Vanguard is one of the biggest ETFs and Mutual Fund providers of the world. Yet, no commission-based financial adviser will ever recommend them.

Why?

Because Vanguard pays no commission.

Only advisors whose income is not directly derived from the products they sell you, ever recommend Vanguard.

So why is Vanguard the leader?

The most important reason is that Vanguard is the pioneer in low-cost index funds and ETFs. In the beginning, Vanguard was ridiculed, and very few people paid attention to it. Vanguard struggled for almost 10 years before people started to notice.

One of the reasons why it didn’t catch up right away is because Vanguard doesn’t pay commission to the financial advisers who recommend it. So no financial advisor ever did recommend it. Only fee-only advisors ever did recommend Vanguard funds.

Also, as the years went by, when comparison sites such as Morningstar started doing mutual fund comparison, and the Vanguard Mutual funds and ETFs started coming up on top, year after year, some people started to notice.

Why does Vanguard outperform all the other funds and ETFs?

The trick is in their low-cost structure.

Vanguard does not actively manage their funds. They buy all the stocks in one particular sector and just hold those stocks, they don’t have a staff of high paying researchers trying to guess which stock will go up and which ones won’t, all they have is a big computer, in a low rent part of town. This cost savings give Vanguard a huge competitive advantage.

Imagine all the expenses that go into a mutual fund. All the analysts get paid over $100,000 per year. Then they need fancy computers to analyze the stocks, and they have huge offices in a prime real estate area in the most expensive cities, and finally, they have to spend millions of dollars in advertising and promotion.

When you add all those expenses and compare them with Vanguard who doesn’t have analysts, who don’t have high office expenses, and who doesn’t have marketing and commission expenses, the savings are so huge that Vanguard’s funds end up outperforming most of the other similar mutual funds.

My recommended portfolio

If you have read my previous blog post, you know that I recommend 1/3  Canadian, 1/3 U.S.,  and 1/3 international ETFs. And NO BONDS.

Now, this is just a guideline. It does not have to be a rigid division. I find that most people build their portfolio on the basis of fear and doing so, they leave lots of money on the table.

I’ll give you an example. Imagine that in the 1900s, you were an English man who had the same idea, 1/3 English stocks, 1/3 US stocks, and 1/3 the rest of Europe stocks. If that English man would sell his US stocks every year to re-balance his portfolio, that English man would have left a lot of money on the table. The U.S. went through a 100-year rally which made it the powerhouse it is today.

By the same token, imagine my Emerging Market asset allocation starts skyrocketing, well, I am just going to let it ride. If it gets outside the initial 1/3 allocation, who cares? The 1/3 allocation was an arbitrary number with no science behind it. It’s not more or less risky than a different portfolio percentage. Canada is only 2% of the global economy, so the initial 33% was another random number.

Why No Bonds?

I have mentioned in previous articles.

1. In any 10 years time period, bonds always underperform stocks.
2. Bonds are less volatile than stocks but it’s not less risky as many people insist. It’s almost like cash. Many people think cash is safe, but cash is probably the only asset class that guarantees to lose money as soon as you start holding it.

Under which circumstances I would hold Bonds?

I would have bonds in my portfolio when I don’t care about making money anymore. For example, Let’s say that my goal is to have a $1,000,000 portfolio. If I implement the 4% rule, one million should give me the equivalent of $40,000 year after year for the rest of my life. Then, if my portfolio grows to $1,100,000; I could put that $100,000 in my bond portfolio, simply because, I already achieved my objective.

By the way, this would be the same scenario that I would use to play individual stocks when I don’t care about the end result anymore when I can compare buying an individual stock with going to Las Vegas when it’s not important anymore.

1/3 Canada

For my 1/3 Canadian allocation, I would choose Canada All Cap Index ETF (VCN) with an MER ( Management Expense Ratio) of 0.06%.

As the name implies (All Cap) this fund holds a representation of Canada’s big, medium, and small companies.

1/3 United States

For my 1/3 U.S. allocation, I would choose the U.S. Total Market Index (non-hedged) VUN with a MER of 0.16%.

As the name implies (All Cap) this fund holds a representation of the U.S’s big, medium, and small companies.

1/3 International

For my international allocation, this is the way I would do it. I would divide the 1/3 leftover in this way.

1. Developed All Cap Excluding North America (8.25%) VIU with a MER of o.23%
2. Developed Asia Pacific All Cap (8.25%) VA with a MER of 0.22%.
3. Developed Europe All Cap (8.25%) VE with a MER of 0.22%
4. Emerging Markets All Cap (8.25%) VEE with a MER of 0.24%

What’s the end result?

I went to Portfolio visualizer, created a $10,000 portfolio which started in January 2016 and this is the return:

For 2016, the returns were 9.96%
For 2017, the returns were 13.66%
For the first six months of 2018, the returns were 2.35%

The asset allocation has stayed almost the same.

I know, I know, two and a half years is not enough data to draw any conclusion, but at least is something. It gives us enough information to speculate about the future.

Conclusion

Vanguard has many other ETFs. Maybe you would like one of the other ones. Also, Vanguard is just one out of thousands of other companies. Please consult an advisor before making any financial decision.

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