What Should My Asset Allocation Be? (Nervous Newbie Edition)

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What should my Asset Allocation be?


This is the number one question we get in our (pretty much constantly flooded) inboxes. As this silly little blog continues to spiral out of control and our readership continues to climb, more and more people are writing to us and saying we’ve sparked something in them. A yearning, it seems, for life before it got so damned complicated, and so damned expensive!

And that’s AWESOME. The first step in the Millennial Revolution is standing up and refusing to be beholden to these annoying little truths that we’ve all come to accept. BS “truths” like “you HAVE to buy a house or you’re a loser.”

So of course the next step is to learn what to do with your money instead. We advocate a balanced, diversified Index Investing approach using low-cost ETFs that get rebalanced periodically. As we’ve said over and over again, this is the only way that the average Joe Shmoe can reliably and safely invest in the stock market. It beats 85% of active fund managers, and is championed by none other than Warren Buffet himself.

But one of the central pillars on Index Investing is to hold equities and fixed income in an asset allocation that makes sense for you. Remember the effect that asset allocation has on your portfolio performance. The higher your equity allocation, the higher your long-term returns will be, but at the cost of higher volatility.

Remember…the higher the volatility and the further to the right each dot is…
…the more jaggy your portfolio will behave

As a result, academic research focuses on asset allocation as a function of age. Over 10-15 year periods of time, volatility becomes irrelevant. Remember that the S&P 500 has NEVER lost money over a 15-year period. So most studies recommend a higher equity exposure in your 20’s (~90% to 100%) and then gradually backing off as you get older.

Here’s the problem. In your 20’s, most people don’t know what the Hell they’re doing when it comes to Investing. We know we didn’t. We had to learn all that shit as we went, in the MIDDLE of the worst financial crisis of our generation no less. It was a bit like taking off in a plane and learning to fly it while it was in the air. Not fun.

So what’s a beginner investor to do? Should they go 90% equity like the papers say, or something more conservative like the 60%/40% split that we do?

This is a tough question to answer, as any financial advisor will say “it depends” and “there’s no one-size-fits-all answer.” And that’s true, but we here at the Millennial Revolution think we can do better.

Here’s the thing. While the cold, hard math indicates the single biggest determinant of long-term financial success is your asset allocation, in practice the single biggest determinant of long-term financial success is you, the investor. If you freak out and panic-sell at the first sign of loss, then it really doesn’t matter what your asset allocation is. You’re gonna get screwed and lose money during the next stock market crash (and it WILL crash).

So here’s our suggestion to those beginner Investors:

  • First, pay off any and all high-interest debt. If you have any credit card debt whatsoever, investing makes no sense.
  • Make sure you’re cash-flow-positive, meaning you’re saving money every month and your savings are growing, not shrinking.
  • Carve out a small amount of your savings, say $5000 and invest it using low-cost Index ETFs or Index Funds such as the ones listed on CanadianCouchPotato. Use a portfolio allocation of 50% equity/50% fixed income.
  • Leave the rest in a savings account and continue to sock money away into it.

The purpose of this exercise for the nervous first-time investor is to get comfortable with the idea of investing while limiting the amount of money that they could lose. Over time, either the stock market will either run ahead or (if you’re lucky) crash horribly, knocking your 50/50 asset allocation out of whack.

Why do I say “if you’re lucky” a stock market crash will happen? Because you’ll get to experience the deafening screeching noise the media makes each and every time the stock market crashes. They’ll say that “it’s different this time”, that the “world’s going to end as we know it”, and to “sell everything and run for the hills”. How do I know?

They say it every market crash.


The great thing about this strategy is that you’ll only have $5000 in the markets when this happens, so you’re less likely to freak out.

Then with the help of the soothing noises this blog will be emanating, you will be able to watch your portfolio go down in value calmly without worrying where your next meal is going to come from, figure out how many fixed income assets to sell to rebalance to your target 50/50 asset allocation, buy into the equity markets as they free-fall, then sit back and watch your portfolio rebound to a level higher than before.

We know this will happen because it happens every market crash. But only if you follow the rules of Index Investing and rebalance the way you’re supposed to. This simple strategy caused us to pull off a feat most of Wall Street couldn’t: If got us out of the Great Financial Crisis of 2008 without losing any money.

And after you make it out of your first crash, you’ll realize like we did that “hey, Investing isn’t that hard! Market crashes aren’t that scary!” At that point, you can up your equity allocation to something more aggressive, as well as deploy all that cash you’ve been saving this entire time.

The trick about investing is that there’s no real trick to it. The only thing you have to watch out for is your own fear forcing you to do the exact wrong thing at the exact wrong time. But what I believe is that fear comes from the unknown. The first time you ride a roller coaster, it’s scary because a part of you doesn’t know if you’ll get hurt. But when the ride’s over and you realize you’re OK, you’re not that scared the next time. Same with Investing.

And as usual, standard disclaimer: We are not licensed Financial Advisors and as such can’t legally recommend individual ETFs. The advice here is not based off fancy exams and certifications, but cold hard math and the fact that it allowed us to become the youngest retirees in Canada.

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54 thoughts on “What Should My Asset Allocation Be? (Nervous Newbie Edition)”

  1. I’m 26. And have no issues with volatility. Im currently doing 75% equity, 25% bonds. Do you suggest maintaining this allocation for returns?

    1. If you’re comfortable with volatility, that allocation should work. Since you are only 26, you can afford to take more risk because your time to retirement is farther out.

    2. At the start of the Market cycle yes… but we are 7 years into this market cycle, with an almost 100% increase (doubling) in all the markets, more in the NASDAQ.

      Its time to Rebalance. In your case 60/40 will be fine. I am at 50/50, but I am 55.


  2. Garth posted on his blog recently the following allocation, are you guys using something similar?

    17% in a mix of government, corporate, high-yield, real return bonds; 5% in REITs; 18% in preferreds; 17% in Canadian equities; 21% in US growth; 18% in international markets; 4% alternative strategies.

  3. Love your blog! I have learned so much but what is throwing me for a loop is that I am a Canadian who is also a dual citizen because I was born in the US (lived in Canada since I was 1). With the new IRS reporting requirements I feel like I must either 1)renounce US citizenship and miss out some mobility or 2) never be take advantage of RESPs & TFSAs. (RRSPs are not an issue due to our tax treaty. There are a lot of dual Cdns facing this issue right now, so if you guys could do a break down of pros & cons of renouncing vs work arounds for dual investors that would be awesome. Keep up the great work!!!! You guys are doing our generation a great service!

    1. There are tax advantages to renouncing, but it could be expensive to do so, and the downside is the loss of mobility. Best thing to do is to consult an immigration lawyer since you need to consider all factors, not just the financial ones.

  4. Great introduction article about investing. I think it’s odd how people often sell stocks low and buy when they are high yet the same people try so hard to avoid selling their home when house prices are down. I wonder why the buying and selling of homes with seams intuitive but when the concept is applied to stocks rational people loose their nerve. Keep up the great posts!

    1. Because a house is an emotional attachment and you can still make use of it when it is down in price by living in it as your home. Stocks are merely investments that do not have the same emotional attachment and emotions run stronger with (loss of further) money in a rapidly dropping “waterfall” crash scenario.

    2. I think it’s because stocks are much easier and less costly to sell than a home. If you needed to pay 5% of your entire portfolio, be forced to sell it ALL at once, AND had to wait months before the sale went through, stocks would trap people the same way homes do. Good thing they don’t 🙂

  5. Terrific point about the fear. I know your aiming for the beginning cautious investor, but if you’re young with a long time horizon, I would really urge you to train yourself to get that stock allocation as high as you can.

    Of course, I know there are a ton of studies out there showing that when markets are good, people think they are more risk averse. And when they’re bad, people are less risk averse. So maybe I’ll fall into that trap too and freak out when the next real downturn happens, although I like to think that I’ve learned enough to try to divorce myself from those emotions.

    I always personally wonder how I would have done in 2008. I was in college during the 2008 crash, so didn’t get to see anything of my own go down in value. Would I have been able to hang tough like you guys did?

    1. 2008 taught us a very valuable lesson. Don’t panic (this served us well during Grexit and Brexit) and be more cautious with your asset allocation. We could cowboy it up like the other FI-ers and go 90/10, but we need to be able to not panic and sell at the bottom during a crash. So 60/40 works well for us.

  6. Interesting article. Just like all investment vehicles, ETFs aren’t for everyone. I actually prefer mutual funds over ETFs for a few reasons:
    1) Because ETFs simply track the market, they can never outperform the market. Mutual funds are actively managed and can outperform the market – not always, but they can.
    2) With ETFs, when the market goes down, you go down with it unless you sell at just the right time – and we all know that’s nearly impossible for most investors. With MFs, the managers have far superior knowledge of market conditions than you or I, and can sell or reallocate the fund into less risky investments during downturns thus minimizing loss.
    3) You get what you pay for. Yes, MERs are lower with ETFs than MFs, but I like to compare it to a meal at McDonald’s. Do you leave a tip? No? Why not? Because you get what you pay for!
    4) Unless you can find a discount brokerage offering $0.00 trade commissions, you cannot make weekly, bi-weekly, or monthly contributions into an ETF without getting hit on commissions. With MFs, that’s not a concern, which is VERY important when just starting your investment career as you may not have lots of money to invest regularly and ANY commission will kill your returns.

    Again, ETFs aren’t bad, I just prefer MFs.

    Happy investing!

      1. There are more than you might think. Mawer is a fund company that is one example. Disclaimer, I own their Europe fund. It has handily beat its benchmark for 10 years. And by an even wider margin many of the indexes that the most recommended europe ETFs are based on. Why? Europe as a group has had a decade of no growth. The fund invests in the stronger companies in the stronger countries. Soooo hard.

        Their Canadian fund has also outperformed for nearly a decade. Instead of tracking the TSX which is a highly unbalanced index (too much volatile materials & energy) they have a balanced sector portfolio. Reduces volatility and increases average returns except for the rare year when commodities boom.

        Good mutual funds can be very good investments for people looking for simple options.

      2. Which Market ?

        The Nasdaq has nearly tripled in Value in the last 7 years… given a doubling of value in 10 years equates to 7%/yr, that puts the value at close to 12%/yr…

        Wanderer hit on something… average market returns over 15 years, is about 6-7%. But with a strict rebalancing regime and diversification, its easy to achieve better. The hard part is to sell assets that are still going up… if this is a problem for you, pay someone else to manage your money. Buy a Balanced Mutual Fund, and forget about it.

        There are lots of Mutual Funds that claim average returns over 7% for 15 years or better, but doesn’t mean they will continue to do so.


    1. “With MFs, the managers have far superior knowledge of market conditions than you or I, and can sell or reallocate the fund into less risky investments during downturns thus minimizing loss.”

      HA! No, they don’t. That’s just what they want you to think. I have yet to see a MF that consistently beats the market.

      “Unless you can find a discount brokerage offering $0.00 trade commissions, you cannot make weekly, bi-weekly, or monthly contributions into an ETF without getting hit on commissions.”

      Some readers on this blog have mentioned Questrade, which has free buys. Also, if your portfolio is large enough, the trade commissions will be a small percentage of your portfolio, whereas the savings on the MERs will be huge. Most MFs we’ve looked have MERs of 2% or more, and doesn’t beat consistently beat the market. Most of your gains will be eaten away by the fees.

        1. Statistically speaking, there will be some players in the market that consistently flip heads. The act of flipping heads consistently doesn’t in and of itself prove that someone has some form of superior skill, as they are equally likely to just be statistical outliers.

        2. Thats why I own BRKB …. since they offered class B shares, they are up 125%… just hope Warren doesn’t die soon.

      1. ETF’s in self directed? Yes you can, its called DRIP. Dividend Reinvestment Plan. You don’t pay a brokerage to reinvest the dividends earned, but to buy and sell, yes.

        That is why ETF MERS are so low…

        And yes, if your Mutual fund isn’t beating the market? Buy the Market with Index Funds, the MER is usually .5% or less. but you must balance yourself…


  7. I struggle with how often to rebalance. Once a year? But what if there are shifts in the market? Monthly? Any advice on triggers?

    1. Novice investor so take this thought with a grain of salt. I’ve often wondered the same so I’ve done some ‘googling’. General rule is once a year, or if your allocation is off by at least 5-10%. Of course, this depends on size of portfolio and whether re-balancing will cost you money. Unless the cost is low or 0, I’m sticking with once a year.

      Some thoughts:
      For a smaller portfolio, you can likely reset the asset allocation with your periodic (bi-weekly/monthly) purchase.
      For higher balance (100K+) ETF portfolios, you tend to buy in bulk (as there are fees for each purchase) and rebalance at the same time. This saves on fees

  8. Swami, you maybe missed this part of her post ” It beats 85% of active fund managers”.

    Or perhaps you just don’t believe it after all most of us think the experts “HAVE” to know how to reallocate when markets drop. However, I’d strongly advise you to simply google the statements “performance of actively managed mutual funds compared to indexing” or something along those lines. You will soon find out that indexing DOES outperform active managers. It’s been extensively documented whether you want to believe it or not. Furthermore, you can also Google this fact. We in Canada pay the highest (or very close to the highest) Mutual fund MERS in the world. Meaning although if you bought American mutual funds, you’d still 75-85% of the time still underperform indexing, we in Canada investing in Canadian mutual funds are REALLY getting screwed over. All of this is easily verified by reading up on it. 2 – 2.5% MERS are the norm here in Canada. You can get a great variety of etf’s with MERS of .05 – .5%.

    Just think if you went to buy a car what a difference it would cost if you had to pay 2.5% tax OR .05%.

    Btw, you can also Google this and read about it, but there are people that have calculated the difference over a 30 (for example) year period of investing factoring in the effect of being in a typical high mutual fund MER or in a low MER cost etf. The difference can result in hundreds of thousands of less money. That 2-2.5% MER drag compounds your results lower over time.

  9. Swami, regarding your third point about contributing weekly and the ding of commissions, I’d suggest you check out TD E-Series mutual funds. Yes, I don’t like mutual funds at all, however, if someone feels they really want mutual funds then these funds are some of the least expensive ones out there.

  10. I don’t mean to hijack the comments but I’m really passionate about how people with little or no financial knowledge have been getting screwed (I believe, and I used to be one) by the Canadian mutual fund industry for decades. Therefore, here is Another good article on mutual funds.


    Note this part: Numerous studies, most notably from research firm Morningstar, have shown that on average, Canadian mutual fund fees are the highest in the world. Morningstar went as far as to give Canada an ‘F’ for fees and expenses in its latest report.

    1. “Canadian mutual fund fees are the highest in the world. Morningstar went as far as to give Canada an ‘F’ for fees and expenses in its latest report.”

      Thank you, Pam! You said exactly what I was thinking.

  11. Disclosure/confession: I’m a baby boomer and I enjoy reading millenial revolution. You kids have it all figured out. Great life you’re leading and great job in educating others in a highly entertaining and informative blog. Wish I had figured this all out at your age. Keep up the good work!

  12. ROFLOL… I’m 30, have a house that pays for itself, and have more than $3mill in net worth. My GF is 29, and has a over a couple of mils saved up as well… both self made. 1 million is nothing these days.

    1. For a couple to amass $5MM by the time they are 30 is impressive, and I’d like to see the math behind it. If you start at age 20 and average 9% compounded annually, you’d need to sock away $26,000/month to hit $3MM. I realize this probably wasn’t all done in the markets – probably real estate as well, but the rate of growth still needs to be around $26,000/month. Not average or realistic if you ask me – especially without financial assistance from someone with deep pockets.

    2. It’s easy to hop on a website and state you have 3+ million and it’s certainly possible as well.

      You said you were self made so if that is the case, you neither inherited any money, you weren’t loaned money to invest/start a business and you weren’t given an incredibly high paying job from family or friends (nepotism).

      There are several ways you “could ” have made that by yourself at your age I suppose one being creating a startup that was bought out by some big company. (Like that incredibly ridiculous multiple million Yahoo paid to some 17 yr old for an app or program that they never actually used)

      Or maybe you deal in drugs or any other hundreds of lucrative illegal means.

      Please do enlighten us, we are all ears/eyes. Without a smidgeon of background, your statement is nothing but hot air.

      Btw, 1 million is still considered a lot of money by most people.

  13. Greetings!

    What software do you guys recommend to manage your investments? Do you use a brokerage instead? Im a sparky and I see the burnout in alot of my older colleagues (when I say burnout I mean, “forget your anniversary because of meetings and get divorced as a result” burnout) so Im interested in how you guys do it. Measure twice cut once right?

    1. Turner Investments is our full service provider and uses the Raymond James platform.

      Prior to that, we used TD Waterhouse. Other readers have mentioned Questrade for Canadians and Vanguard for Americans.

  14. I’m still having a rough time wrapping my head around this. What is the idfference between index investing and ETF’s except for the costs (management fees and buying/selling costs). DOn’t they both track the market?

    1. In addition, I have seen you recommend ETF for large portfolios (500K+), but what’s the difference whether you have lots of money or not. I know the MER fees are lower for ETFs. Are you suggesting that when you start with a small portfolio, you’ll constantly be buying and thus a lower fee (mutual fund) is beneficial, but when you have large portfolio, you won’t constantly be buying/selling, thus it is better to have lower fees. But don’t you always want to grow your portfolio and when you re balance(which is bound to happen) don’t you have to buy/sell (so expensive MER fees are still there?).

    2. I can see why this would be confusing. Okay, let me clarify:

      Indexing investing is an investing strategy. Instead of picking individual stocks, you buy an index fund that tracks the market (eg S&P 500).

      ETF’s is an investment vehicle. It’s what you USE to carry out the strategy. Similar to a mutual fund, except its value fluctuates throughout the day instead of getting calculated once at the end of the day. ETF’s also have much lower fees (0.1% compared to 1-2% for mutual funds) because they aren’t actively managed (and they don’t need to be if you’re just tracking the index). There are many different types of ETFs…Bond ETFs, Index ETFs, REIT ETFs, Preferred shares ETFs. So it’s not only for indexing investing.

  15. Great article, thank you for the blog.
    I have an embarrassing question….
    I know nothing about investing (besides what the word means). I have no idea where to start. I do have a basic/standard TFSA with tangerine, is that good?
    Most of the post did not make sense to me and I’m wondering what would be a good place to start. I mean, investing for kids, or something.
    Can you recommend some basic reading for that? (I’m Canadian by the way).
    Any help would be pro-great!

    1. Hey Clementine, so a regular TFSA (High Interest Tax Free Savings Account) has a very deceiving name. It usually is only giving you a 0.05% return or even less. So even with $1 million invested you would receive a paltry $500 annually. You need a proper investment account to really have any compound growth. So to answer your question, a basic/standard TFSA is simply awful and will not allow you to reach goals of passive income or to produce assets for your kids. I suggest a few books when just starting, including “Wealthing like Rabbits” and “Millionaire Teacher”, both can be found at chapters, they cover almost everything finance wise that you should know, in very funny, enjoyable easy to read formats, I’m 26 and did not find them a bore at all!! But since you already have a tangerine account, I suggest starting with Tangerine Tax-free investments https://www.tangerine.ca/en/investing/TFSAs/tax-free-investment-fund/index.html, but if you read those books i suggested and feel more experienced, the TD e-series Index portfolio ends up being cheaper than tangerine which results in you getting higher interest returns on your investments. Choose a portfolio based on your level of risk tolerance i.e. how tolerant you are to loosing money, but keep in mind the it is “Impossible” for index funds to go to zero, so you can’t lose all your money, and over time you always come ahead money wise, even after the worst stock market crash in recent history (2008) where people lost 30-40% of their money, using an index strategy, people still made all the money back and then some the following years. Utilizing the Tangerine tax free investment account you will get around 6% returns on average, I believe, compared to 0.05% with a regular TFSA, which is a $60000 annual gain on $1 million vs $500 with a basic TFSA for perspective. Also if you want to save for your kids education, it would be good to open a RESP (Registered Education Savings Plan) since the government will match certain portions of money you put into this program, any free money is a plus!!! Another good strategy is to use an RSP (retirement savings plan) to contribute to lower your amount of taxable income on your tax return, then put that extra return that you received and put that into your TFSA investments.

      1. Thank you very much for the response,
        I will get those books because I am looking for a place to start in terms of investing, but finding it overwhelming to wrap my head around. I have a good job but a big student loan, but I want to start moving in the investing direction.
        One of the things that kept me from investing into an actual investment account was the feeling that I could not get that money should an emergency come up. It seems there are rules and guidelines for how that money can be touched and when, without penalty.
        One of the advantages (of the clearly unfortunate TFSA) is that I could use it for a sudden move across country. Why does it all feel so complicated!!
        Thank you again.

    2. Quite a few readers have asked us for a step-by-step guide on how to start investing. We’re currently reviewing a few low cost brokerages, robo-advisors, and index ETFs. Once we’re satisfied with their performance, we’ll post a review and readers can follow along and copy our allocation if they so choose. Stay tuned!

  16. DOPE blog. Been binging for a few days now. Quick q: you mentioned in an earlier blog post that when you hit the 500k mark you were on the verge of using a dividend-focused investment strategy, until your financial advisor persuaded you otherwise. Can I ask what changed your mind on that? Higher returns or…?

    1. Dividend investing carries more risk than indexing because you buy individual stocks to chase yield. With index investing, you are buying the entire market, so when companies on that index collapse, they get replaced with new ones. That way your investments can’t go to zero. Not true with dividend investing. Also, in Canada, chasing dividend-yielding stocks means being heavily weighted in oil and bank stocks, which carries a sector risk. Had we used a dividend-investing strategy, our portfolio would’ve been hit HARD by the oil rout in 2015.

  17. Gotcha, wise choice!! One follow up q: is there any reason you guys would have focused only on Canadian dividend stocks? To protect against currency fluctuations?
    Thanks again!

    1. That and the Canadian dividend tax credit. We wouldn’t be taxed efficiently for American or international dividends.

  18. Awesome thank you. You guys are my new personal heroes honestly. Last q (promise!): do you find that indexing gives you enough dividends to live off year to year or do you also sell a small portion of your portfolio for yearly income? Or maybe a better way to phrase that would be – did you structure your portfolio with the ability to live off just dividends in mind or was it not a big consideration? Sorry a little bit all over the place but I think you catch my drift!

  19. Is an index fund and an ETF the same thing? Vanguard offers index funds and I’m not sure what to make of it. Does it mean you are paying someone to manage the fund? However if the fund is made up of an index it shouldn’t require managing? Would really appreciate some clarification.

    1. An index fund buys the index. It uses the indexing strategy. Whereas ETF is a vehicle for investing (like how mutual fund is a vehicle for investing).Comparing index fund and ETF is like comparing dividend investing with mutual funds. One is a strategy, the other is an investment vehicle.

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