it can become very significant. If you had started with $3,000, then that difference would have been $300. And if you had started with $5,000, then that difference would have been $500. That is your money and every amount helps towards reaching your retirement goal.
Finally why does your portfolio grow larger when you rebalance it annually? The answer is simple. You are buying low and selling high.
To illustrate, let's look back at the example when your portfolio's mix changed to 70% stocks and 30% bonds. This was caused by stocks going up and bonds going down during the past year. Thus you rebalanced by selling some stocks and buying some bonds. Now imagine that another year passed by. This time bonds went up and stocks went down. Thus you would rebalance by selling some bonds and buying some stocks.
As you can see, you are essentially buying low and selling high when you rebalance your portfolio every year. This is why it will grow larger compared with one that is never rebalanced.
Excellent work for finishing the tenth part of our guide. Checking your compass once a year is enough to make sure your ship stays in the right direction. Therefore you do not need to worry about constantly steering your ship. This will help you stay invested like a pro and create a smooth journey to your retirement goal.
Your ship is heading in the right direction to your paradise island. Now you need to make sure that your ship does not slow down. How can you do this? Find out by reading the next part - Reinvest Your Dividends and Interest
* Zilbering, Y., Jaconetti, C. M., CPA, CFP, & Kinniry Jr, F. M., CFA. (2015, November). Best practices for portfolio rebalancing. Retrieved 2016, from https://www.vanguardcanada.ca
Now let's relate everything back to investments. Your balanced portfolio has a mix of 60% stocks and 40% bonds. This mix will help create a smooth journey to your retirement goal. Remember that this mix can perform like the world's best investment portfolios. As a result, 60% stocks and 40% bonds is the right direction to your paradise island.
In addition, remember that stocks and bonds tend to move in opposite paths. When stocks go up, bonds go down. And when stocks go down, bonds go up. This will cause your portfolio's mix to drift off course over time. For example, imagine that you created your portfolio one year ago. Stocks went up and bonds went down this past year. Thus its mix might now be 70% stocks and 30% bonds.
Your portfolio has drifted off course, and it needs to be steered back in the right direction. How can you do this? You need to sell 10% of your portfolio from stocks. And then use that amount to buy bonds. This will bring it back to 60% stocks and 40% bonds. This process is called rebalancing your portfolio.
Now you may wonder, how often should you rebalance. And what will happen if you never rebalance? According to research* done by Vanguard, you should rebalance once a year. Otherwise your portfolio may significantly drift off course over time. Let's illustrate this by using the same example from the previous part of our guide.
Imagine that you had invested $1,000 in a balanced portfolio in the beginning of 2008. If you had rebalanced annually, then it would have grown to around $1,630 by the end of 2018. And if you had never rebalanced, then it would have grown to around $1,530 by the end of the same year.
As you can see, you would have ended with $100 more by rebalancing annually. That difference may seem small, but it can become very significant. If you had started with $3,000, then that difference would have been $300. And if you had started with $5,000, then that difference would have been $500. That is your money and every amount helps towards reaching your retirement goal.
Finally why does your portfolio grow larger when you rebalance it annually? The answer is simple. You are buying low and selling high.
To illustrate, let's look back at the example when your portfolio's mix changed to 70% stocks and 30% bonds. This was caused by stocks going up and bonds going down during the past year. Thus you rebalanced by selling some stocks and buying some bonds. Now imagine that another year passed by. This time bonds went up and stocks went down. Thus you would rebalance by selling some bonds and buying some stocks.
As you can see, you are essentially buying low and selling high when you rebalance your portfolio every year. This is why it will grow larger compared with one that is never rebalanced.
Excellent work for finishing the tenth part of our guide. Checking your compass once a year is enough to make sure your ship stays in the right direction. Therefore you do not need to worry about constantly steering your ship. This will help you stay invested like a pro and create a smooth journey to your retirement goal.
Your ship is heading in the right direction to your paradise island. Now you need to make sure that your ship does not slow down. How can you do this? Find out by reading the next part - Reinvest Your Dividends and Interest
* Zilbering, Y., Jaconetti, C. M., CPA, CFP, & Kinniry Jr, F. M., CFA. (2015, November). Best practices for portfolio rebalancing. Retrieved 2016, from https://www.vanguardcanada.ca
