Laurie wants to begin investing, but…(Part 5 of 6)

…she doesn’t know why she should be buying ETFs or which ones to buy.

ETF means exchange-traded fund. An ETF is an investment fund (financed by the pooling of investors’ monies) that is traded on a stock exchange. It is like a mutual fund (another type of investment fund), if you’re familiar with them, but much cheaper to own (mutual funds are not traded on a stock exchange and can only be redeemed at a price calculated at the end of each day).

The main benefit of an index ETF is that it provides you with a way to inexpensively diversify your investment portfolio. By diversifying, you are following the age old adage, “Don’t put all of your eggs in one basket” (lest you trip and fall and all the eggs break). So some of the investments in an ETF will do well and some will “break”, but overall enough of your nest eggs will thrive to make up for the “breakage”.

Part 4 of this series indicated that only 3 ETFs could suffice. Well, what are they? Assuming that a risk assessment was performed as stipulated in Part 2, so that a range of debt (bonds) and equities (stocks) have been determined, and that the account will be a self-directed RRSP brokerage account like those described in Part 3, then the combination of those 3 ETFs may be taken from a chart prepared by Select the “CPM Model ETF Portfolios”, although the other model ETF portfolios (Vanguard, BMO, iShares) do not differ much in cost or content. Here is the list of June 30, 2019 CPM Model ETF Portfolios. The first page is for RRSPs and RRIFs (tax-deferred portfolios).

Continuing with the assumption that we want an RRSP portfolio of investments, we would move along the top of the page until we come to the proportions of debt (bonds) and equities (stocks) suggested from doing our risk assessment in Part 2. Let’s say that as a result of our risk assessment, we decide to invest 30% in bonds and 70% in stocks (the fourth portfolio from the right). Accordingly, with $1,000 to start our portfolio we would buy $300 (30% of $1,000) of the ETF with the symbol ZAG, $230 (23% of $1,000) of VCN, and $470 (47% of $1,000) of XAW.

The reason we buy XAW is because it contains stocks from around the world, excluding Canada. With Canada representing only about 2 to 2.5% of the world’s economy, it makes sense to take advantage of productivity of some of the other 98% of the world. VCN represents our investment in Canadian stocks, and ZAG represents our investment in Canadian bonds or debt securities.

There, we’ve started. In Part 6, we’ll describe our investment portfolio with a bit more detail.