Smart Investing
  • Share this page on Facebook
  • Share this page on LinkedIn
  • Send to a friend
Andrew Hallam
24.07.2019

How Australians And Canadians Can Invest Like Jedi Knights

In the 2017 film, The Last Jedi, Luke Skywalker reluctantly takes one last student. Her name is Rey. But Skywalker fears her natural power. What if Rey turns to the Dark Side, like Darth Vader and Kylo Ren had done?

Becoming a Jedi requires more than a lightsaber and nifty hand speed. Jedi Knights need to avoid destructive human emotions… like fear and greed. Smart investors need to do the same. And that’s especially challenging when stocks fall hard.

Stock market crashes are perfect testing grounds. They make investors face fear. Conquering fear and greed might be far more important than choosing the lowest-cost investment weapon. Don’t get me wrong. I’m a low-fee zealot. But an all-in-one ETF might channel your inner Jedi and lead to better results.

No, these aren’t the cheapest ETFs. They can cost as much as 0.27 percent per year. That might ruffle the capes of many would-be investment knights. After all, investors can build a diversified portfolio of ETFs for less than 0.15 percent per year. But an all-in-one ETF might still be a better choice for expat Canadians and Australians.

Here’s a bit of history to explain why these products rock.

All-in-one funds have been available to Americans since the mid 1990s. But it wasn’t until 2003 that Vanguard introduced diversified portfolios of indexes wrapped up into a single fund. My American wife, Pele, invests in Vanguard’s Target Retirement 2025 fund. It includes U.S. and international stock and bond market indexes. When she first started to buy it, about 13 years ago, the fund’s annual costs were about 0.18 percent. As with many index funds and ETFs, its fees have since dropped. Today, it costs 0.13 percent per year.

Instead of buying this all-in-one fund, Pele could have built a portfolio of slightly lower-cost, individual index funds. But we liked the all-in-one fund’s hands-free approach. Vanguard rebalances the fund. We just add money. No matter what the markets do, Pele invests on autopilot. She doesn’t speculate. She doesn’t have to choose which index fund to buy during any given month.

Morningstar routinely studies investors’ behaviour. Their results show it’s easy to invest when markets rise, such as they’ve done over the past ten years. But the Dark Side tests us when stocks hit the skids. To get a complete picture of how investors behave, it’s best to examine a period that comprises rising and falling markets, such as the time from June 30, 2004 to June 30, 2019.

U.S. and international stocks rose a lot between 2005 and 2007. They both fell hard in 2008. Stocks recovered some of that ground in 2009. But global markets soon wobbled. Stocks had plummeted in 2008 so many people expected the same thing when markets fell hard, midway through 2010.

As a result of such volatility, over the 15-year period ending June 30, 2019, investors had trouble staying on course. That’s why they underperformed their funds. For example, Vanguard’s S&P 500 Index Fund (VFINX) averaged a compound annual return of 8.62 percent. But over this same time period, investors in the fund averaged a compound annual return of just 6.34 percent. In other words, many let the Dark Side hurt their returns. When stocks went haywire, many people stopped investing. Plenty of people sold, hoping to re-enter the market when things “returned to normal.”

It was much the same for most of Vanguard’s index funds. Over this 15-year period (which included a market crash) most investors underperformed their funds. They might have second-guessed what they owned. When a particular fund performed poorly (see the European index below) they might have jumped out, only to jump back in after the fund had a better year. As you can see below, this cost investors plenty.

How Did Investors Perform Compared To The Funds They Owned?

June 30, 2004 – June 30, 2019

Fund
Fund's Average Annual Performance
Investors' Average Annual Performance
Annually, How Much Did Investors Underperform or Outperform Their Funds?
Vanguard's S&P 500 (VFINX) 8.62% 6.34% -2.28%*
Vanguard's Total Stock Market Index (VTSMX) 8.88% 9.33% +0.45%*
Vanguard's Extended Market Index (VEXMX) 9.33% 8.65% -0.68%
Vanguard's International Stock Market Index (VGTSX) 5.67% 4.47% -1.20%
Vanguard European Stock Market Index (VEURX) 5.52% 0.93% -4.59%
Vanguard Pacific Stock Market Index (VPACX) 5.05% 0.34% -4.71%
Vanguard's Total Bond Market Index (VBMFX) 4.12% 3.61% -0.51%

Source: Morningstar.com

*The broad discrepancy between investors’ behaviour between Vanguard’s S&P 500 index (VFINX) and the Total U.S. stock market index (VTSMX) might have been the result of investors selling VFINX when the markets were low, and adding the proceeds to VTSMX at the same time. This might not relate to market timing but a desire to include a U.S. index (VTSMX) that also included small-cap and mid-cap stocks. The S&P 500 index only includes large-cap stocks. The S&P 500 used to be Vanguard’s biggest index. But that’s not the case now. Many investors migrated towards Vanguard’s Total Stock Market Index. It’s now the world’s biggest index.

 

 

However, things looked different for those who invested in Vanguard’s all-in-one funds. For example, Vanguard’s Target Retirement 2045 fund averaged a compound annual return of 7.38 percent over the 15-year period ending June 30, 2019. But investors in the fund did better. They averaged 8.07 percent per year. In other words, most of this fund’s investors performed better than the fund itself.

Below, I’ve listed all of Vanguard’s Target Retirement (all-in-one) funds that have 15-year track records. I’ve also shown how each fund performed compared to how its investors performed in each respective fund.

Investors In All-In-One Funds Appear To Behave Better

June 30, 2004 – June 30, 2019

Fund
Fund's Average Annual Performance
Investors' Average Annual Performance
Annually, How Much Did Investors Underperform or Outperform Their Funds?
Vanguard Target Retirement 2015 Fund 5.95% 5.63% -0.22%*
Vanguard Target Retirement 2025 Fund 6.53% 6.73% +0.20%
Vanguard Target Retirement 2035 Fund 7.02% 7.53% +0.51%
Vanguard Target Retirement 2045 Fund 7.38% 8.07% +0.69%

Source: Morningstar.com

*Investors in Vanguard’s Target Retirement 2015 fund were likely withdrawing money after 2015. That might be the reason such investors underperformed their fund. While markets soared from 2015-2019, they were selling to cover retirement costs.

Get monthly expat investor insights in your inbox

 

Your email will be retained and solely used to send you the Expat Investor newsletter. You have the right to access and amend your data (see privacy policy).

During volatile market conditions, here’s how investors can outperform their funds: Many continue to add the same amount of money every month. As a result, they buy a greater number of units when the markets fall. They buy fewer units (with the same amount of money) when the markets rise. That’s how an investor could pay a lower-than-average unit price for a fund over time…and beat the fund’s return.

Best of all, this doesn’t require any thinking. And when the portfolio’s allocation gets out of whack, the fund company rebalances the fund, bringing it back to the fund’s original allocation.

Those who invest in all-in-one funds might do less second-guessing. This might help such investors remain on course.

In February 2018, Morningstar’s Jeffrey Ptak published, Success Story: Target Date Fund Investors. He says most people who invest in all-in-one funds behave much better than those that pick individual funds. Jeffrey Ptak wrote:

To gauge investors’ success, we estimated the difference between target-date [all-in-one] funds’ dollar-weighted and time-weighted returns for the March 1994 to January 2018 period…the annual behavior gap was a modest negative 0.38%, which is smaller than the gaps we’ve observed in other asset classes in the past.”

PlanVision’s Mark Zoril has been working in the financial services industry for years. He also likes the simplicity of all-in-one portfolios. The American keeps all of his personal investment money in Vanguard’s Target Retirement 2045 fund. “The longer I do this, the more I realize how effective these options are,” he says. “It helps me keep my hands off of my accounts. I don’t track or worry about them at all.”

Non-American expats can’t buy the same product that Mark Zoril does. But Canadian and Australian expats can buy something similar. Risk-averse Canadians might like Vanguard’s Conservative ETF Portfolio (VCNS). It comprises about 60 percent in bonds, with the remaining 40 percent invested in Canadian and global stocks. It trades on the Toronto Stock Exchange, and it costs 0.22 percent per year. Vanguard automatically rebalances the fund so investors don’t have to. But based on its high allocation to bonds, it won’t likely earn high long-term returns.

Canadians with a moderate tolerance for volatility could buy the iShares Core Balanced ETF Portfolio (XBAL) or Vanguard’s Balanced ETF Portfolio (VBAL). They’re very similar products. Each fund represents a complete portfolio, comprising about 40 percent in bonds and 60 percent in Canadian and global stocks. The iShares all-in-one portfolio costs 0.18 percent. Vanguard’s equivalent costs 0.22 percent. But that doesn’t mean these costs are stagnant. Vanguard and iShares have a habit of reducing costs over time.

Canadians with long time horizons, or a higher tolerance for risk, might prefer the iShares Core Growth ETF Portfolio (XGRO) or Vanguard’s Growth ETF Portfolio (VGRO). They each contain about 20 percent in bonds, with the remaining 80 percent allocated to Canadian and global stocks. They also cost 0.18 percent and 0.22 percent respectively.

You might be tempted to compare the iShares all-in-one portfolio performances with their Vanguard counterparts. But don’t bother looking. The iShares products used to be actively managed. Prior to 2019, they were all-in-one portfolios of ETFs that iShares managed. In other words, iShares shifted the fund’s holdings based on forecasts. They have since made them purely passive products, much like their Vanguard counterparts.

Australia’s stock market offers similar products. Vanguard Australia’s Diversified Conservative Index ETF (VDCO) comprises about 70 percent in bonds (and cash), with the remaining 30 percent allocated to Australian and global shares. Vanguard Australia’s Diversified Balanced Index (VDBA) comprises about 50 percent bonds, with the remaining 50 percent invested in global and Australian shares. The firm’s Diversified Growth Index ETF (VDGR) contains about 30 percent in bonds, with the rest allocated to Australian and global shares. Finally, investors with long time horizons and really strong stomachs could select Vanguard’s Diversified High Growth Index (VDHG). It has about 10 percent in bonds, with the remaining 90 percent in Australian and global shares. Each of Vanguard Australia’s all-in-one portfolio ETFs cost 0.27 percent per year.

Some investors say these all-in-one portfolios cost too much. But wise investors– whether they choose them or not–view them with respect. There’s a Dark Side to investing. It causes many investors to second-guess decisions and waver or sell when stocks fall hard. All-in-one portfolios might help to collar such behaviour. That’s why they just might be a Jedi-investor’s most potent weapon.

All-In-One Portfolios For Canadian Expats

Conservative

60% Bonds
40% Stocks

Balanced

40% Bonds
60% Stocks

Assertive

20% Bonds
80% Stocks

Best suited for investors looking for stability and low returns. Best suited for investors looking for some stability, coupled with some long-term growth. Best suited for investors looking for high growth. Such investors can emotionally handle market declines.
Vanguard's Conservative ETF Portfolio (VCNS). iShares Core Balanced ETF Portfolio (XBAL) or Vanguard's Balanced ETF Portfolio (VBAL) iShares Core Growth ETF Portfolio (XGRO) or Vanguard's Growth ETF Portfolio (VGRO).

*Each of the above trades on the Toronto Stock Exchange

All-In-One Portfolios For Australian Expats

Very Conservative

70% Bonds and Cash
30% Stocks

Conservative/ Balanced

50% Bonds
50% Stocks

Assertive

30% Bonds
70% Stocks

Aggressive

10% Bonds
90% Stocks

Best suited for investors looking for high stability and low returns. Best suited for investors looking for some stability, coupled with moderate long-term growth. Best suited for investors looking for slightly more growth. Such investors can emotionally handle market declines. Best suited for investors looking for high growth. But such investors require strong stomachs. If it would upset them to see this fund not make money for a decade, they shouldn't invest in it.
Vanguard Australia's Diversified Conservative Index ETF (VDCO) Vanguard Australia's Diversified Balanced Index (VDBA) Diversified Growth Index ETF (VDGR) Vanguard's Diversified High Growth Index (VDHG).

*Each of the above trades on the Australian Stock Exchange

  • Share this page on Facebook
  • Share this page on LinkedIn
  • Send to a friend
Any questions?