Building an easy set and forget investment portfolio

Recently a reader emailed me and asked a very interesting question. This particular reader was in his/her early 20’s and wanted to build an easy “set and forget” investment portfolio for the next 25 years. In other words, this reader would like to put the portfolio on autopilot as much as possible.

The reader planned to invest around $5,000 annually and since the working salary would increase, the annual contribution amount would increase as well.

This was a very intriguing question for me. How would you build an easy “set and forget” all equity investment portfolio if you are in your 20s or 30s and had a long investment timeline of probably over half a century ahead of you?

Here are a few options on how I’d build this “set and forget” all-equity investment portfolio.

Option 1 – via an all-in-one ETF

Over the last couple of years, I’ve come to really like the all-in-one ETFs from the likes of Vanguard, iShares, BMO, and Horizons, due to their simplicity. However, all of these all-in-ones, the GRO’s, BAL’s, CNS’s all invest a certain percentage in bonds.

If someone is in their 20s or 30s, I personally would not invest in bonds at all. Instead, I’d invest 100% in equities and try to capture the average historical long-term return of 10%.

So if I want to keep it super simple, I’d invest in one of the all equity ETFs. XEQT and VEQT are both great all-equity ETFs to invest in. If I had to pick one, I’d pick XEQT, simply because of its higher exposure to the US. And since there are significantly more well-known international companies based in the US than in Canada, buying an index ETF that has higher exposure to the US market makes a lot of sense.

Since many discount brokers like Wealthsimple and Questrade offer free trade or free ETF trading, the reader could buy XEQT regularly and take advantage of dollar cost averaging without having to worry about any trading commissions.  

Assuming an initial investment of $5,000 and a yearly contribution of $5,000, at 0.20% MER and an average investment return of 10%, after 25 years the reader would end up with a little over $528,000. That’s pretty awesome considering the reader would have only invested $125,000 in total. 

Yup, the power of compound interest is pretty powerful. 

Option 2 – Building via ETFs

XEQT is a very simple way to invest for the next 25 years, but what if you are not comfortable with XEQT’s exposure to the Canadian market? After all, in 2021 Canada only made up about 1.39% of the global GDP, so having around 25% exposure to the Canadian market for XEQT may be considered too high for some investors. 

So with option 2 of the “set and forget” investment portfolio, I’d propose using two ETFs:

• 90% XAW 
• 10% VCN

By investing in XAW, you can immediately gain international exposure. At an MER of 0.22%, it is one of the cheapest ex-Canada international ETFs available to Canadians. Best of all, it’s traded in CAD so you don’t have to worry about currency conversation while having exposure to the global market. 

Similarly, VCN, Vanguard Canada All Cap Index ETF, has a very low MER of 0.05% while holding 185 different Canadian stocks. Although VCN is heavy in the financial and energy sectors, it does provide good exposure to other sectors like materials, industrials, telecom, and utilities. More importantly, VCN provides more exposure to medium and small cap stocks compared to its counterpart VCE, Vanguard Canada Index ETF.

With this option, the reader would split the annual contribution 90-10 between XAW and VCN but would need to re-balance the investment portfolio whenever they’re adding new cash. This is slightly a bit more work than simply buying XEQT but it should provide better overall geographical diversification.

Some readers might suggest adding other ETFs like HDIV, VDY, VOO, or even some sectorized ETFs. I’d caution readers from doing that. I think holding too many ETFs in a “set and forget” investment portfolio will only cause headaches. 

Remember, there are benefits in simplicity. 

Option 3 – all hail Buffett

Warren Buffett is one of the most successful investors in history and his company, Berkshire Hathaway, a multinational conglomerate holding company, has provided 20% average annual returns since 1976. In case you’re curious, the 20% return is almost double that of the S&P 500 during this time period.

At the time of writing, Berkshire Hathaway’s five largest positions are Apple, Bank of America, American Express, Chevron, and Coca-Cola. All of them are considered wide-moat companies and all pay dividends. 

In case you’re wondering, you can see this visualization of how Berkshire Hathaway’s holdings have changed from 1994 to 2022:

If you want to hold an individual stock that provides diversification across different asset classes, I believe Berkshire Hathaway is an excellent stock to do that. Since Berkshire Hathaway is traded on the New York Stock Exchange (NYSE), exchanging between CAD and USD would require a bit of work, so I wouldn’t call the investment portfolio set and forget it.

Fortunately, there’s a simpler way to solve the currency exchange issue – Canadian Depositary Receipts (CDRs).

Thanks to CDRs, you can easily buy BRK on the NEO Exchange without having to worry about currency exchange at all.

Now, since both Warren Buffett and Charlie Munger are in their late 90s, they will not be with us for much longer. Some investors may worry that Berkshire Hathaway won’t do as well under different management. 

I don’t think you need to worry about this at all. Charlie Munger revealed in Berkshire’s 2021 annual meeting that Greg Abel is next in line to look after the billion-dollar company. Abel, a Canadian, is currently the chairman and CEO of Berkshire Hathaway Energy and has been with the company for decades. 

It is well known that Buffett had a long-standing bias against technology investments, which he felt had no margin of safety. Looking at some of Berkshire’s recent high tech holdings, like Apple, Amazon, BDY, HP, and Snowflake, I’m guessing a lot of these purchases were somehow orchestrated by Abel. 

In other words, I strongly believe Berkshire Hathaway will continue to execute and make billions for many years to come and I would not hesitate to hold BRK CRD for the next 25 years or more. 

Option 4 – via individual dividend stocks 

Well, you probably saw this option coming didn’t you? The last option and probably my preferred option is to build a “set and forget”  investment portfolio based on 10 individual stocks. 

Why 10? Because I think that’s a very manageable number and any new contributions are easily divisible by 10. 

Here are the ten stocks I’d pick and my reasons:

• Royal Bank –  one of the biggest banks in North America and the largest here in Canada. Have been paying dividends since the late 1800s. 

• Canadian National Railway – businesses in North America will continue to rely on the railway for transportation. Not to mention the very wide moat. 

• Fortis – can’t go wrong with an over 45 years of dividend increase streak.

• Telus – The only pure telecommunication company in Canada with a solid dividend history. 

• Enbridge – despite slowly shifting toward renewable energy, North Americans will continue to rely on oil and natural gas for years to come. Enbridge also has been investing in renewable energy in recent years.

• Costco – Ever been to a Costco warehouse that’s not full of people? I don’t think so. 

• Waste Management – humans will continue to make garbage every day. Waste Management is in the business to get rid of the garbage and it makes money from this dirty business. 

• Apple – the most recognizable brand in the world. Made billions with an accessory (AirPod). Very strong product ecosystem. Apple has continued to evolve as a company.

• Procter & Gamble – multinational consumer goods corporation with a wide range of products. 

• Johnson & Johnson – a well established healthcare brand with over 60 years of dividend hike streak.

To get started, I’d suggest the reader divide the initial $5,000 equally and invest $500 CAD equivalent in each stock (convert CAD to USD for the US stocks). 

Ideally, the reader should aim for equal weight distribution for these ten stocks in CAD. Therefore, for the yearly contribution, the reader may need to invest a different amount of money in each stock. Technically it’s a little bit more work but you can easily figure out how many shares to buy using a spreadsheet. 

I think having five Canadian stocks and five US stocks will provide geographical diversification, especially considering the likes of Costco, Apple, Procter & Gamble, Johnson & Johnson, and Royal Bank all have exposures outside of North America. 

In addition, I picked ten stocks in different sectors to allow for sector diversification as well. I would be very comfortable in holding all ten of these stocks for 25 years or more. 

You may consider swapping out Waste Management for either Microsoft or Berkshire Hathaway. I picked Waste Management due to the easy to understand business model but I don’t think you can go wrong with any of these three companies.

Some Canadians may prefer BCE over Telus. Since BCE is also in the media business and that’s a VERY hard business to be in (have to create content all the time), I personally prefer Telus over BCE between the two.

Summary – Building an easy set and forget investment portfolio

Above are four options I’d consider for building an easy “set and forget” all equity investment portfolio for someone in their 20s or 30s. As the reader gets older, he/she may want to consider owning bonds and other non-equity assets like GICs to reduce their exposure to the stock market. For that, they may want to consider the retirement landscape in Canada and adjust their portfolio accordingly. 

Personally, I’d be happy to go with any of these four options. There are pros and cons for each option so whichever option the reader goes with will entirely depend on his/her preference.

The key here, I believe, is keeping the set and forget investment portfolio as simple as possible to avoid the desire and need to tweak and tinker with it every year. Enrolling in DRIP to reinvest dividends or distributions when eligible is also a great idea. 

Dear readers, what do you think about my “set and forget” all-equity investment portfolio? Which option would you go with?

Disclaimer: This post is not advice. Think of it as ideas for consideration. Please consider investment risks, tax implications, withholding tax implications, currency risk and currency conversion charges involved before you make a buying or selling decision.