Weekend Reading – How many ETFs are enough?
Hey There!
Welcome to some new Weekend Reading wondering: how many ETFs are enough?
Before that take, some recent reads on my site…
Here is a lively discussion about bonds: do you need any bonds in retirement?
And…thanks to so many readers who felt passionate enough to share their own debt-free story in this post too:
Weekend Reading – How many ETFs are enough?
I have my own answer below (including a financial forecast I didn’t know I had until I re-read my post from 2012 (!)) but of course this answer can be none, one or many – and it can depend on the assets you hold, how you wish to manage those accounts, and in what order those accounts could be tapped in semi-retirement or retirement.
Read on!
First, what is diworsification?
It’s the evil cousin to diversification in your portfolio.
Diworsification is the term that was popularized by Peter Lynch in his book One Up On Wall Street – when he discussed that some companies tend to expand into areas widely different than their core business. Over the years this diworsification term has been leveraged to describe some investors who believe they are diversifying their assets but may be doing more harm than good in the process. This term has also been used in context of holding a concentrated basket of stocks (say 10 or 15; including younger companies and start-ups) and believing this is a better approach to returns beyond owning hundreds if not thousands of stocks from various sectors and countries (i.e., indexing that you can read more about on my site here). This is because with just a handful of stocks, there is a higher chance of very poor, possible investment outcomes including when we are talking any early-stage companies that could go under.
Regardless of the context associated with diworsification, you can probably appreciate that most investment choices should try to achieve the following:
a good risk/reward trade-off such that any DIY investor aligns their investment choices with their financial goals. So, make plans before products is my motto.
This means depending upon your goals your financial decisions could be vastly different than your neighbour, your friend, your co-worker, your immediate family member and the list goes on…
Diversifcation can protect wealth but concentration builds wealth
In a previous Weekend Reading edition, I wondered if diversification really matters at all given the most successful investor of our modern times does not practice this – even though he preaches it.
Warren Buffett, despite what he preaches, does his own thing and does not practice diversification whatsoever. Here is a look at Warren Buffett’s portfolio today. You can always track it yourself in an updated link here.
Do you see diversification in practice with >60% of his assets, billions of assets, in just four (4) stocks?
Yet he mentions:
“By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” – Source: Berkshire Hathaway shareholder letter 1993.
And…
“In my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there’s more money in it for them if they do.” – Source: Berkshire Hathaway Annual Shareholder Meeting 2020, courtesy of CNBC.
Hummm.
Since I’m not Warren Buffett, I believe there are four key reasons to consider diversifying your portfolio:
- Not all types of investments perform well at the same time.
- Different types of investments can be affected differently by factors such as interest rates, exchange rates and inflation rates.
- Diversification can help you build a portfolio whose risk is smaller than the combined risks of the individual securities.
- If your portfolio is not diversified, you could be taking on unnecessarily risk. To compound that, you may or may not be compensated with returns for accepted this unnecessary risk.
For each individual investment we make there is a number on the roulette wheel. We can bet on the same number all night and that number might not come up. In this case, the investor is banking on low probability but higher payout if/when their number comes up.
Instead of betting on a number, one or more stocks, you could consider owning the entire casino by focusing on all of the possible outcomes/companies available to you. Some stocks will be stars. Some stocks will be absolute dogs. Yet, via equity indexing, you own them all.
Through diversification, while an investor may lose out on the chance to win big, said investor may also avoid having invested solely in an asset that could make them poor. Diversification in a word narrows the range of possible outcomes.
Well over a decade ago, I wrote about how many stocks are enough. Very interesting to look back at what I wrote:
“Over time, while at the time of this post I own almost 40 individual stocks from Canada and the U.S., I’d like to get that number down to about 20-30 at most and then index invest the rest. It will likely juice my returns and simplify my portfolio at the same time.” – My Own Advisor
Well, funny enough, after 10+ years of investing I’ve moved in that direction. At the time of this post:
- I’m down to less than 30 individual stocks from Canada and the U.S. now.
- I’ve owned low-cost XAW ETF since 2016 for lazy ex-Canada returns.
- I continue to own QQQ ETF in my registered accounts since 2018 for a small tech-kicker, for now.
- I’ve held HGRO/HEQT ETF in my LIRA specifically since 2020 for global low-cost growth.
So, how many ETFs are enough?
Back to the question for this post…if we go back to my thesis that equity investing involves risk management, such that we should make our financial choices so they are aligned with our financial goals then you can likely accomplish this with just a few equity ETFs in your portfolio.
I have three (3) main equity ETFs for different reasons in different accounts and even then, I should likely simplify more:
- My LIRA will be turned to a LIF in the coming years, I will sell ETF units over time.
- My RRSP will become a RRIF, eventually, I will sell ETF units over decades, and after #1 and #2 happen,
- My TFSA will be tapped, potentially decades from now, therefore I might as well let XAW grow along with a few Canadian stocks I own there (i.e., Canadian banks and some Canadian utility companies for bond-proxies)…
Instead of making some strategic choices like purchasing QQQ that I own, you might go even further to put just one (1) all-in-one asset allocation ETF across all your investing accounts for simplicity.
That can work very well for you!!
For many investors, just one all-in-one fund across all your investing accounts could be enough and you could fire your money manager or advisor in the investing process.
In general, my answer is no more than 4-5 well-picked, well thought-out ETFs are likely more than enough for both diversification benefits and/or retirement income needs for life.
Always remember with investing and the need for diversification:
“…all too often…the same things that maximize your chances of getting rich also maximize your chances of getting poor.” – Financial historian, celebrated author and neurologist William Bernstein.
How many stocks do you own in your portfolio? How many ETFs do you own and why?
Weekend Reading – Beyond How many ETFs are enough?
Some inspiration for this post came from Morningstar.ca that listed some of the Best Canadian Stock ETFs to own. A very strong list and very much aligned with mine maintained for a few years on this page:
I also like the fact they included low-cost XIU for the Canadian market. As established readers will know, one of my favourites for some income, growth and tax efficiency too. If you don’t want to pursue some Canadian individual stock selection like I do then XIU is an amazing fund for the win.
My friend Dividend Growth Investor shared the updated list of U.S. dividend aristocrats for 2025 – to help you with your individual stock selection.
Fan of this site and investor advocate Ken Kivenko shared with me: mutual funds and ETFs experienced a record for annual growth in assets, in 2024. Some very big investing numbers here…
Author Jessica Moorhouse sent me her book to review: Everything But Money. I’m reading it now. 🙂 I look forward to sharing my interview with Jessica and offering you a chance to win a copy of her book via my site in the coming weeks. If you want to learn more about her book, before my Q&A chat and book giveaway, you can read more here:
Everything But Money excerpt: How much money do you need to not be stressed out?
Have a great weekend, be well, be safe!
Mark
I would be interested in hearing more about total return over a long time period. It’s all well and good to diversify, but that gives you averages of the total market. Meaning ALL your holdings total Average return, say over 20 years. With the right investments obviously you will do very well. But how have you done in real life, anyone? We are all equities and concentrating on dividends (2 Non-Dividend). Our 20 year average annual return is 12.27%. I think the BTSX has done better, and that’s all dividend stocks and not very diversified.
Thanks, Div.
BTSX stocks have done well, for sure, but in terms of following that BTSX process (selling some stocks every year/rebalance the 10-stock portfolio) I don’t know of anyone that follows this approach to the letter.
I know of some DIY investors that enjoy their truly low-cost ETF approach – one fund, or even a few ETFs and that’s all they own now. But that approach is not for me. I much prefer my hybrid investing approach with a bias to dividend stocks in Canada and then low-cost investing beyond Canada – although I still own just a few U.S. stocks for now.
That 20-year return is amazing. 🙂
Mark
Hi Mark,
What are your thoughts on transitioning one’s portfolios to holding low volatility etfs as the “core” holdings? My wife and I currently have ZLB and ZLU, among other holdings comprising of individual stocks and etfs. And we have been adding and plans to continue add to the two holdings. Incidentally, the link to Morningstar that you included in the post has XMV as one of the “Best Canadian Stock ETFs, so this may be another option for us. I suspect, however, there may be some overlapping holdings between ZLB and XMV?
As I have one too many FOMO stocks (the usual suspects), I’m making deliberate effort to embrace JOMO by transitioning to etfs in general and low volatility etfs in particular. And hope that this “win by not losing” approach to investing will pay off.
Enjoy reading your posts, Mark. Great content and always timely.
Thanks, Andrew.
Yes, XMV is a good fund to consider as is ZLB. I like both. My preferred fav. fund for Canada remains XIU which is market-cap weighted fund.
Yes, XMV and ZLB will have some overlap for sure so not sure I would personally own both.
I think when in doubt, low-cost indexed funds continue to work for many. You can certainly consider owning low-vol ETFs as well, hardly anything wrong with that but they may not be as diversified as market-cap funds that own more stocks in more sectors – that’s all.
In looking a XMW, I think I own 7 stocks directly in the top-10.
Ha, yes, win by not losing is smart! 🙂
Thanks for the kind words.
Mark
I like to add ETF’s based on sectors which are considered hot at the moment. I recently added XOVR ( I like the huge potential associated with XSpace which is not available to private investors), NUKZ, QTUM. To me, those ETF’s offer huge potential in this Trump Bump presidency. I prefer U.S. ETF’s as they tend to outperform Canadian ones.
One has to be comfortable with whatever you decide to pick. I am quite a risk taker!!! Only time will tell if I am right or dumb!!!
Good luck to all of you.
Yes, you can certainly invest in sector or niche ETFs to take advantage of some momentum. Nothing wrong with that for sure, I just prefer a more lazy route but you could argue for sure I have QQQ as a niche ETF myself!
Keep me posted on your success, Ken.
Mark
Hi Mark,
I am firmly in the “not knowledgeable” investor category, and I am fully aware of it. So my choices that have served me well over the last 7 years have been VGRO, VTI (a bit of US exposure in USD) and a Canadian ETF (XIC I think).
I find unbundling Dividend ETF’s looks like a great idea, but too complicated, so I simply continue to throw money into these ETF’s and keep my costs down.
Chris, you can be very successful with no ETFs, an all-in-one ETF, a few ETFs – the choice is yours.
Unless your investing behaviour is out of whack, hard to go wrong with VGRO or VTI or XIC, etc.
Keeping costs down is very smart. Kudos.
Mark
Glad to have come across your web site. I own a single US company for four years now. And buy more of it whenever I can at whatever price it is trading at. I’m 43 and plan to retire when I’m 50. My investment horizon is 15+ years. I sell out of the money options to generate some revenue which has worked quite well on average. My biggest learned lesson is to intimately know the company you own and realize the opportunity it has to disrupt some major industries. And to stick to the plan. My average options return is 4% per year. And my unrealized gain on the asset is 279%. But I wish that part was way less so I could continue to buy at lower prices👍
You know, I never got into options work JH. Never really considered it.
How timing consuming is that? Do you use covered call ETFs?
The key is, I believe, if you have a process, you know the risks; your process is meeting your goals – then all the more power to you. I know successful investors who own real estate, all stocks and no ETFs, just ETFs and a mix of everything in between including private equity or lending. Lots of ways to define success in my book.
Continued success to you in 2025.
Mark
Maybe on average about half an hour a day. I looked at covered call ETFs but doing it myself has been more lucrative for me. My average annual return is now about 15%, but when I started I was too aggressive so had a several months where I lost. Ie, sold too many puts and the stock dropped significantly.
That’s a VERY good return! If you have a system, process, investing approach that works for your goals = all good.
Mark
I have 13 Canadian stocks chosen from those in XIU, 9 stocks with international exposure (Brookfield companies, Couche Tarde, Blackrock, Visa) and an ETF based on the S&P500. Before I knew when I was going to retire, I had international mutual funds and etfs based on my brokers recommendations. I am now comfortable with my current strategy as I understand what the companies do.
Good stuff, Jan. Those seem to be reasonable stocks and ETFs like those tracking the S&P 500 are excellent for long-term returns and diversification. I have >60% of the U.S. market via XAW and QQQ in my post is focused on the higher-flying NASDAQ index.
I would love to add more BN to my taxable account over time. We’ll see if I can find the $$ to do so!
Happy investing,
Mark
Hi Mark,
The only diversification I practice in our individual equity all-Canadian dividend portfolio is diversification by sector. I should of learned that from the tech meltdown of the early 2000’s, but it took me until after the global financial crisis to realize it was not a good idea to have too much in any one Canadian sector. 34 stocks in that portfolio right now. Some are still growing their dividends, others have stopped. The lagging stocks in this portfolio get the most attention.
For the much smaller global portfolios in the registered accounts I just let the etf’s diversify for us.
Ya, I recall you have many CDN stocks = 34 is a lot, more than I have now. I’ve sold off a few over the years.
I recall beyond your 34 stocks you also have a smart, low-cost ZBAL for your RRIFs. You also keep an emergency fund. Seems very well balanced overall and more importantly it meets your needs.
(I put my parents RRIFs in low-cost VBAL for likely the same reasons you do; easy to manage, sell bits every few years.)
Are you buying anything in the taxable this year or just staying status quo?
Mark
All the above you commented on is correct, Mark. I should also add XDG in the TFSA’s.
I usually buy more shares in our Canadian dividend stocks at least monthly in the taxable account. I never know which one I’m going to add to until I take a look at our updated spreadsheet before I make the purchase.
Nice. Well done. You’ve done so well I recall.
We’ll see how my portfolio evolves. Right now, no “BAL” or “GRO” funds here – just the equity ones I mentioned but never say never?!
I see my CDN stocks mostly as bond-proxies with some collective upside.
Keep me posted on your changes and buys. 🙂
Mark
Hi Mark,
I’m not clear what point you were making in the Warren Buffet discussion. He specifically said, based on the quote you provided, that for the average/not knowledgeable investor, that diversification through using products like index funds is the way to go. The fact that he focuses the bulk of his company’s investments in 4 stocks still makes sense because he is probably one of the most experienced and successful investors in modern times. So doesn’t it make sense that his advice tracks – the average investor should spread out their risk, but the professional that does the deep research and has the experience can be more consolidated since they are working their investments daily? I don’t see a conflict with what he is saying, but I believe your point was that he should also be more diversified. Please correct me if I’m wrong.
Really enjoy your engaging posts and the discussions they initiate.
Thanks very much, Tim. 🙂
The way I see it, Buffett doesn’t really practice what he preaches, that’s all. I’m not suggesting he isn’t someone to listen to; who has incredible wisdom. re: indexing in the S&P 500 is good. He just doesn’t do it himself whatsover unless that applies to his estate.
Even Jack Bogle, the founder of Vanguard, didn’t invest in international stocks even though his firm had a bunch of them. Interesting things, that’s all.
All my best and hope 2025 is good to you!
Mark