Use the ETF “XEQT (iShares Core Equity ETF Portfolio)” as a one-stop stock pick to buy a piece of the world’s stock markets. Equity investment gives you the most bang for your buck in long-term investment returns. Although there’s no guarantee that you’ll make money in any particular period of time, the odds are with you in the long run1, and you don’t need to worry about picking specific investments.
You can stabilize the value of your portfolio by holding interest-bearing CASH along with your stocks. Interest rates rise and fall but they don’t fall below zero, meaning that the CASH portion of your portfolio will not lose value. This stabilizing effect allows you to shorten the time it takes for your investment to mature.
Because we now live in The Age of ETFs, it’s easy to put together a decent balanced investment portfolio using just two investments:
- XEQT for Equity (I think this one is best)
- CASH for Cash (There are a couple of popular alternatives).
| Years | EQUITY | CASH | |
|---|---|---|---|
| 10 | 100% | – | Consider this account unavailable for ten years, to allow for market variations to work out over time |
| 5-10 | 60% | 40% | Keep some of the portfolio in safe interest-bearing investment, and REBALANCE periodically to limit the downside |
| <5 | 20-50% | 80-50% | If you want to be able to access cash from your portfolio within five years AND you can commit to keeping your hands off at least 20% of the starting balance, then invest that 20% (or more) in EQUITY and leave it alone to maintain some potential for long-term growth/inflation protection. Spend only from your CASH. (See discussion of REBALANCING below.) |
We got lucky for a year or two (2023-2024) with interest rates around 5%. But looking back, there can be long stretches of time where interest rates don’t even keep up with inflation. This is something we need to worry about with our long-term savings.
If you’re willing to commit to convincing yourself that you have less money saved than you really do, then you can try to beat inflation by investing PART of your portfolio for the LONG term, and keeping part of it available in case you need (or just want) to use it for something in the SHORT term.
There are a couple of valuable tricks you can use to keep your investment portfolio chugging along as the markets rise and fall and rise and fall (and rise): REINVEST and REBALANCE.
REINVEST dividends
ETF units don’t just grow in value over time – they pay out dividends from time to time (months or quarterly). So make sure you set up dividend reinvesting (DRIP) on these investments so that the money paid out in dividends gets folded back in where it can keep working.
If you’re using WealthSimple, you can buy fractions of units of ETFs, so you can reinvest the full value of every dividend regardless of the current unit price.
REBALANCE your portfolio
As time goes by, the equity portion of your portfolio will grow (or shrink) faster than the cash portion. The ratio can also shift if you add money to your investment or draw some out.
Keep an eye on the relative current value of these investments, and when it starts to drift from the desired percentage split, you should sell units of the one that’s too big and reinvest the proceeds in units of the one that’s too small. This bit of magic allows you to preserve your profits when XEQT is doing great, and to buy more XEQT when it is down in value (and thus cheaper).
If you’re using WealthSimple, there is no fee on trading, so you can do this without penalty even when the balance is just off a little. But if you’re invested in a brokerage that charges commission on every trade, you might want to hold back until your spit is more significantly out of balance.
Special consideration when you’ve cashed out some of your savings
If you have taken money out of the CASH portion, then — when it’s time to rebalance — ask yourself whether you intend to put that money back before you will want to draw money again. (This would happen if you were just “borrowing from yourself” or if you are adding new conributions to this investment account from time to time.)
If you intend to replace the “missing” cash, then include that amount in your CASH value when you do your rebalancing calculations. Pretend it’s still there so you don’t sell your equity prematurely.
If you don’t plan to put it back, then rebalance normally, based on what’s actually in the account, and go from there.
Notes
Why XEQT?
“iShares Core Equity ETF Portfolio” is a composite “exchange-traded fund” (ETF) invested in other ETFs which together cover global equity markets in all major sectors. You benefit from the historically observed tendency for such investments to rise overall in value over time. This style of investing is relatively new and has advantages that were never available before to small scale investors. And because you don’t need to choose anything, your success or failure is entirely due to the markets and not to your choices. There are other ETFs but XEQT is notable for its breadth of market coverage and low fees (Management Expense Ratio (MER) is 0.2%).
Why CASH?
“Global X High Interest Savings ETF” allows small investors to access high-interest Canadian bank deposit accounts and their interest rates which are much higher than what small investors can access themselves. Again a low MER (0.11%) will allow you to get very close to the best available interest rates even when interest rates continue to drop.
Alternatives to CASH
When interest rates fall, it’s possible that the CASH ETF might not continue to be the star of the high-interest show, because it uses actual bank savings accounts.
CBIL is a sibling to CASH that invests only in short term Bank of Canada Treasury Bills2, with the same low 0.11% MER as CASH. Bank of Canada is at least as secure as the Canadian banks, and the Treasury Bill terms are short enough (currently under three months) to avoid most of the risk3 associated with interest rate changes. Currently (mid-October 2024) CBIL is paying 4.32% compared to 4.19% for CASH.
Another popular cash ETF is PSA, which also has a fairly low MER (0.16% vs 0.11% for CASH and CBIL) and invests in short term Bank of Canada Treasury Bills as well as in high-interest bank savings accounts. Adding the “t-bills” to the mix gives PSA some flexibility that might sometimes produce better results than just one of the two options.
The one I’ve been using is CMR (mainly because it’s on the list of 100 commission-free ETFs at Qtrade where I invest) which actually has a little more adventurous portfolio of “ investment grade debt securities, including treasury bills and promissory notes issued or guaranteed by Canadian governments or their agencies, bankers acceptances and commercial paper”. MER is 0.13% and current yield (Oct 2024) is reported as 4.232%
Why both?
In the long term, you’re not going to grow your investments without equities. But usually we need access to at least some of our money even when equity investments are down in value. So we invest in equity to keep us moving ahead and keep some money in cash to keep us afloat when equities are down.
Is it really that simple? And are you qualified to give advice?
I can’t say with confidence that this will give you better results than most other available advice, but I am confident that there’s nothing unusually risky or dumb about this advice.
XEQT and CASH are both reputable and popular in Canada (according to my reading of The Internet). The exact years and percentages are a little arbitrary but they implement the popular advice to treat XEQT as a long-term (10 years) buy-and-hold investment.
What about Bond and Balanced Portfolio ETFs?
I learned (by losing) about a BIG PROBLEM with the normal mainstream approach of using bond funds to offset the risk of investing in equity funds. The fact is that investing in bond funds subjects your investments to another dimension of risk.
Individual bonds pay the stated interest as promised. If you buy a bond and hold it to maturity date, there is no (significant) risk that you won’t get your money back with the promised interest. If for some reason you need to sell a bond before its maturity date, and if the current market interest rate is higher than the rate on your bond, then the buyer isn’t going to buy your bond unless you give them a discount. So you lose money by selling the bond early.
If you hold units of a bond fund/ETF, you have no way of knowing the maturity dates of the underlying bonds. So when you sell this investment, there can be a significant risk that some of the bonds you are selling are worth less than what you paid for them, meaning that you are losing money.
I personally haven’t been able to figure out why people are willing to take this chance, burdening their portfolio with bond market risk ON TOP OF equity market risk. I would rather balance risk with safety rather than with a different offsetting risk.
This is why I am recommending non-speculative interest-bearing cash investments to balance speculative equity investments.
By following this advice, it’s possible that you’re missing out on potential growth from the higher interest rates available with bonds. But until I can figure out how to handle the associated risk, I’m not about to recommend it to others.
- For equity investing, “the long term” is taken to mean TEN YEARS. But that’s an oversimplified short cut. It’s possible (but not likely)for a ten-year-old equity portfolio to still be dragging (annualized return less than zero). But I’ve seen a graph that suggests that by twelve-years, zero-return is no longer a possibility, and that during years the minimum annualized return goes up from +4% to about +8%. These are the very worst-case observations. ↩
- Money lent to the Canadian government ↩
- See discussion of bond fund investment risk below. ↩
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