Many investors agree that diversification is an important consideration to minimize in the risk in a portfolio.
But how do you build an investment portfolio that is diversified globally while keeping your investment costs low as a DIY investor?
DIY investors now have different options to start investing without the exorbitant fees.
In this post, you’ll learn about 3 simple ways to do just that.
1. Asset Allocation ETFs
At the moment, the cheapest way to build a well-diversified investment portfolio is through asset allocation ETFs.
These all-in-one funds offer investors an affordable and fast access to a diversified portfolio containing securities across different asset classes (stocks, bonds and so on).
Why should you invest using an asset allocation ETF?
Here are a few reasons:
- They are cheap so you can keep your investment cost low
- Convenient and fast way to setup a diversified portfolio
- They eliminate the need for regular rebalancing
And you get all of these for a modest management fee.
Take a look at the management expense ratio for the asset allocation ETFs from Vanguard, Blackrock and BMO below:
|ETF Name||Ticker||MER (%)||Equities/Bonds Allocation|
|Vanguard Conservative Income ETF Portfolio||VCIP||0.24||20% : 80%|
|Vanguard Balanced ETF Portfolio||VBAL||0.24||60% : 40%|
|Vanguard All-Equity ETF Portfolio||VEQT||0.24||100% : 0%|
|iShares Core Income Balanced ETF Portfolio||XINC||0.2||20% : 80%|
|iShares Core Income Balanced ETF Portfolio||XBAL||0.2||60% : 40%|
|iShares Core Equity ETF Portfolio||XEQT||0.2||100% : 0%|
|BMO Growth ETF||ZGRO||0.2||80% : 20%|
|BMO Conservative ETF||ZCON||0.2||40% : 60%|
At MERs of 0.25% and below, you’re paying a fraction of the fees of a mutual fund.
Plus, you may be able to buy the ETFs commission-free depending on the broker you’re using – Questrade and Wealthsimple Trade let you buy ETFs for free for example.
So if you’re a DIY investor and want to reduce the time you spend on monitoring and managing your portfolio, you should consider making the switch to these one-ticket investment products.
If you’re just starting out with investing and wondering if you should go the robo-advisor route to avoid the time commitment that comes with a self-directed account, an asset allocation ETF may be your answer.
Check here to learn how asset allocation ETFs work and some options for Canadian and U.S. investments.
To open a self-directed account in Canada, check the 2 options below:
- Questrade: Get $50 trade commission rebate using the Questrade offer code
- Wealthsimple Trade: 2 free stocks as a sign-up bonus
Another way to build a low-cost diversified portfolio quickly is through a robo-advisor.
Robo-advisors, as you probably know, are digital platforms that let investors put their money to work on an automated basis.
All the on-going management, buying of securities, rebalancing and so on are managed by the robo-advisor. All you need to do is make contributions to your account on a regular basis.
To get started, you’ll complete a short questionnaire aimed at understanding your investment goals, time horizon and risk tolerance to provide a suggested asset mix.
Using these information, a diversified portfolio is then built for you. The portfolios are built using ETFs to keep investing costs low.
The total cost to the investor is made up of the:
- MER of the underlying ETFs: usually 0.2% to 0.25%
- The management fee for the robo-advisor: varies. Questrade starts at 0.25% and WealthSimple at 0.5%.
This means your total cost to own a diversified portfolio at Questrade will be about 0.4% or 0.70 at Wealthsimple.
Who should use a robo-advisor?
- You are new to investing
- You don’t have the time or you’re not ready to start getting your hands dirty with investing decisions
- You need someone to handle all the heavy lifting for you at a modest cost
- You want to take emotions out of your investing.
Get $10,000 managed free for a year at Questrade
Learn about the best robo-advisors in Canada here.
U.S. residents can check out:
- Wealthfront: 0.25% advisory fee plus 0.06%-0.13% fees for the underlying ETFs
- Betterment: also with a 0.25% management fee.
- Wealthsimple Invest Review
- Questwealth Portfolios Review
- Wealthsimple Invest vs Questwealth Portfolios
3. Index Funds
The third way to build an investment portfolio for cheap is through an index fund that you can buy at your bank.
Index funds are designed to mirror the performance of the market index they track. They are a cheaper alternative to investing in a diversified portfolio than actively managed funds – but generally more expensive than ETFs.
One popular index fund you’ll find in model portfolios for Canadians is the TD e-series index funds.
The Canadian Index fund has an MER of 0.32% and 0.34% for the U.S. Index funds. Check here for the other available index funds from TD.
Canadian investors also have the investment funds from Tangerine. There are 5 portfolios, with varying allocation to equities and bonds, and expense ratio of 1.06%.
They are more expensive than TD e-series but you won’t have to worry about rebalancing your portfolio. Your portfolio will be rebalanced for you periodically.
With TD e-series funds, you would have to buy different index funds for each of your asset class (equities and bonds), monitor their performance and rebalance if or when needed.
If you want an hands-off portfolio from TD, you may consider TD Managed Income Portfolio. But at an MER starting at 2.83%, there are better and cheaper investing options.
Which one is best for you?
Any of the 3 ways above can help you build a well diversified portfolio at the fraction of the cost and time it would take if you were using individual securities.
But the best one for each investor will depend on their personal situation.
If you want the cheapest investment cost and willing to log in to your brokerage account to place trades once in a while, an asset allocation ETF is your best bet.
Want to set everything up once, automate your contributions and be hands off afterwards? A robo-advisor will let you do just that.
Tips for Building a Low-Cost Diversified Portfolio
Here are some tips to help you build a diversified portfolio without the usual high fees or stress.
- Boring is better: Pick one of the 3 investment types (asset allocation ETFs, robo-advisors or index funds) and stick with it. You won’t even have to rebalance.
- Start small and invest regularly: It’s very easy to start investing with small money these days.
- Watch out for those investment fees: This is one of the few things within your control to build wealth.
- Invest according to your risk appetite and time horizon: Choose an asset allocation that aligns with your investment objectives.
- Continue to learn and improve your investment knowledge.
Related Post: 21 Best Investing Tips For Beginners To Master
Building a well-diversified portfolio is now much easier especially for DIY investors.
Irrespective of what your financial advisor tells you, investment costs do matter. Spreading your risk across different asset classes also matter.
You may not have a control over your portfolio returns, but you can keep costs low by choosing the right investing products.
Also Read: 7 Things Within Your Control To Build Wealth Through Investing