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A question that comes up from time to time is the simple matter of diversification – how to achieve it and how to manage it. One simple test for this concern revolves around the number of ETFs required to build a properly structured and diversified portfolio. As with so many things in life, reasonable people might differ.
The consensus that most accept is that portfolio size is a key determinant and that the exact number of products also depends on a few other things – including client sophistication, the frequency of deposits, and whether the account is registered or not.
Generally speaking, smaller accounts can justify having fewer holdings – if only to reduce the number of transaction charges (typically modest, but not nothing) involved in trading. Even if trading costs are set at a modest $15/trade, that cost can add up if you’re trying to maintain a balance on a TFSA with (say) $30,000 invested and $3,000 added semi-annually.
Let’s begin with some basic parameters and then flesh it out from there. To begin, we need to come to terms with the other primary driver in this decision: how active you intend to be in monitoring your portfolio. The more involved you intend to be, the more granularity you can justify. Most people with small accounts want simplicity, ease of use, and minimal commissions. For them, there are several providers (Blackrock, BMO, and Vanguard are the leaders in Canada) that offer single-ticket solutions where one can purchase an ETF that offers instant diversification. If you want simplicity and ease of use, these products are tough to beat. You’ll simply need to be sure you’re buying an offering that matches your risk profile.
Small investors who want to be a little more involved might want to have separate products for Canadian equity, International/Global equity and income.
As a rule, investors might want to be closer to the low number when at the low end of the account size range and only creep toward the higher number of products when they get to the high end of the range. For instance, having eight products in a portfolio with $110,000 is likely overkill. It would almost certainly be better to simply aim for four and then, as the account grows, to judiciously add new products and themes along with that growth slowly over time.
Whether you build the portfolios yourself or work with an advisor, it is important that there’s a resistance to the temptation to overthink and micro-manage things. Just because there are myriad options doesn’t mean you need to try all of them. Have a strategic asset allocation. Monitor and maintain it. Manage turnover and taxes purposefully. Be reasonable in your expectations.
Portfolio construction is fairly easy to understand but requires focus and discipline on an ongoing basis. Build a portfolio that suits your disposition and preferences and then stick to it.
John De Goey, CIM, CFP, Fellow of FPSC, is a Portfolio Manager at Wellington-Altus Private Wealth Inc. He can be reached at john.degoey@wprivate.ca. For more information about John’s team, see STANDUP Advisors.
This article previously appeared in the Winter 2021 issue of Your Guide to ETF Investing, published by BrightsRoberts Inc. Used with permission.
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© 2021 by John De Goey. All rights reserved. Wellington-Altus Private Wealth Inc. (WAPW) is a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). The opinions expressed herein are those of the author alone and do not necessarily reflect those of WAPW, CIPF or IIROC. Investors should seek professional financial advice regarding the appropriateness of investing in any investment strategy or security and no financial decisions should be made solely based on the information and opinions contained herein. The information and opinions contained herein are subject to change without notice.
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