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Inside the Market How ETF investors make extra work for themselves and hurt their returns

Concerned that the popular new class of balanced ETFs are too simple to be effective in your portfolio?

If you answered yes, congratulations on your successful brainwashing by Bay Street. Simple is a virtue in investing, not a sign of weakness or laziness. The investing universe is well populated by people destroying value by over-thinking things. And yet, suspicion of simplicity is common.

A reader recently emailed to ask about using balanced exchange-traded funds like the Vanguard Balanced ETF Portfolio (VBAL) and the iShares Core Balanced ETF Portfolio (XBAL). He wondered if he was being too lazy in using a balanced fund only and wanted some comment on the idea of adding additional conservative stocks to generate dividends.

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All the stocks he was thinking of adding are built into VBAL and XBAL. Buying some extra shares of these stocks to complement the balanced portfolio could ramp up dividend income, but it would also result in extra risk. Adding extra stocks to a balanced ETF means you’re tinkering with the stocks/bonds mix. If the stock market crashes, your loss could be sharper than you expected. In a bull market, those conservative dividend stocks might underperform. There’s also the danger of buying the shares of a seemingly safe company that runs into trouble.

Index investing as practised by balanced ETF is a proven formula for investing success over the long term. You make what the indexes in your fund make, minus a small a small fee and the cost of brokerage commissions. The experience of actively managed mutual funds over past decades is that it’s exceedingly difficult to beat the indexes consistently.

It’s worth noting that balanced ETFs aren’t for everyone. They especially suit investors who want long-term growth and are less concerned with generating high levels of income. Globeinvestor.com shows VBAL with a yield of 2.1 per cent and XBAL at 2.8 per cent. If tax-advantaged dividend income is your primary goal, you might be better off with a dividend ETF.

If a balanced ETF does meet your needs, embrace the simplicity of putting your money into a single fund that rebalances itself and requires zero maintenance. You’ve done a smart thing by putting your money in something so basic.

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