In the ETF Model Portfolio page you’ll find a ‘suggestion’ for the Balanced Growth Portfolio. Of course it includes the 4 core portfolio building blocks.
And for the Canadian investor, here’s how that ETF Portfolio might look. It is typical for Balanced Growth Portfolios to be in the range of 70-80% stocks and 20-30% bonds. As always, investors are free to get more ‘creative’ around the edges by adding foreign bonds, other fixed income, developing markets and perhaps some smart beta additions.
This is certainly a simple but effective ‘plain vanilla’ portfolio that invests in the developed stock markets of the world, with risks managed by Canadian bonds.
In the headline I suggested that the Balanced Growth Portfolio is in the sweet spot. The 75/25 model can typically deliver returns that equal an all-stock portfolio with less risk or volatility. It can deliver better risk-adjusted returns. It’s also in the sweet spot for retirees who are often best served with generous growth potential and a modest amount of bonds for support. Those bonds are there to address that sequence of returns risk that will arise when the stock markets go in the tank.
Here’s a simple example using the TSX 60 (XIU) for stocks and the Canadian Universe Bond Index (XBB). Portfolio 1 is the Balanced Growth model. Portfolio 2 is the all-stock model. The chart is courtesy of portoliovisualizer.com. Of course, past performance does not guarantee future returns.
The time period, limited to the availability of the ETFs, is January of 2001 to end of September 2018.
For the period, the returns are identical. And we can see that the Balanced Growth Portfolio has delivered superior gains (is in the lead) for much of the time frame. The Balanced Growth Portfolio is delivering the same returns with less risk.
Here’s the updated returns for the core ETF portfolios.
In the financial crisis of 2008-2009 the drawdown (portfolio value decline) on XIU was 43%, for the Balanced Growth model it was 32.5%. The all-stock portfolio was underwater for 5 years and 5 months, the Balanced Growth model was under water for 2 years and 7 months. Those bonds can certainly punch above their weight when it comes to reducing portfolio risk.
Stock market corrections are the great equalizer.
The event that we have on display here is an investment version of the Tortoise and the Hare. The faster rabbit (Hare of course from the famous Aesop’s fable) goes into the lead when the stock markets are on a tear. But when the stock markets hit those major corrections or recessions the more steady tortoise (Balanced Growth model) moves into the lead as the Hare gets tired and trips up. The lower risk model, in certain periods, can deliver matching or better gains precisely because it carries less risk; it ‘falls less’ it has less of a hill to climb. And that certainly sounds counterintuitive as we are often told that investors are rewarded for taking on additional risks. Many would suggest that is an investment myth.
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On that you can check out my review of the Tangerine Dividend Portfolio. The indices used in that model find lower risk by way of a dividend focus and quality screens. Those High Dividend Yield indices have beat the markets with lower volatility in Canada, US and International.
Now certainly the all-stock versions of portfolios can outperform the Balanced Models when we are in periods where the stocks are on an incredible bull run. Let’s have a look at the Balanced Growth Model using a more internationally diversified portfolio, and with a longer period of evaluation. Portfolio 1 is 37.5% each of US stocks and International Developed Markets and 25% broad-based US bond market. Portfolio 2 is the all-stock benchmark with 50% US stocks and 50% Developed Markets.
We’ll begin in January of 1995 to allow a 5-year period when the stocks can run before the major market correction of 2000-2003.
We see the Balanced Growth Model (the blue line) take back the lead through the market corrections. Once again, the all-stock model moves into the lead during the stock market bull runs, and then the stocks ‘give it all back’.
For the full period the annual rates of return (CAGR).
Balanced Growth – 7.5% annual
All-Stock – 7.75%
We are not being rewarded handsomely for taking on that additional risk. With respect to that risk the all-stock portfolio was down 54% in the 2008-2009 financial crisis, the Balanced Growth model was down 41.4%. That is still a significant portfolio decline, we should always keep in mind that while the portfolio model has the word ‘Balanced’ in the name, this is an aggressive portfolio that can be quite volatile at times.
suitable time horizon for this model is generally in the area of 7-10 years or more.
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You might want to consider HXT instead of XIU. Lower fees, no US withholding fees, true total return product that reinvests dividends. Tracks the index better than XIU (perfectly in fact).
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Thanks Hans, to each his or her own. I am not a fan of synthetic products. I like the real holdings, the real dividends. But I certainly understand the advantages of HXT when all is working well. Not sure what happens with that in any kind of real market turmoil. Each investor should invest as they see fit, and know the products that they choose. I certainly have more research to do on the HXT’s of the world. Thanks for your comment, much appreciated. Dale
My wife and I each have a TFSA and RRSP. We won’t need any of it for about 10 years when we retire. We are going to allocate the funds to the ‘Balanced Growth Portfolio’ in a 75/25 ratio. We will dollar cost average and purchase every two to three months.
Should we purchase all four ETFs in the prescribed ratio in each account, so that each account contains it’s own ‘Balanced Growth’ portfolio? This will result in fees on 16 trades each time we purchase.
Or, should we purchase one fund per account? This will only result in fees on 4 trades.
Fees aside, does it matter which account holds which ETF? Which method would be easier to re-balance?
Hi and thanks for the note. You can separate the portfolio with individual ETFs and lower the fees. Keep in mind that you can purchase ETFs for free at Questrade and BMO (has a good but limited list) plus at QTrade and National Bank and others. So you can avoid trading costs other than the sells for when you rebalance.
When you separate the ETFs you could also gain greater tax efficiency by owning U.S. dollar ETFs in a U.S. dollar account. You would avoid the withholding taxes on the dividends. Not a major issue but it is an advantage. No worries if you don’t want to go that route.
You would then have to get the monies converted to U.S. dollars by way of the Norbert’s Gambit. Here’s good post on that.
https://wealthsavvy.ca/norberts-gambit-questrade/
I would not worry about losing withholding on U.S. and International in TFSA – many would suggest that you let asset allocation run the ship, not tax concerns.
Here’s a great post from Justin Bender on U.S. and International withholding taxes.
https://www.pwlcapital.com/part-i-foreign-withholding-taxes-for-equity-etfs/
All said, nothing wrong at all with the one tickets for simplicity and effectiveness. Your behaviour and the amount you invest will be more important than being tax perfect.
As you may know, I’d be a fan of adding some additional inflation protect to the mix, at some point. But that is another personal decision.
I hope that make sense. Please feel to reach out again.
Dale
I was not expecting such a speedy response! Sound rationale, Dale. I read your “Permanent Portfolio” post, as well as your post “Advanced Couch Potato portfolios” on MoneySense. There is much wisdom there!
My wife’s holdings account for 50% of the portfolio, which she is comfortable holding in XBAL (all-in-one ETF).
Considering the portfolio as a whole, should I reduce any holdings in individual funds in my portion to avoid duplication? I am looking specifically at XEF and XBB, which are held in XBAL in a weighting of 15% and 23% respectively.
I will be giving Excel a workout come rebalancing time!
Many thanks.
Hi, are you looking to avoid duplication in your own portfolio, or your wife’s? 🙂
With thanks,
Dale
Your question provides my answer, I believe. It depends on how I am looking at the combined portfolios – as one whole portfolio, or as two separate portfolios. We have done everything jointly for 30+ years, but I think I will treat the portfolios separately. It will be interesting to watch the performance of each respective portfolio in the coming years.
Happy Thanksgiving!
Happy Thanksgiving. I would treat each portfolio separately mostly. But they might be tailored to your time horizon, risk level and how it fits within the total financial plan. You might consult with an advice only planner if not confident in that area.
Dale
Hello, again, Dale. Taking advantage of the tax savings by using USD accounts, my ‘Balanced Growth Portfolio’ would look like this:
XUU.U – 40%
XEF.U – 10%
XIU – 25%
XBB – 25%
To add some inflation protection, I would consider adding PRA (and possibly CGR).
What percentage of the portfolio should be allocated to inflation protection? Would I reduce the 75% equities, or the 25% fixed income allocation?
Thanks.
Hi, you might consider a U.S. listed ETF for U.S. equities, the fees will be lower. But there are reporting considerations in the U.S.
Here’s a good post on the subject, once again quoting Justin Bender
https://www.investmentexecutive.com/newspaper_/strategies/etfs-and-foreign-withholding-taxes/
In that post Justin reports that there is no benefit to U.S. dollar ETFs for other foreign equities. And within the entire mix you can consider the benefit of taxable accounts as some of the withholding taxes paid can be recovered.
Yes, you can consider PRA and REITs for additional inflation protection. I am also holding Canadian energy producers XEG and the Ninepoint energy fund, and XMA for materials. That said, PRA is a good one-stop shop. You could consider Canadian REITs and U.S. REITs as well, but CGR gives you nice global exposure.
I am really liking the oil and gas energy producers from here, for several years or more.
You can also look to Horizons commodity ETFs for oil and gas, silver and gold.
The idea is to have these sectors covered to have a truly balanced portfolio.
The percentage for inflation protection is a tricky one and a personal decisions. Younger folks might not worry about it, at all, as they’ll trust stocks for the long run. Others need to protect. I think it has to be 10% or so to have a meaningful effect, that is would help ‘save us’ in a serious inflation or stagflation event. You might trim from the equities area as you want to keep you bond allocation at that 25% area.
Keep in mind that commodities often ‘suck’ and are a cost, it can be like insurance. But eventually it appears they often/eventually come in to play to do their thing when needed.
Please use this as information of course, not advice. I know you do your own research to form your opinion and investment approach.
I hope that helps, I’m happy to get others to pitch in as well if you have other concerns.
Dale
I was looking at ITOT as a U.S. listed ETF in place of XUU. Any other potential ETFs I should consider?
Hi BadDog. ITOT is awesome. It is a U.S. listed ETF, XUU is in Canadian dollars. They both buy the broader market. ITOT has a super low managment fee. You have U.S. Dollar accounts?
I don’t, yet, but I intend on opening USD accounts and using Norbert’s Gambit to save on the currency conversion fees. That’s why I was looking at a U.S. listed equity ETF. ITOT is more reasonably priced than IVV or VOO which are trading around $400 a share *as of writing).
What are your thoughts on IVW? U.S. large-cap growth stocks, as represented by the S&P 500/Citigroup Growth Index.
It looks good. I’m not sure it’s much of a boost over the S&P 500. I’d be more a fan of QQQ when the price is right, if one is looking for greater growth. Both are still very expensive these days. But timing entry would be more than difficult.
Hi Dale
Would these 4 compare to your sweet spot portfolio?
XUU 25%
XAW 25%
VCN 25%
ZAG 25%
The XAW and XUU is a double up but XAW having 63% U.S.A exposure brings my U.S.A to 40%. This will be 75/25 equities to bond. Do you see any issues with this setup?
Thanks
The Simpson
Hi The Simpson. That looks totally fine to me with U.S. at 40%. I like CAD at 25% as well.
It’s a good mix.
You are in the accumulation stage?
Hey Dale
Yes I am still accumulating. I also have 1 year emergency funds in HISA ETF.
The Simpson