Which ETF should a Millennial Couch Potatoes invest in?

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a. Conventional investment wisdom says young people can afford to be aggressive, especially if they can wait to have a defined pension plan in retirement. I’ve heard from many investors in their 20s and 30s who, like you, are considering an all-equity portfolio, and it’s not surprising. Stocks have significantly higher expected returns than bonds, so if you have a long time horizon, why not strive for maximum growth?

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The problem is that what makes sense on a spreadsheet doesn’t always make sense in real life. While long-term stock investments have been mostly rewarding, short-term ones are often belly-wrenching. We have seen this in 2022. Market volatility will often shrink your portfolio by 20% in a few months — this is called a bear market — and you should probably expect to cut an all-stock portfolio in half over the course of its lifetime. At least even once. Only the most disciplined investors can tolerate such losses without the temptation to sell their shares, which is a surefire way to break a long-term plan.

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A long-term bear market is painful but even more difficult than a short-term recession. The great financial crisis of 2008–09 was devastating, but it lasted only six months and the recovery was remarkably rapid. Compare this to the time since the dot-com bust at the turn of the millennium. A portfolio consisting of equal parts Canadian, US and international stocks saw negative returns for three consecutive calendar years. It was a long, excruciating ride, and many investors jumped ship well before things changed in 2003.

See: Portfolio Maker Lesson 1

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Jonathan, you’re 30 and you weren’t investing when the dot-com bubble burst, so you won’t have any direct experience with losses of this magnitude. Since 2009, investors have enjoyed one of the best periods ever for the stock markets: double-digit returns and remarkably low volatility, at least until recently. Even the losses of the initial pandemic were short-lived, with a quick turnaround that lasted until 2022. As a result, many young investors have reduced their risk tolerance.

Sure, on an intellectual level, they can understand that an all-stock portfolio will likely have multiple haircuts, but if they haven’t really experienced it, it doesn’t make sense. First published in 1940 in his immortal book, Where Are the Customer’s Yachts? In 2012, Wall Street trader Fred Schweed put it this way: “There are some things that cannot be adequately explained by words or pictures to a virgin. Nor any detail I can offer here can even approximate what it’s like to lose a real chunk of the money you had. ,

It’s also important to remember that at age 30 you cannot assume that you will enjoy a comfortable defined benefit pension in retirement. A lot can happen between now and then, including many job changes. The situation may be different for public servants who already have 20 or more years of service and a pension that is essentially guaranteed.

If I still haven’t convinced you, Jonathan, the good news is that building a global stock portfolio is easier and cheaper than ever. The Vanguard All-Equity ETF Portfolio (VEQT) allows you to achieve this with one fund. This ETF is approximately 40% US equities, 30% Canadian equities and 30% international equities, covering both developed and emerging markets. It holds approximately 14,000 stocks from around the world, and is automatically rebalanced so it requires virtually no maintenance—all for an annual management expense ratio (MER) fee of just 0.24%.

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