The purpose of having a balanced index portfolio is to increase exposure to various markets and investment types. A common strategy for North American investors is to include the following four index types:
- Canadian Stock Index
- U.S. Stock Index
- International Stock Index
- Bond Index
For the U.S. stock index, you can either choose an S&P 500 index or a Nasdaq Index. I tend to prefer an S&P 500 index as it consists of more companies. For example, the e-series Nasdaq index actually consists of 110 investments, while the S&P 500 index consists of 504 investments. Regarding the bond index, you should obtain one that is in your local currency. The reason for this is that currency fluctuations can often be greater than bond returns. Since you are looking to get bond exposure, not currency exposure, sticking to a bond index in your local currency is most logical. An international stock index will typically consist of the some of largest international markets combined as one unit. If, for example, you only wanted to invest in European stocks, you could purchase an all-European stock index instead.
Great, so now we have an idea of what to buy, but how much to buy of each? There are four general strategies you can follow as a balanced index investor:
Strategy 1: bond allocation = age
(example for a 22-year-old investor)
Bond Index (22%)
Canadian Stock Index (26%)
U.S. Stock Index (26%)
International Stock Index (26%)
One effective and common solution is to set your bond percentage allocation as your age and to then split the remaining allocation across all stock indexes. As in the example above, a 22-year-old investor would place 22% in a bond index and split the remaining 78% across the three stock indexes. One advantage of having this strategy is that your bond allocation naturally increases over time. Meaning you are gradually decreasing risk exposure with age while having substantial stock exposure at a younger age, giving you a chance at greater returns.
Strategy 2: even distribution across all indexes
Bond Index (25%)
Canadian Stock Index (25%)
U.S. Stock Index (25%)
International Stock Index (25%)
This option is great for simplicity and offers strong stock exposure, but you are not reducing risk over time.
Strategy 3: bond index heavy
Bond Index (70%)
Canadian Stock Index (10%)
U.S. Stock Index (10%)
International Stock Index (10%)
An option for a low-risk portfolio still with some stock exposure. This option will be the least volatile, but will generally have the lowest average expected long-term return.
Strategy 4: stock index heavy
Bond Index (10%)
Canadian Stock Index (30%)
U.S. Stock Index (30%)
International Stock Index (30%)
An option for a higher-risk portfolio still with some bond exposure. This option will be the most volatile, but will generally have the highest average expected long-term return.
These are only some general models you can follow. You can select indexes and set percentage allocations are you see fit for your own situation. Keep in mind that greater stock exposure tends to represent greater risk but greater potential rewards.
Steps Overview:
Step 1: decide which types of index funds you want to invest in. I recommend choosing between 3-5 indexes, including a bond index in your local currency.
Step 2: decide which portfolio model strategy you want to follow. If you are unsure, I would recommend going with the first option (bond allocation=age).
Step 3: if you already have an investment account, you can now place orders! Continue to rebalance to your original allocations through contributions (at least once a year).
If you have any questions about portfolio models, comment below!
Here are some of our other articles on similar topics:
Best Index Funds and ETFs (Canada)
The Case For and Against Rebalancing Your Index Portfolio
Adjusting Your Index Portfolio During Market Downswings
-Yinvestors.
For the U.S. stock index, you can either choose an S&P 500 index or a Nasdaq Index. I tend to prefer an S&P 500 index as it consists of more companies. For example, the e-series Nasdaq index actually consists of 110 investments, while the S&P 500 index consists of 504 investments. Regarding the bond index, you should obtain one that is in your local currency. The reason for this is that currency fluctuations can often be greater than bond returns. Since you are looking to get bond exposure, not currency exposure, sticking to a bond index in your local currency is most logical. An international stock index will typically consist of the some of largest international markets combined as one unit. If, for example, you only wanted to invest in European stocks, you could purchase an all-European stock index instead.
Great, so now we have an idea of what to buy, but how much to buy of each? There are four general strategies you can follow as a balanced index investor:
Strategy 1: bond allocation = age
(example for a 22-year-old investor)
Bond Index (22%)
Canadian Stock Index (26%)
U.S. Stock Index (26%)
International Stock Index (26%)
One effective and common solution is to set your bond percentage allocation as your age and to then split the remaining allocation across all stock indexes. As in the example above, a 22-year-old investor would place 22% in a bond index and split the remaining 78% across the three stock indexes. One advantage of having this strategy is that your bond allocation naturally increases over time. Meaning you are gradually decreasing risk exposure with age while having substantial stock exposure at a younger age, giving you a chance at greater returns.
Strategy 2: even distribution across all indexes
Bond Index (25%)
Canadian Stock Index (25%)
U.S. Stock Index (25%)
International Stock Index (25%)
This option is great for simplicity and offers strong stock exposure, but you are not reducing risk over time.
Strategy 3: bond index heavy
Bond Index (70%)
Canadian Stock Index (10%)
U.S. Stock Index (10%)
International Stock Index (10%)
An option for a low-risk portfolio still with some stock exposure. This option will be the least volatile, but will generally have the lowest average expected long-term return.
Strategy 4: stock index heavy
Bond Index (10%)
Canadian Stock Index (30%)
U.S. Stock Index (30%)
International Stock Index (30%)
An option for a higher-risk portfolio still with some bond exposure. This option will be the most volatile, but will generally have the highest average expected long-term return.
Pie Chart Overview of the Four Index Portfolio Models
Steps Overview:
Step 1: decide which types of index funds you want to invest in. I recommend choosing between 3-5 indexes, including a bond index in your local currency.
Step 2: decide which portfolio model strategy you want to follow. If you are unsure, I would recommend going with the first option (bond allocation=age).
Step 3: if you already have an investment account, you can now place orders! Continue to rebalance to your original allocations through contributions (at least once a year).
If you have any questions about portfolio models, comment below!
Here are some of our other articles on similar topics:
Best Index Funds and ETFs (Canada)
The Case For and Against Rebalancing Your Index Portfolio
Adjusting Your Index Portfolio During Market Downswings
-Yinvestors.
keywords: index portfolio models, index investing, e-series, bond index, stock index, how to balance my index portfolio, S&P 500 index, index funds.
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