Hey guys! If you're a Canadian investor looking for a simple, evidence-based approach to building your portfolio, you've probably stumbled upon the Ben Felix model portfolio. Ben Felix, a portfolio manager and host of the Rational Reminder podcast, advocates for a factor-based investing strategy. This strategy is built on academic research. It focuses on capturing specific market factors that have historically provided higher returns. But what exactly is this model portfolio, and how can you implement it in Canada? Let's dive in!

What is the Ben Felix Model Portfolio?

The Ben Felix model portfolio isn't a rigid, one-size-fits-all solution. Instead, it's a framework for constructing a portfolio that aligns with your risk tolerance and investment goals while emphasizing exposure to specific factors that drive long-term returns. These factors typically include:

• Market (Beta): This is the overall market risk, typically represented by a broad market index like the S&P 500 or the MSCI All Country World Index (ACWI).
• Size: Smaller companies have historically outperformed larger companies over the long term. This is known as the size premium.
• Value: Value stocks, which are companies that are undervalued relative to their fundamentals (e.g., book value, earnings), have also historically outperformed growth stocks.
• Profitability/Quality: More profitable and higher-quality companies tend to generate better returns than less profitable ones.

The core idea behind the Ben Felix model portfolio is to overweight these factors in your portfolio. Overweighting is done to potentially achieve higher returns compared to a traditional market-cap-weighted index fund. Instead of just blindly following the market, you're strategically tilting your portfolio towards areas with a higher expected return based on historical data and academic research. Sounds cool, right?

The portfolio is typically implemented using low-cost exchange-traded funds (ETFs) that track these specific factors. This makes it a very accessible and cost-effective strategy for Canadian investors. Plus, because it's based on diversification and long-term investing principles, it can be a pretty stress-free way to manage your money. No constant checking of stock prices required!

When building a Ben Felix model portfolio, remember that there is no 'holy grail' allocation. A lot depends on your individual circumstances. These circumstances include your risk tolerance, investment timeline, and financial goals. Some investors may prefer a more aggressive approach with a higher allocation to small-cap and value stocks. Others may opt for a more conservative approach with a larger allocation to broad market index funds. The key is to find a balance that you're comfortable with and that aligns with your overall financial plan. Also, don't be afraid to consult with a qualified financial advisor to get personalized advice. They can help you assess your risk tolerance, determine the appropriate asset allocation, and implement the portfolio in a tax-efficient manner. It's always good to have a professional in your corner!

Key Components for Canadian Investors

So, how do you actually build a Ben Felix model portfolio in Canada? Here are the key components you'll need to consider:

1. Asset Allocation

This is the foundation of your portfolio. It determines how your investments are divided among different asset classes, such as stocks and bonds. The specific allocation will depend on your risk tolerance and investment timeline. Generally, younger investors with a longer time horizon can afford to take on more risk and allocate a larger portion of their portfolio to stocks. Older investors with a shorter time horizon may prefer a more conservative allocation with a larger portion allocated to bonds. Here's a sample breakdown:

• Stocks: 80-90% (or less, depending on risk tolerance)
• Bonds: 10-20% (or more, depending on risk tolerance)

Within the stock allocation, you'll want to diversify across different factors:

• Canadian Equities: A portion of your stock allocation should be invested in Canadian equities to provide diversification and exposure to the Canadian economy. Consider using a broad Canadian equity ETF that tracks the S&P/TSX Composite Index.
• U.S. Equities: U.S. equities offer exposure to a large and diverse market. You can use a U.S. equity ETF that tracks the S&P 500 or a broader U.S. market index.
• International Equities: International equities provide exposure to companies outside of North America. Consider using an international equity ETF that tracks the MSCI EAFE Index (Europe, Australasia, Far East) or the MSCI All Country World ex Canada Index.
• Small-Cap Value: This is where you tilt your portfolio towards the size and value factors. Look for ETFs that specifically target small-cap value stocks in Canada, the U.S., and internationally.

2. Factor ETFs

These are the building blocks of your factor-based portfolio. You'll want to choose ETFs that are low-cost, liquid, and accurately track the desired factors. Here are some examples of ETFs that Canadian investors can use (note: these are examples and you should do your own research to find the best options for your specific needs):

• Canadian Equities:
  • XIC (iShares S&P/TSX Capped Composite Index ETF): This is a broad Canadian equity ETF that tracks the S&P/TSX Composite Index.
• U.S. Equities:
  • VUN (Vanguard U.S. Total Market Index ETF): This ETF tracks the performance of the CRSP US Total Market Index, providing broad exposure to the U.S. equity market.
  • XUU (iShares Core S&P U.S. Total Market Index ETF): Similar to VUN, XUU offers broad exposure to the U.S. equity market.
• International Equities:
  • XEF (iShares Core MSCI EAFE IMI Index ETF): This ETF tracks the performance of the MSCI EAFE IMI Index, providing exposure to developed markets outside of North America.
  • VIU (Vanguard FTSE Developed All Cap ex US Index ETF): This ETF tracks the performance of the FTSE Developed All Cap ex US Index, offering similar exposure to XEF.
• Small-Cap Value:
  • AVUV (Avantis U.S. Small Cap Value ETF): While not Canadian-listed, this U.S.-listed ETF can be used to gain exposure to U.S. small-cap value stocks. Consider the currency exchange implications.

3. Rebalancing

Once you've established your asset allocation, it's important to rebalance your portfolio periodically. Rebalancing involves selling some of your overperforming assets and buying more of your underperforming assets to bring your portfolio back to its target allocation. This helps to maintain your desired risk level and ensures that you continue to benefit from the factors you're targeting. A good rule of thumb is to rebalance annually or whenever your asset allocation deviates significantly from your target (e.g., by more than 5%).

4. Tax Efficiency

In Canada, it's important to consider the tax implications of your investment decisions. Different types of investment accounts have different tax treatments. For example, investments held in a Tax-Free Savings Account (TFSA) grow tax-free, while investments held in a Registered Retirement Savings Plan (RRSP) are tax-deferred. You'll want to structure your portfolio in a way that minimizes your tax liability. This may involve holding certain types of assets in specific accounts. For example, it may be more tax-efficient to hold dividend-paying stocks in a TFSA, where the dividends are not taxed. Another thing to consider is that capital gains are only taxed when you sell an investment. So, if you're planning to hold your investments for the long term, you may want to avoid selling them unnecessarily to minimize your tax liability.

Benefits of the Ben Felix Model Portfolio

So, why should you consider the Ben Felix model portfolio? Here are some of the key benefits:

• Evidence-Based: The portfolio is based on academic research and historical data, rather than speculation or market timing.
• Diversified: The portfolio is diversified across different asset classes and factors, which helps to reduce risk.
• Low-Cost: The portfolio is typically implemented using low-cost ETFs, which helps to minimize investment expenses.
• Simple: The portfolio is relatively simple to understand and implement, even for beginner investors.
• Potentially Higher Returns: By tilting the portfolio towards factors that have historically outperformed the market, the portfolio has the potential to generate higher returns over the long term. Of course, past performance is not indicative of future results, but the evidence suggests that these factors are likely to continue to be rewarded in the future.

Potential Drawbacks

While the Ben Felix model portfolio has many benefits, it's important to be aware of the potential drawbacks:

• Factor Tilts Can Underperform: While small-cap and value stocks have historically outperformed the market, there can be periods of underperformance. This can be frustrating for investors who are used to seeing their portfolios grow steadily.
• Requires Discipline: The portfolio requires discipline to stick with the strategy through thick and thin. It's easy to get discouraged during periods of underperformance and want to abandon the strategy, but it's important to remember that long-term investing requires patience and perseverance.
• Not a Get-Rich-Quick Scheme: The portfolio is designed for long-term wealth accumulation, not for getting rich quick. It's important to have realistic expectations and understand that it may take many years to see the full benefits of the strategy.

Is the Ben Felix Model Portfolio Right for You?

The Ben Felix model portfolio is a great option for Canadian investors who are looking for a simple, evidence-based, and low-cost way to build a diversified portfolio. However, it's not for everyone. If you're looking for a get-rich-quick scheme or you're not comfortable with the idea of tilting your portfolio towards specific factors, then this may not be the right strategy for you. Ultimately, the best way to determine if the Ben Felix model portfolio is right for you is to do your own research, consult with a qualified financial advisor, and consider your own individual circumstances.

Remember, investing involves risk, and there is no guarantee that you will achieve your investment goals. But by following a disciplined and evidence-based approach, you can increase your chances of success.

Happy investing, eh!