How to Build an Index-Fund Portfolio

Okay, you want low fees, broad diversification and market returns. But how do you actually pick the right index funds? US vs. Canada? Stocks vs. bonds?  Dan Bortolotti ( @rationalreminder ) breaks it down in this clip from The Wealthy Barber Podcast, out now on all platforms!

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Now let’s get more to the crux of the, the matter of the index funds. Okay. You sold me. I want to keep my costs down. I don’t think I can outperform the market. I want to just take market returns less a small fee. How do I choose the index fund? How do I choose the asset allocation aspect of it? Do I go all US? Do I go us and Canada? How much bonds, how much stocks, all of this? How do I think through these different things?

Yeah, let’s start at the top level, like basic portfolio construction, if I’m starting from scratch and I want to build a diversified portfolio, what building blocks do I need? And I would say the easy answer to that is some amount of fixed income. So that’s bonds and or GICs, uh, and the rest of the portfolio in stocks with a mix of Canadian US and international stocks.

Now, the exact proportions of those doesn’t really matter, but as a rough rule, you know, one third Canada, one third US, one third international is not a bad starting place. You can certainly tweak that. I’m not going to die on that hill about what’s the optimal, but something like that. All US large cap tech stocks, not diversified, right?

A mix of Canada, US and international, that’s a diversified equity portfolio. And then on that fixed income, that bond GIC side, the, the size of that part of the portfolio really depends on your risk tolerance and your ability to deal with volatility. So if you’re the type of person that can weather a 30 or 40 percent decline in your portfolio in six months which should be expected if you’re a hundred percent stocks, then great go a hundred percent stocks. Most people cannot stomach that. And so should dilute that a little bit by adding some more stable fixed income, which just makes the portfolio less volatile. But if you’ve got those basic ingredients in there, in whatever proportion is suited to you, that’s the right starting point.