It’s hard to believe but owning a single investment can be all that you need to retire. Is it really that easy? Yes! Investing for retirement does not have to be a complicated endeavour and in fact, by making it more complicated than it is can be detrimental to your returns.
So what should you invest in? I’m a big advocate for ETFs (exchange-traded funds). They provide you with the lowest fees and diversify your investment across dozens if not hundreds of individual companies. Furthermore, Warren Buffett also believes that unless you have the time to research individual stocks, buying an ETF is the best way to maximize your returns while keeping your investment decision simple.
What is an ETF?
An ETF is a basket of securities, like stocks and bonds, that track the market like the S&P 500 in the U.S. or the TSX in Canada. There are also ETFs for real estate, bonds, and commodities with hundreds to choose from. ETFs are similar to mutual funds but with far lower fees, which can have a huge impact on your returns over time.
Can You Buy Multiple ETFs?
Yes. There is a growing trend where the belief is that by owning more than one ETF you keep yourself diversified across different industries and countries reducing the risk tied to any one individual company, economic sector or national economy. This is in line with common wisdom of not putting all of your eggs in one basket and a lot of robo-advisors follow this line of thinking.
Should You Buy an ETF or Invest With a Robo-Advisor
While I believe diversification is important for most investors, investing in multiple ETFs can lead to over-diversification, limiting your returns. Studies show an investment portfolio should be 30 investments to be properly diversified. So by investing in an S&P 500 index, for example, you are investing in 500 companies. Invest in any additional ETFs and that number increases exponentially. Robo-advisors, which are becoming more popular, have taken this approach to ensure a minimum market return.
Whether or not you should invest in multiple ETFs ultimately it depends on your financial goals and your own investing behavior whether you should go with a robo-advisor or invest in an ETF on your own by opening an account at a discount brokerage.
Pros of a Robo-Advisor
- Less control over you investments. This prevents you from selling your ETF in a panic when the market drops, which it will.
- No research required. Invest your money and forget about it until you need it or until retirement.
Cons of a Robo-Advisor
- High fees compared to investing in an ETF on your own. Wealthsimple, for example, is 0.50% per year while the Vanguard S&P 500 ETF is 0.03% per year. Wealthsimple’s fees are still cheaper than traditional financial advisor fees, so keep that in mind.
- Can lead to over-diversification. For example, Wealthsimple advertises that their unhedged growth portfolio can have a 5.4% annual return on average (in Canada). Investing in an S&P 500 ETF has a historical return of 9.6% per year. Keep in mind historical results are not an indication of future performance.
Ultimately, if you are finding yourself tinkering with your portfolio after investing on your own, such as trying to time the market, you are better off investing with a robo-advisor to take that temptation away (for more information on which robo-advisor I recommend the most, see my review on Wealthsimple). Statistics show active investing by buying and selling leads to poorer performance over time compared to a buy and hold strategy.
Should I Buy ETFs or Individual Stocks?
Warren Buffett famously stated that “diversification is protection against ignorance. It makes little sense if you know what you are doing.”
The fact is that he spends everyday and the majority of his time reading financial statements to make a few select investments per year to buy good companies at fair prices. Furthermore, with each new investment in a stock, time and energy are required to keep track of any fundamental changes with the company. His top 10 holdings as of December 31, 2018 are Apple, Bank of America, Wells Fargo, Coca-Cola, American Express, Kraft Heinz, U.S. Bancorp, JPMorgan Chase, Moody’s, and Delta Air Lines consisting of over 80% of his portfolio. He also rarely sells his investments preferring to hold them forever.
If you don’t have that kind of time on your hands or are not passionate about the markets, then investing on your own with an ETF or a robo-advisor is recommended. If you do have time and are passionate, then try to limit your investment to a well-researched, 10 stock portfolio. My advice is to pretend you can only make 10 investments ever during your lifetime helping to limit and focus your investing decisions.
Which ETF Should I Buy?
If you’re convinced of branching out on your own in the investing world, the first step is to open an account at a discount brokerage. If you make the mistake of walking into a bank branch, they will try to sell you on their proprietary mutual funds, which have high fees, and poor returns. Avoid!
The second step is to determine what kind of exposure do you want. There are literally hundreds of ETFs. Do you want real estate exposure? Or Canadian exposure? Or international? This can lead to the temptation of buying multiple ETFs to keep your bases covered, but as I said previously, this leads to over-diversification. If you are okay with that, then go ahead and buy as many as you want. If you’re looking for an all-in-one ETF that you can hold until retirement and set it and forget it, look at the Vanguard S&P 500 ETF that covers the U.S. market. I speak more about the most popular ETFs, what each invests in, and historical returns in my book.
A single investment can be all you need to retire. Buy an ETF or invest in a robo-advisor, and check back when you are ready to retire to see the power of compound interest at work. Now you are ready to start kicking financial ass.
Legal Disclaimer: The views expressed by Mr. Dumont on Money Sensei are solely his and not intended as investment advice nor a guarantee of any financial return. Mr. Dumont is not an investment or tax professional, so the information contained on the blog is not a substitute for professional advice. The contents of this blog are accurate to the best of his knowledge at the time of posting, but rules and laws are ever-changing. Please do your research to confirm that you have the current information.