The Canadian Money Roadmap

The Power of Single Fund Strategies

June 28, 2023 Evan Neufeld, CFP® Episode 87
The Canadian Money Roadmap
The Power of Single Fund Strategies
Show Notes Transcript Chapter Markers

Can a single fund be the answer to your investment goals? Achieving success and maintaining diversification might seem impossible with just one fund, but I'm here to break down the pros and cons of this simplified investment strategy. Join me as we explore various types of single fund solutions, either as ETFs or mutual funds, and how they create a balanced and diversified portfolio through target allocations.

We compare Fidelity and Vanguard, two industry giants offering different single fund investment options, and take a deep dive into the costs and returns associated with their offerings. Additionally, we touch on factor-based strategies from Dimensional and how they can potentially lead to outperformance over a longer period of time. Throughout the episode, we discuss the advantages and disadvantages of single fund solutions, showing you how investing doesn't have to be complicated to be successful.

Remember, before making any changes to your financial plan, it's important to consult with financial, legal, and tax advisors. So, tune in to discover if a single fund could be the key to simplifying your financial life while still achieving investment success. 


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Speaker 1:

Hello and welcome back to the Canadian Money Roadmap Podcast. I'm your host, evan Neveld. Today's episode we are going to explore whether you can actually be diversified and have investment success with just a single fund in your portfolio. Big welcome to everyone that's joining today and anyone that's new. Welcome here. In this episode, i wanted to talk about something that came up in a couple of meetings with me recently some with existing clients of mine and some with new clients And I've seen this idea a little bit online as well, so I wanted to talk about it here on the podcast. The main idea is whether or not you can actually have investment success and be diversified enough with just a single fund. I'm going to cut to the chase and tell you yes, i think you can, and so hopefully you'll stick around and listen to some more things about this topic. But before I go too much further, when I talk about a single fund, there's a lot of misunderstanding about the language there that I'm going to be talking about. Okay, so when I talk about ETFs or mutual funds ETF, as a reminder, stands for mutual funds. It stands for exchange traded fund. Okay, so when I often talk about the language of funds, people often think actively managed, expensive mutual funds and like okay, that's the. That whole conversation is another thing for another day. But when I talk about funds for the rest of this episode, i'm not distinguishing between an exchange traded fund or a mutual fund. It's just the idea of a pooled investment. That is just a single line item on your investment portfolio statement. It's a one ticket solution, one fund solution. That's all I'm talking about, so I will just use the general language of fund throughout the rest of this episode. So I've been reading a book recently called the laws of wealth, and the author, daniel Crosby, references the idea that so many people have this obsession or compulsion to have complexity in their financial life because if they don't have the complexity, they don't feel like they're doing enough. And I would agree with him in that. One of the core parts of my investment philosophy is that you should try to make things as simple as possible as opposed to as complex as possible. I don't think anyone should strive to be an investment collector. I think you would have far more success, especially if you're just starting off with being an investment minimalist, and the easiest way to do this is by using one fund solutions or all in one solutions or whatever The general language that we use in the industry for these types of products. They're often called asset allocation funds. What does that mean? Asset allocation just means your combination between stocks, bonds, cash and anything else really, and so within any of these funds again that could be mutual funds or ETFs the investment team behind them will set a target allocation. That could perhaps be 80% stocks, 20% bonds, and they will build a portfolio behind the scenes that matches that asset allocation, which is pretty cool. I'll come back to that in a second here. But the main idea that people get confused with this when they just see a single fund in their portfolio and I do this with many of my clients some are more complex than others, but in many cases they're just be single funds Can we actually be diversified enough with one fund? And my argument is definitely yes, because under the hood of a single fund, these funds can hold thousands of different stocks and bonds And even other asset classes, depending on the funds, or even like real estate in many cases. Recently here in Canada, crypto can be in there, you can see gold, all these different things, but it all depends on the fund that you're choosing. So, the way that they often do. That is that they structure it as being something called a fund of funds, like kind of meta thinking here. But if you think about this, for example, there could be an ETF that is just US equity And then another one is just Canadian equities, and then another one that's just international or emerging markets or whatever, and then what they do is they bundle them all together And they sell it to you and I, as let's call it, the Vanguard growth ETF portfolio Perfect. So what you see is just one fund, but under the surface in that case you're buying about four or five different funds. So there is a little bit of underlying complexity, but as far as you're concerned, it's about as simple as it gets. I'll try to put together a little analogy here. When I was a kid, i went to Toronto with my family and we went to a restaurant. I don't think it exists anymore. I remember it being pretty great as a kid, but it was called Movenpick or Movenpick Marchet And it was a very interesting restaurant where you. It was a really big place, but there were different stations that had different types of foods. So if you wanted to go and get pizza, you'd go over to the wood fire pizza station. Or if you wanted to get fish, you go over to the fish place. If you wanted a waffle, there's a waffle bar over there, like all these different things that you could do. It was pretty neat, so it didn't really matter. For example, if, say, the shrimp wasn't great that day, you just go over and get a waffle or a pizza. So think of a situation like this where, instead of you deciding what you're going to have every day, what if there's an expert or someone that was there every day that said I'm going to walk around for you and pick some good stuff from every station? You'll always have some pasta, some vegetables, some meat, a dessert, whatever, but you're just going to one place. It's like that sounds awesome, right, and so a fund of funds or a single fund solution can be something like this, where someone else is picking a little bit of everything for you And all you have to do is show up. The best part with these funds is that you can be diversified against many different risks. So let's talk about diversification in general here. Diversification is a benefit that will protect you against any one company going bankrupt or completely falling off of a cliff maybe not bankrupt, but becoming far less prominent. Say, for example, you just owned shares in a single company like Apple. Apple's the biggest company in the world. Are they going to go bankrupt tomorrow? Probably not, but there could be significant risks with their business. I'm not predicting that by any means here, but things have happened before and the biggest companies in the world have fallen from grace many times in the past. And Apple's probably not going to be the biggest company forever. But if you just had all of your money in Apple stock, you might be exposing yourself to any of those singular risks of that one company. Now, also, along with single company diversification, you should have a portion of your money in other countries as well. So here in Canada we have great public markets and many different companies that we can buy. However, we are pretty well concentrated in a few industries like oil and gas, banking, mining companies, things like that. We don't have as much exposure here to things like tech companies or healthcare. These are some of the major industries around the world that don't have necessarily a home base as prominently in Canada. So by diversifying between countries, you get different exposures between currencies, industries, but also things that we've seen around the world very recently with things like political turmoil or even wars, like Russia was a major country not necessarily in the public stock markets, but they had a presence there for sure But now they're virtually uninvestable. Or you see things like hyperinflation. Again, i'm not talking about fears about Canada or the US falling into hyperinflation, but countries like Argentina and Venezuela, turkey. These are big countries with lots of people And they've fallen under economic situations that have led to hyperinflation, making them virtually uninvestable places to be. So if you only had your money in single countries, it becomes much more challenging to avoid some of those singular risks. So I won't keep going on diversification here. But when you have some of these single fund solutions under the hood, you will own thousands of different companies. So you avoid any of that risk of any single company going bankrupt. You'll own stocks from many different countries. So the currency, political risk, industry focus, whatever of any one country is largely diversified away, and then within that you get the benefit of not picking the wrong investments because you'll just own all of them, right. So I guess you will own the wrong ones all the time, but you'll also always own the right ones. So diversification make sure that you're able to participate in the markets at all the times. Even though this isn't gonna be the way to hit home runs, this is gonna be the best way for you to participate in the benefits of investing in the stock and bond markets. So, to talk about a few of the options that are available, i'll talk about the investment philosophy spectrum here, a little bit between passive and active, and then somewhere in the middle is something that I've referred to as factor-based, where it's largely a passive strategy but with an active choice to include or exclude certain things. So for something that's fully passive meaning you're just gonna own total markets, but you wanna own some Canada, some US, some anywhere else, some bonds from around the world. I'm just gonna give a hypothetical example here, not necessarily a recommendation or anything like that. It's just very popular and people are familiar with it. The Vanguard ETF portfolios have been extremely popular, and for good reason. They're very low-cost and they're very well-diversified, and so you could very well own a single ETF in this case that owns thousands of different stocks and thousands of different bonds. Let's just take a look at VGRO. So that's the ticker symbol, vgro And this fund, i believe, is about an 80-20 mix between 80% stocks and 20% bonds, and in their case, here in this fund, they own 13,000 different stocks and 18,000 bonds. Okay, so as far as diversification goes, no problems. You're not worried about diversification here. So even though on your statement you're just seeing one fund, diversification is not the problem. You can very comfortably own a single fund that is built in this manner and not have diversification as the main issue for your investment approach. Now, if you want it to be a little bit more active, if you have the investment philosophy of being an active investor, some of the best performing funds of this format the single fund solutions have been from Fidelity. So Fidelity you might have seen them before. They're probably one of the largest non-bank investment firms in the world. They have options in the passive factor and active space. So I'm just going to talk about their active option here, just as a contrast to the Vanguard one. They've had these types of funds in Canada for a really long time, so they've had over a 15-year history with these single fund asset allocation funds, as Vanguard's have been around for a little over five years, so you don't have as long of a history there. Fidelity has a much longer track record here, but they use their underlying active funds to build their active asset allocation funds. I know there's a lot of jargon in there, but just know that this is a bit more of an active approach. So this one is about 85% stocks, 15% bonds. It'll fluctuate a little bit because, again, they take an active approach, but that's kind of their target and they can do a few more stocks, a few more bonds, but they won't stray too far from that standard 85-15. And, as you might expect, which makes sense, active management is more expensive. And so if I go back to the Vanguard one, for example, the MER or the management expense ratio for that fund is 0.24%, very affordable, very cheap. But for the active fund over at Fidelity it's 1.15%. Now that doesn't include an advisor fee, any of these. I won't talk about that because your advisor will charge differently. So I don't want to make any assumptions there. So I'm just talking peer product cost here. The Fidelity option is much more expensive. However, when I talk about returns here, all of the returns that they report include their fees. Most mutual fund companies are like this. Most banks are like this, believe it or not, questrade is not like this. They love to talk about fees but they don't like to actually report them. Many other companies most of them that I'm familiar with anyways are reporting their returns net of fees. So what you see is what you get. So they have a 15-year history here And for this fund they've averaged bang-on 7.5% per year for 15 years, net of fees, and the index has done 6.4. So it's outperformed the index by 1.1% per year for 15 years, putting them in the top percentile of all the funds that have been available for that period of time. So if you're someone that has been hard-line, saying passive is the only way to make money, if you're in an active fund, you're always getting screwed. It's like no, objectively that's not been the case, because the best fund in this space has been an active one that is considerably higher fees. Will that be the case for the next 15 years? I'm going to say maybe not. But if you have an active philosophy and that's something that you want, there are really good options out there for you. Okay, so in this case here, just sticking with the Fidelity option. Again, just to explain a little bit more about the diversification of a single fund. This one fund has 21% in Canada, about 24% in the US, about 18% elsewhere, and then they've got some cash on hand as well And that'll fluctuate a little bit over time. Hopefully the math was adding up there pretty closely. But but yeah, you're not having too much in Canada, not too much in the US, not too much internationally. It's like you're getting a pretty good exposure here. You've got some meat and potatoes and salad on your plate and you're going to be in pretty good shape. Again, same thing with the Vanguard portfolio. I don't want to poo poo any of these too much because I'm just giving examples of what's available. Both of those options that I've discussed so far are massive, like the Vanguard fund is over $4 billion and the Fidelity one is closer to six. So these are not niche by any means. Again, not recommendations to use them. I would say speak with your investment advisor or do some research on your own to see what options are available for you. Now, somewhere in the middle between that active and passive, is what i've called factor based. If you listen to some of my episodes recently, i've talked a little bit more about that. The idea there is that factor based strategies generally subscribe to the idea that, yes, the market, or like a passive approach, has the greatest odds of success over time, net of fees. But there's also different factors that you can look for with specific stocks that could lead to outperformance over a longer period of time. The cool thing about a factor based strategy is that because they can be isolated with like computer analysis, it doesn't take a lot of human research or stock picking necessarily define these factors and they can be invested in for really low cost And so it's kind of like an active strategy with passive, like investment costs. So here's an example from dimensional talked about them a little bit before and i'm looking at their option for the cold, the dfa global 8020 portfolio. So i'm trying to stay relatively similar between the previous options that i talked about. So if the vanguard one let's talk about costs here for example, the vanguard one was 0.24% and the fidelity one was 1.15. That's kind of a huge spectrum between really cheap and quite a bit more expensive it's. They're not the most expensive by any means, but if a slides in the middle but much closer to a passive cost, so they're at 0.34 that's really affordable for something. That's a pretty interesting and unique strategy that goes a little bit beyond passive. Same thing here they've got a 10 year track record. They've performed really well. Again, if you wanted to look at any one three, five or 10 year period, each one of these would be the leader in any one of those. So anyways, i'm confident that if you're invested in any of the three strategies that i've presented here, you'd be in really good shape. But that's why i don't really want to compare performance necessarily, because on the three year basis the dfa one blows the other ones out of the water on a one year basis. Another one is better on a 10 year basis. Others are a little bit better yet. So The main idea with these ones is that being diversified is great and then picking your investment strategy to match the investment that you want to own. So the same thing here with the, the dimensional portfolio. It has about 25% Canada, about 33% the US, 21% in international stocks and about 20% bonds. Really neat thing with all of these options is that they will rebalance for you, meaning Every day there's going to be something that performs really well and something that does not very well, and over a longer period of time it can trend in that direction. But if any one thing, let's call it US stocks US stocks to really really well compared to anything else. For any period of time let's say five years what happens is that part of your portfolio will grow so much that, say, you want to have 30% in US stocks. Well, five years later you might have 80% in US stocks. And then what happens? when that market crashes, like we saw last year? right then your whole thing gets killed. So what you want to do is rebalance periodically. I've talked about this before. The best part of the single fund solutions is that they will rebalance For you. So that's between companies, between countries, between the underlying funds What you buy on a single day is what you're going to own five days later, five months later, five years later, it's going to be about the same. It's really cool. So you don't have to be the one that worries about rebalancing, because all of that is done for you. What you have to do is understand yourself, your risk profile and your tolerance and pick the option that is best for you. So all the companies I talked about already Vanguard dimensional fidelity. Many other companies, i just can't mention all of them. They'll all have options for you across the risk profile spectrum. So if you're someone that's young or someone that has an unusually high risk tolerance, you could have an option that's all equities And then maybe 80% equities and 20% bonds, 6040, and so on and so on, but all of them are in the same Single fund, so risk profile doesn't matter. You could use a single fund solution. Whether you're a DIY investor doesn't matter. If you're with an advisor doesn't matter. All of these are options. I've got clients in all three here, and so there are plenty of options for you to be able to take advantage of the simplicity of single fund solutions. Again, it doesn't matter what your investment philosophy is. You can find something that matches that. So what are some of the advantages and disadvantages here? I'll kind of wrap up on this a little bit, but one of the advantages, of course, is that it is so simple. It is dead simple, and the best part about that is that you don't have a decision to make when you're adding new money every month, every quarter, every week, every year, whatever you do. One of the most common questions I get from people when discussing a DIY investment portfolio is like they have 15 funds or stocks or whatever and it's like, oh, where do I put my money now? should I be adding more to the passive? should I do more to the active. Should I do more? no-transcript. This is so simple. Like it's, it takes all the decision-making out of it. You need to participate again, you need to participate and automate as much as you possibly can to have investment success for the average person. And so if you're using an approach like a single fund solution here, you don't have to make that decision and you can automate it. One of the best part about mutual funds Is that you can get the money right into that fund automatically for you ETFs. It's not as simple to automate the purchases of ETFs, but again, so that's simple You don't have any decisions to make where to add new money Whenever you're adding it. On the other side of the coin, if you ever need to withdraw money, either in retirement or whatever the case may be you also don't have any decisions to make, because you would make it for the same reason, right? so you just take money out of the same fund. It's perfect. Another advantage that I've talked about already is that it's self-rebalances, so it doesn't matter if Japanese equities are blowing everything out of the water this year. You'll still own the same amount of it regularly. They will do that and they'll do it for you on a set schedule. If you're in a more active fund perhaps, like the fidelity one, they might be a little bit more creative with how they're allocating between different countries and things like that, but again they're gonna have a pretty solid system that it is predictable for you, so you kind of know what you have all the time. The passive and factor-based ones will be much more regimented and structured that way, because they're they're not taking active stances on Any of those things that we talked about. Now. The final advantage Here's that the asset allocation decisions are made for you. It's like how much should I have in Canada? How much should I have in the US? it honestly like it matters, but let somebody else make the decision for you, and I think you'd be far better off spending your time on other things even things like improving your income or spending time with your family or enjoying a hobby or whatever Then worrying about specific asset allocation decisions, because all of these funds are based on Research and analysis and whatever, and they have way more capacity to do that than you do, than I do, than anything else. You can be pretty confident that if you're choosing one of these funds, the asset allocation should be at least good enough For you to have a great outcome over a long period of time. Now, some of the disadvantages here that the asset allocation decisions are made for you. So if you're someone that really wants to be involved and picking, and you got lots of opinions on different Sectors and countries and whatever it's like, well, this isn't gonna be the product for you, right? if you really like to be hands-on with that, i would say good luck, that's. That sounds really complicated and it sounds like a full-time job and it sounds more stressful and more complicated wouldn't be My recommendation to anybody, but there are people out there that do it. But, yeah, that would be a disadvantage. So, if you really like picking and choosing a lot of different things and doing your research and whatever, these asset allocation funds wouldn't be a great option. One thing I will address, though, is that I've often seen, with the Vanguard ETFs in particular, is that people will own the hundred percent equity one, the balanced one and the 8021. So they'll own VBAL, vgro and VEQT. It's like, what are we doing here? No, just pick one, because they're all gonna be the same. There's just different amounts of stocks and bonds in each one. You're not getting a diversification benefit at all for there. Okay, so don't have this compulsion towards making things more complicated. Pick one and stick with it. Okay, back to the disadvantages here. So another disadvantage is that the cost is slightly higher than if you built your portfolio with the underlying components. So remember I described these often as fund of funds. So the underlying investments are usually different ETFs or mutual funds for each different component. If you bought each of those individual components on their own and built your portfolio around that, it would probably be slightly cheaper if you didn't have any transaction costs, but most people have some transaction costs and it wouldn't be rebalanced for you automatically. So I guess it's a small disadvantage here, but I think perhaps it's worth mentioning. Another disadvantage is that for a lot of people, psychology is more important than the actual outcome, and because it's so simple, it doesn't feel like it's good enough. Because it's so simple, and there's always this fear of, oh, should I be doing something else? Should I be doing something else? If someone saw 15 different funds or holdings in their portfolio, it's like, oh, i'm really covering my basis here. But when you invest in a fund like this, especially for your DIY investor, you have to know what you're buying right. That's the way to combat that kind of feeling of whether these things are good enough. Do a little bit of research, go to the Vanguard or go to Dimensionals website and actually look under the hood and see what you own here, and you'll be shocked to see how many thousands of different individual holdings there are in these funds. These things are plenty complex, okay, and they're good enough, but that can be a disadvantage for some people because they get antsy. I see that as an advantage but if, depending on your personality and whatnot, perhaps that might not be great for you, i'm kind of grasping at straws looking for disadvantages here. If I'm honest, i'm a big believer in simplicity, in global diversification, in rebalancing, and single fund solutions can really cover these bases. One great thing about being an investor in Canada is that we have so many more of these options. I was talking to a rep from Vanguard and he was telling me that American investors do not have these. They don't have V-Grow, they don't have V-Bell and there is significant demand for it, but they just have not released it for whatever reason down there, whereas in Canada that is one leg up that we have on many of our American counterparts, that we've got a lot of these single fund solutions. I'm not sure if it's a matter of different corporate structures that are available or taxation issues or anything like that, but for us as Canadians, this is a significant advantage that we have. Many of these products haven't been around that long, so over time we'll start to see more of them. Fidelity has some more factor-based all-in-one funds. Other companies, like McKenzie Investments I know they have some of these as well. Even some of the banks are putting together some of them. It's a great trend that's happening and one that is definitely not gonna go away. This is where a good chunk of new investor money is going all the time, and this can be at least, if it's not the only part of your portfolio, at least make it the single core part of your portfolio. So, wherever you sit on the investment philosophy spectrum whether you wanna be fully passive, whether you wanna be fully active or somewhere in the middle with a factor-based strategy there are single fund solutions available that you can hold forever. Yes, they are plenty diversified. Yes, they're low cost And yes, they're plenty complex, so you don't have to worry about anything like that. But yeah, hopefully I covered off a few of the issues that I've heard around a single fund solution. So I hope that this was valuable for you. If you really like this podcast, send me an email and let me know what you took away from it. I'd love to hear from you. I've been getting tons of emails from people recently, so that's great. But yeah, thank you so much for listening and I'll catch you on the next episode. Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.

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