Investors have different objectives, risk tolerances and time horizons, so there is no single portfolio that fits everyone at every stage of life. That reality is fine. With more than 4,300 exchange-traded funds (ETFs) available on Canadian and U.S. exchanges, do-it-yourself investors have ample choices to assemble portfolios that match their personal goals.
This article outlines five investor profiles and suggests the kinds of ETFs that might suit each one’s needs.
Young, first-time investor
New investors often face a tension between two sensible but competing ideas. On the one hand, younger investors typically have more time to recover from market downturns and can afford to take greater risk. For that reason, it is common advice that people in their 20s may allocate 80% to 100% of their portfolio to equities.
On the other hand, many first-time investors haven’t yet lived through the emotional impact of significant market declines. An all-equity portfolio is more volatile than one that includes a meaningful portion of fixed income, such as bonds or guaranteed investment certificates (GICs). It’s easy to say you can tolerate a 20% drawdown on a questionnaire; actually watching your balance fall can feel very different.
Young people also frequently juggle short-term financial goals—buying a car, saving for a trip, funding renovations or building a down payment—that are best funded with low-risk vehicles like high-interest savings accounts or GICs. Money that will be needed within one to three years shouldn’t typically be placed in riskier equity ETFs.
For most beginners, the priority should be gaining experience and maintaining discipline when markets correct. A balanced approach between conservative and aggressive strategies is an 80/20 growth allocation—roughly 80% equities and 20% fixed income. Thanks to asset-allocation ETFs that rebalance automatically, a globally diversified 80/20 portfolio can now be achieved with a single fund, simplifying execution for first-time investors.
Experienced, conservative investor
Experience in the market doesn’t necessarily imply a preference for high equity exposure. Conservative, seasoned investors often emphasize capital preservation and income, holding larger amounts of cash and fixed income instruments such as government and corporate bonds, plus dividend-paying blue-chip stocks. That mix tends to be less volatile than a pure equity portfolio.
Conservative investors understand how different assets behave: bonds often hold up better when stocks fall, providing an opportunity to rebalance—selling bonds and buying equities at lower prices. A practical portfolio for this type of investor might include a Canadian dividend ETF, an aggregate bond ETF and a global equity ETF. Some conservative investors split their fixed income further into short-term bond ETFs, corporate bond ETFs or even high-interest savings ETFs, depending on their income needs and risk tolerance.
Experienced, more aggressive investor
Investors who prioritize growth over income may prefer an all-equity approach. A 100% equity portfolio can be implemented via a single, globally diversified asset-allocation ETF or by combining separate ETFs focused on Canadian, U.S., international and emerging-market stocks.
More advanced investors may apply factor-based strategies, tilting toward characteristics such as size (small-cap versus large-cap) or value (lower-priced stocks versus high-priced growth names). ETFs that emphasize these factors can capture potential sources of additional return, though they come with different risk and return profiles than broad-market funds.
Experienced, balanced investor
The classic balanced portfolio—roughly 60% stocks and 40% bonds—remains a sensible approach for many investors seeking moderate growth with some downside protection. DIY ETF investors can build this allocation using a mix of Canadian, U.S., international and emerging-market equity ETFs alongside an aggregate bond ETF.
Alternatively, investors who prefer simplicity can choose an all-in-one asset-allocation ETF structured around a 60/40 split. These single-fund solutions mimic traditional balanced mutual funds but typically charge much lower management fees, providing an easy, cost-efficient option for achieving a diversified, balanced allocation.
Investor approaching retirement or retired
While many investors do well by choosing an asset mix they’re comfortable with and contributing regularly over the long term, people nearing retirement should reassess their mix and strategy as their priorities shift.
Retired investors often prioritize income, which leads them to consider yield-focused products. Covered call ETFs, dividend-focused ETFs and a range of fixed income alternatives—such as municipal, short-term and corporate bond ETFs—are commonly used to generate predictable cash flow.
Anyone approaching or in retirement should also plan their withdrawal approach. Some retirees aim to live off portfolio income alone; this strategy favors dividend or monthly-income ETFs and bond-focused holdings. Others adopt a total-return strategy, supplementing income with systematic sales of holdings. For these investors, a well-chosen asset-allocation ETF that matches their risk tolerance may be appropriate.
It’s worth noting that broad market index ETFs include many non-dividend-paying stocks, so their yield is often around the low single digits rather than the 4% to 5% some retirees seek. Aligning portfolio composition with retirement income needs is therefore essential.
ETFs available to Canadians
The ETF market continues to expand, offering products to meet a wide range of investor needs. Younger investors may be comfortable experimenting with more concentrated or thematic ETFs that can offer higher upside (and higher risk). Retired investors commonly seek yield-focused strategies to support spending without eroding capital. Investors in the middle generally aim to balance return potential with an acceptable level of risk.
Consider which of these ETF investor profiles most closely matches your goals, time horizon and temperament before choosing funds or constructing a portfolio.
Opening an account
MoneySense ranked National Bank Direct Brokerage as the best online broker for ETF investing in 2021 and 2022. If you plan to open an account, some brokerages run promotions that reduce trading costs and offer mobile apps to manage investments, create watchlists and execute trades. Compare platforms, fees and tools to find the one that best supports your investing strategy.
Read more about ETFs:
- How to choose ETFs for your investing portfolio
- How to evaluate ETFs using financial reports
- What experienced investors look for in an ETF prospectus
- How to start investing with ETFs in your 20s
- Switching from mutual funds to ETFs
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