This blog post is adapted from my French column with the newspaper Les Affaires.

I’m sometimes asked for my opinion about the portfolio of an investor who calls on the services of my employer, PWL Capital. Today’s blog post covers some of the most common flaws of the portfolios I’ve analyzed over the past few months. Do you recognize certain features of your own portfolio?

1. Small basket of securities

The old theory that 20 to 30 stocks are enough for a diversified portfolio is quite simply wrong. How can you keep your head above water if half of your portfolio is made up of securities in the wrong sector or wrong country, or even if 4 or 5% of your investments are in shares of a company that goes bankrupt? Over 40% of the value of some of the portfolios I analyzed was concentrated in the 10 main securities. That’s way too much. In my opinion, you should hold thousands of different securities, and no more than 20% of your portfolio should be made up of the top 10.

2. Not enough bonds

Portfolios with zero or very few bonds are frequent. I’ve noted that during episodes of normal volatility, a lot of people have strong enough nerves to feel at ease with a portfolio containing only equities. But in the event of a crash, they find themselves stuck on a rollercoaster that makes them question their strategy and discard it — just when it’s crucial to keep calm and stay the course. The good thing about bonds is that they smooth out portfolio volatility in times of crisis. For most investors, depending on their personality, age and knowledge of how financial markets work, a weighting of 20 to 50% in bonds is prudent.

3. Too much cash

Cash refers to short-term investments such as high-interest savings accounts and other investments due to mature in less than a year. Although these investments generate interest, the amount is much lower than for bonds, which have terms to maturity ranging anywhere from one to 30 years. According to a very solid study commissioned by Crédit Suisse1, the historical gap between the return on long-term government bonds and short-term Treasury bills is about 1.2%. It’s called the maturity risk premium — in other words, the additional return offered to convince you to buy bonds, which are generally more volatile than cash. The credit spread is also bigger for bonds than cash: the difference in rates between corporate securities and government securities is greater for 10-year than 30-day maturities.

In short, if you hold substantially more than 5% in cash on a more or less permanent basis, you needlessly forgo long-term return. And you’re not alone: some of the portfolios I studied contained up to 30% cash. If you don’t expect to have to dip into your investment account to finance an expenditure, I would tend to say that you should keep the percentage in cash as close to zero as possible.

4. Not enough international diversification

The most frequent mistake I noted is that many people hold 80 to 90% of their portfolio in Canadian and U.S. equities. I even saw some with 80% Canadian equities. Most investment mega-managers, like the Caisse de dépôt et placement du Québec and Ontario Teachers’, hold a major percentage of international equities. And so can you. Global markets comprise about 45 countries, half of them developed and the others emerging. An equity portfolio should include at least 30 to 40% non-North American securities.

5. Not enough diversification by corporate size

It is commonplace for portfolios to contain only large capitalization (“large cap”) stocks. Small and mid cap stocks nevertheless account for 30% of the value of the global market. The great majority of publicly traded companies are small and mid-cap companies. On top of this, academic research points to the existence of a small cap premium. In my opinion, 20 to 30% of your equities should consist of small and mid cap stocks, to optimize your portfolio’s risk-adjusted return.

6. Sector concentration / absence of certain market sectors

Some investors fall in love with specific sectors. This is often the case with Canadian banks, with their generous dividends, and technology companies, given people’s highly favourable view of their growth potential. As I’ve already written in this blog, I don’t think that high dividend equities are intrinsically better than other equities2. The same applies to tech companies. When the tech bubble burst in the early 2000s, we saw that securities in this sector can not only soar: they can also plunge.

7. Excessive fees

Ask yourself about the fees you pay. Your portfolio is like a small business: its profitability is equal to income minus expenditures. Spend too much and wave good-bye to profits! Fees can include amounts paid directly to your advisor, mutual fund and exchange-traded fund expense ratios, and commissions on purchases and sales in your portfolio. I estimate that with a balanced portfolio comprising equities and bonds, you can expect a return of about 5%. That means that each 1% in fees reduces your portfolio return by a fifth. The services rendered for these fees (financial planning, other advice to help you organize your financial situation) have to be worth the price! If you do business with an advisor and the total fees you pay are significantly higher than 1%, ask him or her about the services provided. You may decide that the services amply warrant the fees charged. However, if you find the fees too high, it’s time to talk about reducing them or to look for a new advisor. If you manage your portfolio yourself and the total fees are higher than 1%, you are probably paying too much.


In the light of this checklist, I think it’s obvious why I’m a fan of exchange traded funds (ETFs). How can you meet targets requiring diversification in terms of securities, countries, corporate sizes and sectors, while paying fees that don’t gobble up too much of your return? It’s simple: the great majority of other financial products can’t compete with the best the ETF market has to offer3.



1Dimson, E., Marsh, P., Staunton, M., Credit Suisse Investment Yearbook 2018.
2“For or against high-dividend equity funds?” blog post, based on my column “Pour ou contre les fonds d’actions à dividende élevé?,” published in Les Affaires in July 2017.
3For an ETF portfolio suggestion that meets the criteria described in this text, see my blog post “An ETF portfolio resistant to real estate market crashes and other calamities,” based on my column “Un portefeuille de FNB résistant aux krachs immobiliers et autres calamités,” published in Les Affaires in June 2017.