One of the ways that you are likely to lose out in terms of real returns is through fees. When you pay high fees, you end up seeing lower returns. These lower returns are then compounded by the fact that the money you pay in fees not only directly reduces what you receive, but over time that money that could have been invested instead isn't earning compound interest.
While you can't completely eliminate fees, it is possible for you to reduce what you pay. One way to do this is through funds that come with low expense ratios. You can also look for brokers with lower fees, and that offer commission-free options. One such broker is TD Canada Trust.
Using TD e-Series Funds to Invest
TD e-Series Funds may be the simplest way for someone to invest in a diversified portfolio with low Management Expense Ratios (MERs). Not only that, but these funds come with no additional setup fees, or even with commissions. You can reduce what you are paying in fees, and see a better real return over time.
Using funds is also a great way to gain instant diversity in your portfolio. Worrying about whether or not you are picking the right stock can be stressful, and market volatility can make it even more stressful over time. Funds, especially those tied to an index, can help you have peace of mind knowing that you are linked to the overall performance of that index. Over time, you are likely to build wealth. You don't have to worry as much about day to day market volatility.
If you are looking to build a diverse portfolio that will build wealth for the future, you can do it entirely with TD e-Series funds. Below are the four funds that you can use to build a rather complete portfolio and would work well for regular contributions into an RRSP, RESP or TFSA.
TD Canadian Bond Index tracks the performance of the DEX Universe Bond Index. The Universe Index is comprised of Canadian investment-grade bonds which mature in more than one year. It has a MER of 0.50%.
TD Canadian Index tracks the performance of the S&P/TSX Composite Total Return Index. The S&P/TSX Composite Index is comprised of Canadian issuers traded on the Toronto Stock Exchange. It has a MER of 0.33%.
TD U.S. Index tracks the performance of The Standard & Poor’s 500 Total Return Index. The S&P 500 Index is comprised of 500 widely-held U.S. issuers. It has a MER of 0.35%.
TD International Index tracks the Morgan Stanley Capital International Europe, Australasia and Far East Index. The MSCI EAFE Index is a broadly diversified index consisting of equity securities of companies domiciled in developed markets outside the U.S. and Canada. It has a MER of 0.51%.
As you can see, you get wide diversity with this portfolio setup, including exposure to international markets, as well as the safety of bonds.
Not only do these four funds invest you in the entire index, their MERs are about 2% lower than the average mutual fund. This 2% advantage can go along way when investing over a long term, especially when you consider the compounding savings as well as the direct savings.
Another article I wrote details some of the advantages that the TD e-Series Funds have over other mutual funds and shows you how to open a TD e-Series account.
How To Setup and Rebalance TD e-Series Funds
One of the ways that you can create a simple, yet effective, investment portfolio is by investing in TD e-Series Funds. There is a bit of effort you need to put in to invest in TD e-Series Funds, but it is worth it.
Setup Your Investment Portfolio Using TD e-Series Funds
First of all, you need to apply using the form available on the TD Canada Trust website. The account application is pretty straightforward. You’ll need to provide information like your name, SIN, date of birth, and banking information.
The next couple pages are the Wealth Allocation Model and the Investor Profile. Fill out the Wealth Allocation Model to provide your Total Point Score. This score will show you which asset mix is most likely right for you. TD will review this information and help you identify the asset allocation to match your score.
If you are aware of this process, it's possible for you to adjust your score so that you can get the asset allocation that you feel is most likely to work for you. It requires a little thought and planning to adequately personalize your portfolio, but it's worth the effort, to create the easy-to-manage portfolio you want.
The Portfolio Worksheet is where you enter the exact asset mix you want and the amount you are investing, both as a lump sum and pre-authorized purchase plan. To keep it really simple, many investors with a long enough investment time frame might benefit from a equal split into:
- Fixed Income 25% – TD Canadian Bond Index
- Canadian Equity 25% – TD Canadian Index
- U.S. Equity 25% – TD U.S. Index
- International Equity 25% – TD International Index
Once you have that all set up, you need to sign a simple Understanding & Consent form. In the Transaction Form you have to re-enter the information from the Portfolio Worksheet. These two asset mixes do need to match for you to complete your setup.
Once you finish, you need to mail it in to TD e-Series Funds Administration. The full address is on the first page of the pdf. Once everything is setup, TD will mail you your login information.
Rebalance Your Investment Portfolio
Even when you're on an investment plan, your portfolio can begin to drift. Due to the way that funds are operated, and to market conditions, you might end up with more shares of one fund than another. This can bring your portfolio out of balance, and result in sub-par performance.
In order to get back on track, once a year you should rebalance your portfolio back to your original asset mix. Look at your portfolio, and determine your next course of action. If you have a certain amount of new money available to invest, put it into the under performing funds to bring them back up to 25% of your allocation. If you do not have enough new money to re-balance, you can sell some shares of the better performing funds and then put the proceeds into the others. Rebalancing this way forces you to buy low and sell high, which is the preferred strategy when you invest.
Portfolio Rebalance Calculator
It's also a good idea to rebalance as your goals and investing needs change. Eventually, you might want to rebalance so that you have a greater allocation of fixed-income assets. Create a reasonable investment plan that you can follow. Even with a simple portfolio composed of TD e-Series funds, it's possible to change things up as you age and as you reach specific milestones. Just make sure that you rebalance according to a well-thought-out plan.
These steps will provide a diversified portfolio, investing in the entire index that the funds track. You can rebalance the portfolio yourself, avoid undue risk and stress, and you will pay a low Management Expense Ratio (MER) of less than 0.5%.