Programming, Investing and FI

Portfolio Definition: Easy, Lazy!

The name of this portfolio says it all, it’s the easiest to maintain! Even if it’s easy to rebalance and to maintain, it still grasp most of the global markets. Surely I wouldn’t expect wonders happening but it still gives a broad exposure to stocks, bonds, REIT, Emerging markets, and more!

It won’t be really costly to rebalance even if it costs a bit more in management fees (around 0.4 %). We count that as negligible compared to some mutual funds out there.

Context

Like I said above, this portfolio is the easiest to maintain. Everything is regrouped in two ETFs and provides great diversification. An example would again be financial independence but could also be a goal in 15-25 years for someone who doesn’t like complicated stuff. The rebalancing will cost around 20$ depending on how much your broker charges. That is, 10$ per ETF for adding funds.

The reason why I am saying that financial independence is kind of in its own game is because you will almost never touch your capital and live off of dividends and capital gains on the long run. Therefore, you don’t really have an end date and can take on even more risk because the chance of it to recover is better.

Let’s say you want to stack up for a down payment on a condo for your old days, in 20 years. Let’s put 15 000 $ down and add 200 $ per month. That would make 63 000 $ of invested capital at the end of 20 years.

My Estimate

Again, no one can predict the future but I will still try to make an educated guess on how much this portfolio could bring back per year on average.

  • XAW – I will take the same percentage I calculated in Perfect Balance, that is 6.5 %. XAW represents 40 % of our portfolio.
  • XTR – It returned around 4.81 % per year for the last 10 years (with dividend reinvested). I will substract 2 % inflation to that number and it will give me 2.81 % per year for 60 % of the portfolio.

After the calculations, it should give us around 4.29 % per year after inflation and with dividend reinvested (past performance which is to be taken lightly). Now I will need some help from my dear friend the getsmarteraboutmoney compound interest calculator!

Easy Lazy Interest Estimate

According to the graph above, we might have earned around 50 000 $ in interest after 20 years, not bad! This may be a bit reduced by income tax if you’re not in a TFSA/RRSP or any other registered account.

Creation

Let’s build that thing on Investopedia! Here are my ratios below, this one is easy!

Target:

  • XAW – 0.4 * 20 000 = 8 000 $
  • XTR – 0.6 * 20 000 = 12 000 $

Easy Lazy Portfolio

Reality:

Here is the result after buying the ETF.

Real distribution Easy Lazy

Don’t be fooled by the fact that it went down a bit, short term is absolutely irrelevant on a 20 years horizon, money comes with patience and dedication!

The Funds

XAW

XAW from iShares gives exposure to all the world except Canada in various types of investments. I am talking about REIT, emerging markets and stocks mostly! It’s a great choice for broad diversification. Don’t be a stranger and put some money in other countries to diversify. From a past performance perspective only, it has done quite well since its inception, but don’t believe what the past says, it does not reflect the future in any way. Invest for the value of each ETF and according to your plan and goal. Here is the link to the ETF for your information. Below are the geographic and sectors exposure of XAW (might change slightly).

XAW Geographic Exposure

XAW Sector Exposure

XTR

XTR is a mix of pretty much everything but concentrated in North America and about half and half stocks/fixed income (bonds). It should tamper the portfolio a bit and complete XAW from a diversification perspective. It’s worth mentioning that the 20 % U.S. in this portfolio is added to the 50 % U.S. in XAW. This makes for about 32 % of U.S. related in our portfolio, which is acceptable in my opinion considering our goal and horizon.

Below is an overview of the asset classes and geographic exposure you get in XTR (can change slightly).

XTR Asset Classes

XTR Geographic Exposure

I’m always trying to balance the stuff to reduce the amount of risk and maximize the gains but it’s a good idea to consider your situation before making investment decisions. Since we have 20 years in this example, I can accept more risk than if I was in the market for 10 years. Still, plans change sometimes and it’s a good idea to keep your emergency fund at hand by making sure it’s larger when uncertainties are present.

Summary

I admit that this portfolio is costing more in management fees, XTR being 0.62 % and XAW being 0.22 %. But we are doing it for simplicity and simplicity sometimes comes at a cost. It’s like paying someone else to do the work for you. Anyways, it’s worth keeping in mind that we’re still pretty far from the 2 % management expense ratio you can get with some mutual funds!

Simplicity is really at the core of this portfolio, if you’re looking for more control on how your assets are allocated, you might want to go with something else. On the other hand, if your goal is to keep things simple, it might be for you if you adapt it to your needs!

I will come back to this portfolio in one year to rebalance and see how it goes toward the defined objective.

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