Today we have a guest post from Stefan Scott, a flat-fee financial planner from BC. I know Stefan personally. He’s a smart, hard-working guy who specializes in helping physicians get on the path to financial independence using an evidence-based approach. His business is called House Calls Financial Planning and his email is firstname.lastname@example.org. If you have any questions for him, I know he’d be happy to hear from you.
One of the values that Stefan and I share is a belief in empowering physicians. That can take many forms: the moneySmartMD course, flat-fee financial planning, and the myriad online resources that are available. But sometimes one of the best sources of wisdom is a good, old-fashioned book. As you will read below, Stefan and I agree that the latest from Dan Bortolotti is a good one.
Reboot Your Portfolio: 9 Steps to Successful Investing with ETFs.
By Dan Bortolotti. Released November 2021.
Instant Canadian DIY Investing Classic!
Many of you will recognize Dan Bortolotti’s name. Over the last 20 years, he has contributed an immense amount of helpful knowledge and information to DIY investors in Canada through his articles in Moneysense and via his excellent Canadian Couch Potato website and blog. Bortolotti is presently a portfolio manager with PWL Capital. He has put his ‘extra pandemic time’ to good use by writing this 9-Step approach to constructing and maintaining a low-cost, low-maintenance, globally diversified ETF Portfolio that fits beautifully with the MO of the PFI Canada group. “Reboot Your Portfolio” should be recommended in the same breath as “Beat the Bank” and “Millionaire Teacher”. If you are new to DIY investing, or a seasoned pro, this up to date book will have something for all of us. I highly recommend it.
Here are the 9 Steps Bortolotti presents in his book via 9 chapters, and some of my thoughts on each Step.
Step 1: Stop Trying to Beat the Market.
Bortolotti reviews the convincing and long term research that shows us why mutual funds and stock picking are, in the long run, a loser’s game. He explains how indexing, via ETFs (Exchange Traded Funds), is a winner’s game and in the long term will have you outperforming your friends, family, colleagues and even the professionals, over 90% of the time.
Step 2: Set Your Financial Goals.
The importance of developing a long-term, big-picture financial plan is discussed. What is classified as good goal setting? How much money will you need for your retirement? How much can you withdraw in retirement? How important is saving and lifestyle presently in your circumstances? When is saving more important than low fees?
Step 3: Find the Right Mix of Stocks and Bonds.
Asset allocation, as it pertains to mixing stocks and bonds, equities and fixed income, is presented. What’s the right mix for you? That depends on your personal circumstances, your financial goals, how you are emotionally wired, and on how much risk you actually need to take with your portfolio. Bortolotti discusses the volatility and risk that stock markets present, and how unseasoned investors are often over confident in their ability to ride out a market correction, or even worse, a market crash. He also lays out a lucid discussion illustrating how thoughtful diversification can increase your returns and simultaneously lower your portfolio’s risk.
Step 4: Fine-Tune Your Asset Allocation.
How can you prepare your portfolio for the inevitable storms that will come? By ensuring you are diversified across several asset types. Bortolotti discusses the importance of holding Canadian, U.S., International and Emerging Market stocks in your portfolio. He explains why having a larger tilt towards Canadian companies is also prudent for us as Canadians, as well as how currency risk plays into the equation. He discusses bond and fixed income allocation and diversification. How many moving parts do you need in your diversified portfolio? Bortolotti gives his opinion on why you probably do not need to hold REITs, preferred shares, real-return bonds, high-yield bonds, or gold in your portfolio.
Step 5: Select Your ETFs.
I was personally disappointed with this chapter. Based on the title, “Select Your ETFs”, I presumed Bortolotti would lay out an up to date list of ETFs that could be used to construct a low-cost, globally diversified, risk appropriate portfolio. Unfortunately he does not. You have to read between the lines in order to determine which ETFs he’s suggesting. Bortolotti does provide a specific list on his Canadian Couch Potato (CCP) website, but unfortunately he does not direct the reader there. For those of you who are interested in the CCP model portfolios, they can be found at: https://canadiancouchpotato.com/model-portfolios/
He does explain what indices are and how ETFs track them. It’s a good discussion on how one should look ‘under the hood’ to see exactly which index an ETF is tracking and how. He also touches on Factor Investing in this chapter and whether or not it is worth pursuing such factors in an ETF portfolio. Currency hedging and a whether or not a fund’s past performance matters are also discussed with specific examples.
Step 6: Open Your Accounts.
Ultimately, if one has the motivation and discipline, going full DIY with an online brokerage or your main financial institution is the end-game of this chapter. He discusses brokerage fees, which types of accounts you should open, how to cut ties with your current adviser (if you have one), and how to make the transition to a self-directed on-line brokerage.
However, prior to this, Bortolotti briefly puts forth his case and arguments both for the benefits of having an adviser and the downside of most advisers overcharging their clients for a losing, actively managed portfolio. He does disclose that he makes his living as a portfolio manager and financial planner. His clients pay a fee based on a percentage of assets managed: the classical AUM (Assets Under Management) fee model.
He comments on how only a very small number of advisers in Canada do not use active strategies. He states one of his greatest frustrations, “finding a good adviser who charges a reasonable fee is difficult in Canada, especially if your portfolio is modest.” He then goes on to state that fee-based advisers are typically expensive and charge more than 1% annually to manage most portfolios. He adds, “advisers who use nothing other than plain vanilla cap-weighted ETFs are exceedingly rare”, even though, over the long term, this is clearly a winning strategy.
Bortolotti then discusses the pros and cons of Robo-advisers, with one of the biggest downfalls being that Robo-advisers don’t offer true financial planning. Then finally, almost as an afterthought, he briefly mentions Fee-for-Service (FFS) Financial Planners in Canada. One would think after he states how expensive it is working under an AUM model, and the difficulty with which it is to find planners who suggest evidence-based investing in ETFs, he would have more to say about the growing group of Fee-for-Service Financial Planners in Canada who charge a flat or hourly rate, offer unbiased advice, and help design and encourage portfolios based on the financial research he is advocating for.
Step 7: Build Your Portfolio.
Bortolotti does a nice job of taking us through, step-by-step, how to ultimately place your ETF orders on your brokerage’s website, when and how to use DRIPs (Dividend Re-Investment Plans), whether or not you should use U.S. listed ETFs, and some tricks of the trade.
Step 8: Keep it in Balance.
When and how often you should re-balance your portfolio is the topic presented in this chapter. Bortolotti also finally presents and discusses the alternative to a multi-fund ETF portfolio: the One-Fund or All-in-One ETFs that have recently become available over the last few years. He explains clearly how for many of us, an all-in-one ETF may be all that we ever need in our portfolios! Here, those of us that appreciate the elegance, diversification and simplicity (under which lies an amazing complex of holdings) of the VEQTs, XGROs, and VBALs will be very satisfied.
Step 9: Stay the Course.
This is an excellent final chapter to Reboot Your Portfolio. Bortolotti is honest and shoots straight from the hip about how ETF investing is not sexy, exciting or supercharged. It’s an important discussion on why being boring wins in the long run. It prepares us for the battles we will ultimately face as passive index investors.
What do you do when your family and friends are bragging about their 10-baggers, or how Tesla will continue to climb to the sky? He discusses ‘Analysis Paralysis’ and how more choices are not always better. How and why you should ignore market predictions. Why you should ignore the urge to pick stocks or ‘do something’. Why the fear of missing out (FOMO) should not be feared. Why you do not want to overestimate your risk tolerance. Why you should not listen to the financial industry’s BS or what will happen if you don’t give your portfolio time to work. And, finally, how to become successful as an indexing zealot…
Overall, Reboot Your Portfolio is an excellent book that should be placed on the Must Read list for those entering the world of passive ETF investing. It is up-to-date, timely, and lays out passive investing concepts clearly and competently. For those who are more experienced with passive investing, it is a great review and would also make a great gift or suggestion for those who are picking your brains about ETFs. Overall, I give Reboot Your Portfolio two thumbs up.
Matt’s Note: Having recently finished the book myself, I can vouch for Stefan’s assessment. There is no shortage of financial information these days, but what Bortolotti does is fill in those last few pieces of creating and implementing a simple but effective investment strategy. And he does it in a way that is easy-to-read, organized and beautifully practical. Highly recommended.