That’s why I generally recommend that DIY investors use only Canadian-listed ETFs. While the management fees on US-listed funds are often lower, the cost of converting currency to buy them, as well as the extra complexity in managing them, are usually not worth the small benefit. Canadian-listed equivalents give you the same useful exposure to foreign currencies, and they’re much more user-friendly.
Cap-weighted indexes are the traditional tool of index investors, and they should be your default choice when comparing ETFs.
That said, I recommend including a mix of government and high-quality corporate bonds in your portfolio, and you can do this easily with a single fund. The most widely used bond indexes in Canada include about 70% to 80% government bonds, with the remainder in corporates, a blend that should suit most investors.
I need to stress that expected returns should be viewed with a time horizon of at least 20 years. They are the “normal returns” we discussed earlier: they tell you absolutely nothing about what to expect from your portfolio in any given year, or even over five or 10 years. The less time you have, the more you should err on the side of caution.
At the most basic level, the financial planning process comes down to a formula with four inputs: How much money will I need? When will I need it? How much am I currently saving?
There’s really just one essential type of fixed income in your balanced portfolio: investment-grade Canadian bonds.
The silent killers of all investment returns are inflation and taxes, which can reduce the real return on “safe” investments to zero, or even turn them negative.
Since bonds and GICs each have pros and cons, you might consider a balanced approach and use both in your portfolio. For example, you could use GICs for about half of your fixed-income allocation and use a bond ETF for the other half.
However, there are two asset types that have historically made good dance partners: stocks and high-quality government bonds. In most countries, over the very long term, the two have moved independently, and for long periods their correlations have been negative.
If you’re a DIY investor and you’re wondering about retirement readiness, I suggest you hire a fee-for-service financial planner to review your situation. Look for a planner who charges by the project, not one who earns commissions on the investments or insurance products they sell, as this has obvious conflicts of interest.