The Greater Fool Balanced Portfolio

In a recently published blog post Garth Turner published the breakdown of his weightings in a 60/40 portfolio.

I thought it would be fun to take it a step further and speculate on what particular ETFs constitute the mix. Everybody wonders just what funds they buy, but for that EXACT information you have to become a client.

That is totally reasonable considering all of the free information that is spewed our way on his blog. I am very grateful for all this no cost advice. Let's break it down for shits and giggles.

Fixed Income - 40%

Cash - 2% (High Interest Savings Account) 

PSA - Purpose High Interest Savings ETF. 

MER 0.12% 

Distribution Yield 1.29%

Global & Canadian Soverign Bonds - 11%

XGB - iShares Canadian Government Bond ETF.

MER 0.39%

Distribution Yield 2.43%

XSC - iShares Conservative Short Term Strategic Fixed Income ETF

MER 0.45

Distribution Yield 2.84%

Provincial Bonds - 3%

ZPS - BMO Short Provincial Bond ETF.

MER 0.28%

Distribution Yield 3.05%

Corporate and High Yield Bonds - 9%

XCB - iShares Canadian Corporate Bond Index ETF

MER 0.44%

Distribution Yield 3.09%

XHY - iShares US High Yield Bond Index ETF ( Canadian Hedged)

MER 0.67%

Distribution Yield 5.56%

Rate Reset Preferreds - 15%

ZPR - BMO Laddered Preferred Share Index ETF

MER 0.50%

Distribution Yield 3.92%

Total Cost Fixed Income = 0.40%

Total Distribution Yield = 3.16%

Growth Equity - 60% 

Canadian Equity and Dividend - 16%

XIC - iShares Core S&P/TSX Capped Composite Index ETF

MER 0.06%

Distribution Yield 2.87%

XDV - iShares Canadian Select Dividend Index ETF

MER 0.55%

Distribution Yield 4.17%

US Large Cap Equity - 13%

XSP - iShares Core S&P 500 Index ETF

MER 0.11%

Distribution Yield 1.72%

US Mid-Cap - 3%

XMH - iShares S&P US Mid-Cap Index ETF

MER 0.16

Distribution Yield 0.93%

International - 17%

XFH - iShares Core MSCI EAFE IMI Index ETF

MER 0.22%

Distribution Yield 1.96%

Emerging Markets - 6%

VEE - FTSE Emerging Markets All Cap Index ETF

MER 0.24%

Distribution Yield 1.30%

REITs - 5%

XRE - iShares S&P/TSX Capped REIT Index ETF

MER 0.61%

Distribution Yield 4.93% 

Total Cost Growth Equity = 0.55%

Total Distribution Yield = 2.55%

Total MER Costs = 0.47%

Total Yield = 2.85% 

(This doesn't include what you can expect in growth gains throughout the year. Garth's 7 year average gain is 7%. So, this is totally achievable and more than likely you can expect that type of market return should you decide on this type of balanced portfolio. It may be in fact a lot higher.

The Real Cost

Let's use a 150K portfolio as a starting point. We need to factor in what we would pay in management expenses and also investment fees to our financial advisor.

Our MER costs are 0.47% a year and our advisor fees are 0.50% (hypothetical but expect to pay at least that).

Now let's breakdown what will be extracted from our investment account on a monthly basis. This is done slowly so as not to alarm you with large cost withdrawals at the end of the year.

$150,000 X 0.47 (MER) = $705.00/12 = $58.75 per month. This is what you are paying to the ETF providers every month. Costs matter that's why you hear everyone say to keep them as low as possible.

$150,000 X 0.50 (Financial Advisor Fee) = $750/12 = $62.50

Total Monthly Costs of Ownership and Management = $121.25 per month or $1,455 yearly. 

If that sounds cheap for professional management of your portfolio that's because it is. You can't forget this includes tax planning to make sure your PF is tax efficient, a personal relationship, RESP advice, automatic re-balancing and advice on whether you can afford a mortgage or not.

Portfolio Projection @ 7% return

$150,000 X 7% = $10,500/12 = $875 per month

Total Net Portfolio Return - $875 - $121.25 (expenses) = $753.75 per month or $ $9,045 yearly.

Provided that you capture that 7% average. I believe this is being conservative. So, before you say or think professional management of your money is expensive ask yourself; how you are doing without it?

At the end of year #1 you should have a portfolio value of $159,045. 

Alternative Balanced Choices

Let's say the thought of going to a professional financial advisor like those at Turner Investments is not for you. What else is available?

These are some of the popular choices I know other DIY investors flock to.

MAW104 - Mawer Balanced Fund

MER 0.94%

Distribution Yield 1.11%

This fund ranked 12/1258 in the Global Neutral Balanced Fund Category. It has an 11% average return over the last 5 years. You will have to re-balance on your own if you have more money to invest either monthly or yearly. Suitable for small sums of money under 150K. This is a fund made up of a collection of 7 Mawer Funds and some Canadian T-Bills.

On a hypotheical $150K portfolio your monthly cost would work out to be;

$150,000 X 0.94 = $1,410 yearly or $117.50 per month

It is simple and easy to implement but keep in mind you are on your own, no advice given on what your personal financial situation is.

$150,000 X 11% (avg. 5 year return) = $16,500 yearly or $1,375 per month

Total Net Portfolio Return - $1375 - $117.50 (expenses) = $1257.50 per month or $15,090 yearly.

At the end of Year #1 if you capture the 5 yr. average you should have a portfolio value of $165,090.

INI220 - Tangerine Balanced Fund

MER 1.07%

Distribution Yield - Not available

The fund ranked 35/1258 in the Global Neutral Fund Category. It has a five year average annual return of 8.78%.

On the same $150K portfolio investment your monthly cost would work out to be;

$150,000 X 1.07% = $1,605 yearly or $133.75 per month

It is simple and easy to implement but keep in mind you are on your own, no advice given on what your personal financial situation is.

$150,000 X 8.78% (avg. 5 year return) = $13,170 yearly or $1,097.50 per month

Total Net Portfolio Return - $1097.50 - $133.75 (expenses) = $963.75 per month or $11,565 yearly.

At the end of Year #1 if you capture the 5 yr. average you should have a portfolio value of $161,565.

Tangerine is more expensive, ranks lower and delivers a lower return. This fund picks and buys individual stocks and bonds to get to a 60/40 balanced mix.

VBAL - Vanguard Balanced ETF Portfolio

MER 0.22%
Distribution Yield - Not Available

Another portfolio consisting of 7 different Vanguard Funds. It has only been in existence since 25 January 2018 so is brand new. Word of caution that this is just one asset and as Garth so rightly points out that one asset does not make a portfolio. It is cheap and cheap for a reason. Do your own research on these alternative balanced choices.

I don't own any of them.

Why The Different Total Returns?

We are using average returns here. They might be higher for "The Great Fool Portfolio' that I just made up hypothetically.

Also, my MER cost projections for the funds I chose are going to be different than what is actually chosen by the financial professionals. These are MY choices and NOT the final make up of any portfolio.

Garth and company to be sure will have chosen cheaper and different ETFs than I did. They would probably choose US domiciled ETFs for their US and Int'l exposure.

For simplicity sake I stuck mostly with Canadian providers and mostly iShares. This will skew the cost and impact my portfolio projections, so don't automatically say this portfolio lags. It's just an example of what can be done and NOT what will be done for you.

This is an extreme general example of using ETFs to compile investment funds based on the current weightings Garth has provided. Nothing more.

My Final Take

Mawer, Tangerine and Vanguard options are all just a one asset play. One asset does not make a portfolio.

Professional money management can generate superior returns over time combined with spreading out risk over multiple asset classes and doing so in a tax efficient manner. Best suited for portfolios over 150K.

Everyone is different in their risk tolerance, ages vary and so do needs and goals. I have no idea what your situation is and what portfolio would help you sleep at night.

Having a balanced portfolio as in the example weightings prescribed by Garth, you can certainly accomplish that and also be able to snooze through and ignore any crisis happening in the world today. Your money will be at risk sure, you can't get away from it. All you can do is lower risk. Garth and company have accomplished that and done it for you.

How would you construct a portfolio? Do you use a financial advisor?

Related Post: Portfolio Asset Allocation

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