I just opened a brokerage account and am looking to change my high-fee portfolio to a low-fee one. I have about $170,000 and my initial thought was to use the Couch Potato method: 40% bonds, 25% Canadian equity, 20% U.S. equity and 15% international equity. That said, I’m hesitant to invest in the U.S. and international markets and I think I’d actually be more comfortable with a mostly Canadian portfolio. To that end I’m considering a portfolio that consists of 40% in a bond index fund, 40% in a low-fee Canadian equity mutual fund and 20% in a REIT mutual fund. This would reduce my average MER from 2.25 to 1.15%, keep it simple and almost completely Canadian and still have an opportunity for growth. Should my portfolio be this simple and this Canadian?
The other issue is the approximately $5,000 in deferred sales charges (DSCs) that I would have to pay, when I switch over from my high-fee mutual funds. The savings I expect from my low-fee portfolio should cover the DSC loss in about 2.5 years. Is this a wise decision or should I make gradual changes to avoid the fees?
I love Canada. As a university student I lead tours to the Western Arctic, all the way up to Tuktoyaktuk. I've kayaked near Tofino, hiked Larch Valley above Lake Louise, lived with a family in Jonquiere, QC and witnessed the power of the tides in Bay of Fundy. East to West, North to South, Canada is one amazing place.
But it isn't the only place. And it isn't the only place to invest either.
Caution on a Canada-only strategy
Canada is a big country, but a tiny market. It represents only about 5% of global assets, so when you focus your portfolio exclusively on Canada you are making a very big bet. Given this country's focus on commodities you are betting that that sector will outperform others over the long haul. That might happen. But it might not. I would argue that a more diversified strategy serves you better over time.
The Canadian stock market has been a standout over the last 10 years, up almost 90%. But who knows if that strength will continue. It certainly hasn't in 2012. Canada has underperformed many of its global competitors so far this year. For example, the ETF that mirrors the TSX (XIU) is up just 3%. The S&P 500 EFT (XSP) is up 13% year-to-date while the MSCI EAFE ETF (XIN) is up 11% over that same period.
I'm not sure what your discomfort is with the international markets, but I am a big believer in diversifying your investments to minimize risk. So no, I wouldn't say your portfolio should be 100% Canadian.
"Lower fee" versus low fee
You are choosing to use a brokerage account to manage your money and you highlighted the Couch Potato Portfolio as an option. The fees on that approach will be under 0.5% using exchange-traded funds. This compares to the 1.15% in fees on the mutual funds you have selected. That is certainly a "lower fee" than what you are currently paying at 2.25%, but it isn't a "low fee" when compared to exchange traded funds. On a $170,000 portfolio the difference in fees will amount to about $1,000 per year, and that will climb as your portfolio grows.
You'll need to decide if the possibility of outperformance versus the benchmark index is better than the guarantee of cost savings. It is a very tough call, and I see you going either way.
Rip off the DSC band-aid
Your final question is on deferred sales charges and whether you should take the hit and get out all at once or do it gradually. The math you've done shows that fast version will payout in just 2.5 years, if performance is the same. That makes a strong case. Also by ripping the band-aid off quickly and making the move now means you'll be able to make a clean break, and the emotional benefit of that is worth a lot.