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One of the challenges in a blazing hot stock market is to be satisfied with the returns you get from boring old buy-and-hold investing in a balanced portfolio.

Returns from balanced portfolios have been strong in the past year. For example, the $1.4-billion Vanguard Balanced ETF Portfolio (VBAL-T) delivered a total return of 13.5 per cent for the 12 months to Feb. 28 with a mix of 60 per cent stocks and 40 per cent bonds. That’s better than double what you should expect on a long-term annualized basis from a portfolio like this.

But 13.5 per cent can seem a disappointment when you look at the fat double-digit returns from speculative small-capitalization stocks and shares of companies in hot sectors like technology. And so, a 29-year-old reader asks for some feedback on his old-school way of investing.

“My approach is as simple as it gets,” he wrote. “Save a lot of income. Put it all in VGRO [the Vanguard Growth ETF Portfolio] every month. Repeat. But I also hear/read quite a bit about looking at factors or focusing on small caps, etc. I’m starting to wonder if my approach is too simplistic. Am I missing something?”

The answer to this question is no. VGRO, or similar growth-oriented balanced ETFs from providers such as BMO, iShares and TD are a solid way for young investors comfortable with an 80-20 mix of stocks and bonds to invest for the long term.

The example of VGRO shows the importance of studying your holdings closely because you may find you already have what you’re looking for. Specifically, exposure to small-cap stocks. The “portfolio data” section of VGRO’s online profile shows it has 80 per cent exposure to large-cap companies, 11 per cent is in medium or medium/large companies and almost 9 per cent in small or medium/small companies.

In producing The Globe and Mail ETF Buyer’s Guide in recent years, I have kept a close watch on how funds focusing on large-stock indexes (like the S&P 500) compare with the sort of total market funds used in VGRO (they include large, medium and small stocks). In the latest ETF Guide installment on U.S. equity funds, total market ETFs did outperform a bit. But in previous years, they either lagged or delivered similar returns to the S&P 500. I’m keeping an open mind about the benefit of small caps because the case hasn’t been proven definitively.

It’s much more important to have a portfolio properly divided into bonds and stocks from Canada, the United States and the rest of the world. Balanced ETFs do this at a very reasonable cost, which is why they’re ideal for 29-year-old investors willing to invest the old-fashioned way. Save a lot of income. Invest in a balanced portfolio. Repeat.

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