Selecting the right asset allocation ETF for your portfolio can be intimidating — especially if you ask your friends or family for their opinion. They’ll probably give you conflicting recommendations, each of them confident they’re right, and they might suggest a much riskier asset mix than you’d select on your own.

Remember: it’s not their money at risk. My advice on seeking advice is to ignore what your peers are doing. This is your money, so you should decide how much risk makes sense for your portfolio.



When determining your willingness, ability and need to take risk, a good place to start is by completing a risk profile questionnaire. Vanguard Canada has provided a decent online form, which we’ve linked to in Step 1 of the model ETF portfolios section of the Canadian Portfolio Manager blog. It includes 11 questions to help you consider your personal risk profile, as well as your investment circumstances.

Let’s look at the factors that should influence the amount of risk you take in your portfolio.

Your Ability to Take Risk

Your ability to take risk depends on your time horizon and the stability of your income. If you have many years to invest and a stable income, you should be able to take more risk.

For example, if you’re 30 years from retirement, or a tenured professor with a pension, you have the ability to invest in an asset allocation ETF with a higher stock allocation (which has more risk). On the other hand, if you’re a few years from retirement, or working less-reliable freelance jobs, you may want to consider a higher bond allocation (which means less risk).

Although Vanguard’s questionnaire is a good starting point, it’s not without its issues. For example, the first few questions relate to when you’ll need your money back. If you indicate that you plan to withdraw your money in 2 years or less, but you answer the remaining questions as aggressively as possible, the suggested asset mix will be 50% stocks and 50% bonds. We think this portfolio is way too risky for an investment horizon of under 2 years.

As a rule of thumb, you shouldn’t invest in any asset allocation ETF if you require the cash in less than 5 years. We’ve analyzed the hypothetical performance for the Vanguard asset allocation ETFs over the past 50-plus years ending December 2020, and here’s what we found:

  • The worst 1- and 2-year periods were negative for all Vanguard asset allocation ETFs.
  • The worst 3-year period was negative for all ETFs except the Vanguard Conservative Income ETF Portfolio (with ticker symbol VCIP), which holds 80% in bonds. Even still, VCIP only returned 0.7% over its worst 3-year period.
  • The worst 4-year period was negative for all ETFs except VCIP and the Vanguard Conservative ETF Portfolio (with ticker symbol VCNS). But they only returned 2.1% and 0.1%, respectively, over their worst 4-year periods.


Sources: Morningstar Direct, MSCI, DFA Returns Web Canada, Vanguard Investments Canada Inc.


So, looking further out:

  • If you need the cash in 5 to 9 years, VCIP and VCNS should be the only asset allocation ETFs on your radar. Even the Vanguard Balanced ETF Portfolio (with ticker symbol VBAL), which allocates 60% to stocks, returned only 0.1% over its worst 9-year period.


Sources: Morningstar Direct, MSCI, DFA Returns Web Canada, Vanguard Investments Canada Inc.


  • If you won’t need the cash for 10 to 11 years, VBAL could be an appropriate choice, as even its worst 10-year return during this period was 1.8%.


Sources: Morningstar Direct, MSCI, DFA Returns Web Canada, Vanguard Investments Canada Inc.


  • If you don’t need the cash for 12 to 14 years, you could look at a more aggressive ETF, like the Vanguard Growth ETF Portfolio (with ticker symbol VGRO).


Sources: Morningstar Direct, MSCI, DFA Returns Web Canada, Vanguard Investments Canada Inc.


  • And if you’re investing for 15 years or more (and you’re comfortable dialing up your portfolio risk to eleven), the Vanguard All-Equity ETF Portfolio (with ticker symbol VEQT) might be right up your alley.


Sources: Morningstar Direct, MSCI, DFA Returns Web Canada, Vanguard Investments Canada Inc.


Your Willingness to Take Risk

Now, even if you have the ability to take risk, you might not be willing to endure the gut-wrenching stress of a severe market downturn. Even if you have 20-plus years before you require the funds, can you keep your cool when your ETF’s value plummets — which it certainly will from time to time?

There are five questions in Vanguard’s questionnaire that address this concern. But when I completed them to be as conservative as possible (while still indicating a high ability to take risk), the suggested asset mix was 60% stocks and 40% bonds. This is probably too aggressive if you get anxious during stock market declines. For example, even a balanced portfolio with 60% stocks lost more than 25% during its worst 1-year period between 1970 and 2020.

To estimate your willingness to take risk, I suggest imagining what you’d do if the stock allocation in your portfolio dropped by 50%. This is a reasonable worst-case scenario.

If you’re considering VGRO, with an 80% stock allocation, assume the fund’s total value could drop by 40% in a severe downturn. So if you’re planning to invest $10,000, imagine that dropping to $6,000. And if you have $100,000, ask yourself how you would react if it fell to $60,000.

Would you truly be willing to ride out that roller coaster, or (more likely), would you feel like you’d just made a huge mistake?

Be honest with yourself: are temporary setbacks going to completely freak you out? Go through the same process with other asset allocation ETFs until you’ve identified one you can stomach. By going more conservative, you might leave some extra returns on the table over time. But in our opinion, that’s a fair trade-off for avoiding the incredibly expensive mistake of selling your holdings at a deep loss in a panic and fleeing to a more conservative ETF — or, worse, to cash.

If the only bear market you’ve lived through was the brief crash of March 2020, you might be under the impression that market downturns don’t last long. Here’s a reality check. We looked at worst back-tested losses on the Vanguard asset allocation ETFs over rolling time periods. For example, a $100,000 investment in VGRO, which is 80% stocks, was still showing a loss of over $16,000 at the end of its worst 9-year period. And VEQT, which is 100% stocks, was still down by nearly $13,000 at the end of its worst 10-year period. While it’s true these types of longer-term losses were rare during the last 50 years, you still need to be comfortable with the possibility of this occurring again.

For these reasons, we believe your willingness to take risk should always take priority over your ability to take risk.



Your Need to Take Risk

And the final consideration — often forgotten in all the excitement — is how much risk you need to take. If you’re a young investor — and you’re not the offspring of the rich and famous — you probably need to take some market risk to grow your portfolio over the next few decades.

But what if you’ve been a diligent saver all your life, and you’ve already built a substantial portfolio? Could you meet your financial goals by simply investing in GICs? If so, you may not need to put your savings at risk by allocating any of it to stocks.

As you get closer to retirement, you can work with a financial planner to determine whether you can afford to take less risk over time.

Risky Business

Before I let you go complete your questionnaire, I’d like to reemphasize the relationship between your willingness and ability to take on risk. Your willingness should be the one driving the bus, especially when you’re still gaining investment experience.

As a young investor, you’ll often hear that time is on your side, so you can be aggressive with your investments. If we’re talking about ability to take on risk, this is true. But if you only have a modest amount to invest, think about how excruciating it will be when the markets head south on their periodic “vacations,” taking your seed money along for the ride.

Until you’ve personally had the chance to ride out a long bear market or two, we suggest opting for a more conservative or balanced ETF, rather than a growth-oriented or 100% equity ETF.

During the entire period we back-tested — between 1970 and 2020 — the Vanguard asset allocation ETFs with higher stock allocations (like VEQT) outperformed those with lower stocks allocations (like VCIP). However, it’s important to understand that taking more risk, even over periods of 20 years or more, does not guarantee a better outcome.



For example, VEQT underperformed VGRO during 61% of the 373 monthly rolling 20-year periods we measured. And over those same periods, VGRO underperformed VBAL around 49% of the time — basically a coin flip. That’s the other side of taking more risk that investors sometimes forget: it doesn’t always lead to higher returns, even over the long term.

There’s nothing wrong with starting off with a more conservative asset allocation ETF, even if you’re very young, have a long-term time horizon, and a stable income. I’ve yet to meet an investor who failed to meet their financial goals because they invested in a balanced asset allocation, rather than a more aggressive one. So, don’t feel like you need to fake a high risk tolerance to fit in. You can go with a more conservative or balanced asset allocation ETF to start, and use all your youthful energy to embark on an aggressive savings plan.

As you gain more experience, you can always decide to sell VBAL and switch to a more aggressive ETF, like VGRO or VEQT.

Hopefully you’re now feeling more confident about choosing the right asset allocation ETF. Before you run off to place your trades, do a quick reality check on what returns you can expect from these Vanguard Asset Allocation ETFs. Spoiler alert: It’s not anywhere near 10%.