On Valentine’s Day, I’ll tell you how to choose the right one. The one that you stay with throughout the years. The one that will be there for you no matter what. The one that you are glad you chose a while ago. I’m talking about the right ETF asset allocation model of course ;-)
Obviously, I can’t give you specific financial advice nor can I tell you how to trade your ETFs. However, I can help you out with a few guidelines. The rest will need to be done with further research or with the help of a financial advisor.
A few Rules for the Perfect ETF Asset Allocation Model
Since we already discussed how to build a ETF portfolio, I will go straight to the point:
#1 Make Sure You Consider Your Risk Tolerance
If you are not much into wild fluctuations, I would avoid trading ETFs linked to emerging markets, for example. I would also avoid investing too much in stocks and commodities ETFs. But most importantly, I would avoid investing in a Bond ETF thinking it is secure.
In fact, bond ETFs follow bond prices and don’t give you any security. Therefore, if you are looking for safer investments, I would leave part of my money in regular bonds and GICs. Bond ETFs have smaller fluctuations than the stock markets but they will surely go down upon interest rate increases.
#2 Make sure you are well diversified
Put your beliefs aside and invest in American, International and Canadian equities. I outline the latter since the Canadian market represents one of the best places to invest in the financial and commodities sectors. If you think that Europe has problems and you don’t want to invest in international ETFs; you are on the wrong track. Since we can’t predict when the stock market will surge, I think that it is safer to have a good diversification of both sectors and countries.
#3 Rebalance your portfolio once a year
If you rebalance your portfolio quarterly, you will generate trading fees. For a solid asset allocation model, rebalancing once a year is more than enough. With this technique, you won’t be exposed to concentration risk while minimizing your trading fees.
#4 If You Follow the ETF Asset Allocation Model of the Ivy Portfolio, you must stick to it
As previously mentioned in my Ivy portfolio article, one must follow the moving average and trade accordingly. No second guessing, no second thoughts; only your ticker graph along with the moving average. This is the only way this ETF trading model will workout.
#5 Choose a Well Known ETF for Each Asset Class
Instead of trying to find the best performing ETF, I would select a well established company manufacturing several ETFs. You want a solid company that will be able to trade efficiently. Forget about the flavor of the day and focus on long term investments. This is how you will build a solid ETF asset allocation model.
In the upcoming weeks, I’ll build an ETF asset allocation following the Ivy portfolio trading technique. Just for the fun of showing you how it works ;-).