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Investor profile

  • Age: under 40 years
  • Portfolio size: $50,000 and below
  • Tax status: non-taxable
  • Time horizon: over 30 years
  • Risk: aggressive
  • Objective: growth

Benchmark

  • 40% Canadian equities (S&P/TSX Composite)
  • 30% U.S. equities (S&P 500)
  • 30% International equities (MSCI EAFE)

The entire investment industry has been built for baby boomers, those currently between the ages of 50 and 69. Even the average investment advisor is over the age of 50, and current service and delivery mechanisms reflect a traditional approach. But in a few years (2018), fully 49% of the Canadian workforce will be under the age of 40 and boomers will account for only 13% of workers. The financial challenges faced by this new generation include the consequences of short-sighted planning by boomer governments who have miscalculated the impact of living longer on public sector defined benefit pension plans, social welfare programs and the burden on taxpayers to make them whole. Fewer Gen Y investors will benefit from the pensions and benefits of long careers with the same employer as they change jobs more than six times during their working lives. While it is possible that these Gen Y or millennials will invest the same way their parents and grandparents did, don’t count on it. Remember when Canada Savings Bonds were all the rage, or am I dating myself?

Information is ubiquitous. Financial news networks process and broadcast information that is available 24 hours a day from around the world. Investment veterans know that much of the value of experience is the ability to extract the essence of information from the relentless volume of financial noise that these channels produce. For Gen Y, the problem is no less acute. But the benefits of diversification and low cost are two controllable elements that most will almost certainly grasp. The lure of stock picking is omnipresent, but if default options (investment choices automatically selected when investors don’t want to choose) in defined contribution pension plans are any indication, broad diversification is the one thing this generation can count on. So-called target date and target risk funds share one overarching benefit: they force young investors, who may be inclined to hold all cash or company stock, to diversify.

The portfolios

Gen Y investors have long investing time horizons, typically 25 years and more. As young adults with immediate needs such as families and homes, savings start out modestly under $50,000. We have also assumed they will make use of TFSA and tax deferred retirement accounts so their portfolios are non-taxable. The long investing time horizon also allows for an aggressive risk profile so we have chosen 100% equities. Risk profiling someone relatively young is a little controversial. Not being able to sleep at night if losses greater than 5% or 10% are incurred in a calendar year is understandable for investors of any age. But if investors are under 30 they must be made to understand they will have to save more, and perhaps substantially more as a consequence.

Global macro

Our long-term global macro strategy is to capture the growth of economies around the world. To participate, broad exposure in each area of the globe is sought. iShares Core S&P TSX Capped Composite Index ETF (XIC) is a good example and is available at a new low cost of 0.05%. Although there is a long-term perspective, the U.S. market looks moderately overvalued by some measures such as the CAPE Shiller P/E, currently at about 26, a level exceeded only in 1929, 2000 and 2008. Pretty scary to many! We gave a modest underweight to U.S. equities as a result and used the very broadly based Vanguard U.S. Total Market Index ETF (VUN) that includes almost 4,000 equity securities for diversification. The rest of the world appears to offer better value relative to the U.S. so we chose a slightly riskier small-cap tilt in selecting the Vanguard FTSE All-World ex-US Small Cap ETF (VSS). Much of the global growth over the next quarter century is likely to come from what are emerging markets today, so we gave an overweight to Vanguard FTSE Emerging Markets Index ETF (VEE) with almost 60% exposure to China, Taiwan, Brazil and India.

Cost: 0.16%