Weekend Reading – How many ETFs are enough?
Hey There!
Welcome to some new Weekend Reading wondering: how many ETFs are enough?
Before that take, some recent reads on my site…
Here is a lively discussion about bonds: do you need any bonds in retirement?
And…thanks to so many readers who felt passionate enough to share their own debt-free story in this post too:
Weekend Reading – How many ETFs are enough?
I have my own answer below (including a financial forecast I didn’t know I had until I re-read my post from 2012 (!)) but of course this answer can be none, one or many – and it can depend on the assets you hold, how you wish to manage those accounts, and in what order those accounts could be tapped in semi-retirement or retirement.
Read on!
First, what is diworsification?
It’s the evil cousin to diversification in your portfolio.
Diworsification is the term that was popularized by Peter Lynch in his book One Up On Wall Street – when he discussed that some companies tend to expand into areas widely different than their core business. Over the years this diworsification term has been leveraged to describe some investors who believe they are diversifying their assets but may be doing more harm than good in the process. This term has also been used in context of holding a concentrated basket of stocks (say 10 or 15; including younger companies and start-ups) and believing this is a better approach to returns beyond owning hundreds if not thousands of stocks from various sectors and countries (i.e., indexing that you can read more about on my site here). This is because with just a handful of stocks, there is a higher chance of very poor, possible investment outcomes including when we are talking any early-stage companies that could go under.
Regardless of the context associated with diworsification, you can probably appreciate that most investment choices should try to achieve the following:
a good risk/reward trade-off such that any DIY investor aligns their investment choices with their financial goals. So, make plans before products is my motto.
This means depending upon your goals your financial decisions could be vastly different than your neighbour, your friend, your co-worker, your immediate family member and the list goes on…
Diversifcation can protect wealth but concentration builds wealth
In a previous Weekend Reading edition, I wondered if diversification really matters at all given the most successful investor of our modern times does not practice this – even though he preaches it.
Warren Buffett, despite what he preaches, does his own thing and does not practice diversification whatsoever. Here is a look at Warren Buffett’s portfolio today. You can always track it yourself in an updated link here.
Do you see diversification in practice with >60% of his assets, billions of assets, in just four (4) stocks?
Yet he mentions:
“By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” – Source: Berkshire Hathaway shareholder letter 1993.
And…
“In my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there’s more money in it for them if they do.” – Source: Berkshire Hathaway Annual Shareholder Meeting 2020, courtesy of CNBC.
Hummm.
Since I’m not Warren Buffett, I believe there are four key reasons to consider diversifying your portfolio:
- Not all types of investments perform well at the same time.
- Different types of investments can be affected differently by factors such as interest rates, exchange rates and inflation rates.
- Diversification can help you build a portfolio whose risk is smaller than the combined risks of the individual securities.
- If your portfolio is not diversified, you could be taking on unnecessarily risk. To compound that, you may or may not be compensated with returns for accepted this unnecessary risk.
For each individual investment we make there is a number on the roulette wheel. We can bet on the same number all night and that number might not come up. In this case, the investor is banking on low probability but higher payout if/when their number comes up.
Instead of betting on a number, one or more stocks, you could consider owning the entire casino by focusing on all of the possible outcomes/companies available to you. Some stocks will be stars. Some stocks will be absolute dogs. Yet, via equity indexing, you own them all.
Through diversification, while an investor may lose out on the chance to win big, said investor may also avoid having invested solely in an asset that could make them poor. Diversification in a word narrows the range of possible outcomes.
Well over a decade ago, I wrote about how many stocks are enough. Very interesting to look back at what I wrote:
“Over time, while at the time of this post I own almost 40 individual stocks from Canada and the U.S., I’d like to get that number down to about 20-30 at most and then index invest the rest. It will likely juice my returns and simplify my portfolio at the same time.” – My Own Advisor
Well, funny enough, after 10+ years of investing I’ve moved in that direction:
So, how many ETFs are enough?
Back to the question for this post…if we go back to my thesis that equity investing involves risk management, such that we should make our financial choices so they are aligned with our financial goals then you can likely accomplish this with just a few equity ETFs in your portfolio.
I have three (3) main equity ETFs for different reasons in different accounts, including when these accounts will likely disappear as part of retirement income planning:
- My LIRA will be turned to a LIF in the coming years, I will sell ETF units over time.
- My RRSP will become a RRIF, eventually, I will sell ETF units over decades, and after #1 and #2 happen,
- My TFSA will be tapped, potentially decades from now, therefore I might as well let XAW grow along with a few Canadian stocks I own there (i.e., Canadian banks and some Canadian utility companies for bond-proxies)…
Instead of making some strategic choices like purchasing QQQ that I own, you might go even further to put just one (1) all-in-one asset allocation ETF across all your investing accounts for simplicity.
That can work!
For many investors, just one all-in-one fund across all your investing accounts could be enough and you could fire your money manager or advisor in the investing process.
In general, my answer is no more than 4-5 well-picked, well thought-out ETFs are likely more than enough for both diversification benefits and/or retirement income needs for life.
Always remember with investing and the need for diversification:
“…all too often…the same things that maximize your chances of getting rich also maximize your chances of getting poor.” – Financial historian, celebrated author and neurologist William Bernstein.
How many stocks do you own in your portfolio? How many ETFs do you own and why?
Weekend Reading – Beyond How many ETFs are enough?
Some inspiration for this post came from Morningstar.ca that listed some of the Best Canadian Stock ETFs to own. A very strong list and very much aligned with mine maintained for a few years on this page:
I also like the fact they included low-cost XIU for the Canadian market. As established readers will know, one of my favourites for some income, growth and tax efficiency too. If you don’t want to pursue some Canadian individual stock selection like I do then XIU is an amazing fund for the win.
My friend Dividend Growth Investor shared the updated list of U.S. dividend aristocrats for 2025 – to help you with your individual stock selection.
Fan of this site and investor advocate Ken Kivenko shared with me: mutual funds and ETFs experienced a record for annual growth in assets, in 2024. Some very big investing numbers here…
Author Jessica Moorhouse sent me her book to review: Everything But Money. I’m reading it now. 🙂 I look forward to sharing my interview with Jessica and offering you a chance to win a copy of her book via my site in the coming weeks. If you want to learn more about her book, before my Q&A chat and book giveaway, you can read more here:
Everything But Money excerpt: How much money do you need to not be stressed out?
Have a great weekend, be well, be safe!
Mark
Mark
My name is Mark Seed – the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I’m looking to start semi-retirement soon, sooner than most. Find out what I did and how I realized Financial Independence to tailor your own path. Join the newsletter read by thousands. Always free.
