Welcome to another edition of Weekend Reading. I continue to receive a ton of emails from readers and clients about investing, retirement, real estate, and more. I’ll answer some of those questions here in this special Money Bag column.
We’ll look at investing in a rental property, rebalancing RESPs for older children, the limitations of Wealthsimple Trade, dabbling in cryptocurrency, and how much should you invest in your own company stock.
Buying an investment property
“Hi Robb. We live in a small city outside of Toronto, where house prices continue to increase significantly. We are thinking of investing in a 2 bedroom condominium in the city, using $100,000 of our own savings plus a mortgage of $400,000, but have some reservations: (1) The rental income may not be quite enough to cover mortgage payments, condo fees etc. (2) We will have the hassle of dealing with tenants and tenancy issues (3) The housing bubble may burst and prices may stagnate. I wonder if we would be better off investing in REIT’s or something similar.”
Hi Dennis, do you already own your own house in that area? If so, you already have plenty of real estate exposure.
I think you’ve highlighted three really good reasons not to buy a rental property (regardless of the current market conditions).
And by investing in a low cost and globally diversified portfolio of index funds you’ll automatically have some exposure to REITs in an appropriately weighted allocation.
My experience working with clients who do own investment properties is that they don’t spin off as much income as you’d think, they can be a pain to manage, and you’d be better off selling them at some point anyway to top-up your investments before you retire.
Rebalancing RESPs for older children
“Hi Robb, I really enjoy your blog and have been motivated to start my own journey into DIY investing. I plan to follow your lead and invest in VEQT for the foreseeable future. My question is about RESPs for my daughters, who are in grade 6 and grade 4. At what point should I reduce the equity exposure in this account? I have zero confidence in the bond market right now.”
Hi Shonna, I’m in the same boat when it comes to RESPs. My family RESP (two kids, 11 and 8) is still in 100% equities using TD’s e-Series funds. My original plan around this age was to simply start introducing the TD Canadian Bond Index fund with my regular monthly contributions. I still might do this, but I’ll likely wait another year and see what happens with bond prices.
I realize this is market timing and I should simply follow a rules-based approach, but the time horizon is still pretty long at 7-10 years so I feel confident holding 100% equities for another year or two.
Here’s a great explainer from the Million Dollar Journey blog on how he manages his own kids’ RESP portfolio:
You could also consider Justwealth’s target education date (robo-advised) RESP portfolio. They’ll automatically adjust the portfolio allocation in much the same way that the MDJ post describes, except they use a rules-based approach to take away our decision making from the process (that’s a good thing).
If you want to avoid bonds but still want to stick with an 80/20 portfolio you could use VEQT for 80% of the balance and then perhaps open another RESP on the banking / mutual fund side of your financial institution and simply buy GICs. The interest rates will be terrible but you won’t be at risk of losing principal.
Or, go with a short-term bond fund which is less sensitive to interest rate movements (Vanguard’s VSB, for example).
Limitations of Wealthsimple Trade
“My spouse and I have an RRSP, a spousal RRSP, and a personal, joint investment account at CIBC. I’d like to transfer them over but don’t think that spousal RRSP is an account available in Wealthsimple Trade right now. Is this correct? If so what’s the best choice to handle this?”
Hi Parvinder, as you’ve discovered, Wealthsimple Trade has its limitations – mostly due to the account types it offers (only personal RRSPs, TFSAs, and non-registered investment accounts). Wealthsimple Invest, the robo advisor, does offer more account types but you wouldn’t be able to select your investments.
If you prefer to self-manage your investments and want everything in one place then consider Questrade, which offers all the account types you need. Questrade also offers free ETF purchases, so if you’re in the accumulation phase of life and just buying a single asset allocation ETF then this would work out very nicely for you.
Here’s a quick explanation on how to open a Questrade account and transfer your existing investments.
Dabbling in cryptocurrency
Hi Robb, I have a question about Ripple (XRP) as an investment. I’m thinking of throwing $500 into it through the bitbuy app. My friend invested in it and has made quite a bit of money. I’ve been researching the price predictions for the next 10 years and it looks solid. What do you think?
Hi Danielle, if it’s $500 you can afford to lose then there’s nothing wrong with making a speculative bet on it. But, treat it more like casino money and not as an investment.
Price predictions are usually made by those who are heavily invested in seeing the price move up or down, so take any of that research with a huge grain of salt. Cryptocurrency is a hugely speculative asset class. It doesn’t have an expected return because it doesn’t produce anything or have any value beyond trying to sell it to someone else at a higher price.
These speculative plays tend to crash and burn hard, so getting in after an enormous run-up in prices probably doesn’t leave you with much upside. Meanwhile, there’s a LOT of downside.
Finally, beware that most cryptocurrency exchanges are largely unregulated and prone to hacks and fraud. If you want to invest a small amount just to cure your FOMO then consider using Wealthsimple Crypto, which is actually a regulated exchange in Canada. You can only buy Bitcoin or Ethereum, but it’s insured and you don’t have to mess around with digital wallets.
Telus stock versus indexing
“Hi Robb, I know you are a proponent of index investing, but we buy shares of Telus every paycheque, due to the employee matching program. Telus matches us 12% (and no fees for purchasing or participating in the DRIP).
I know it may risky to have a large holding in just one company, but do you think it’s better for us to continue to invest in the Telus shares, due to the fact that Telus just spun-out Telus International and is planning to do the same with Telus Health, Telus Agriculture, Telus Security?
Also, Telus is heavily investing in 5G technology and in the internet of things, making it effectively a company that owns other companies, in the future.”
Hi Jeff, are you asking if investing in a single company in Canada, a country that makes up 3% of global financial markets, is the same or better than investing in a globally diversified portfolio made up of thousands of companies?
It’s generally not wise to have any significant amount of your retirement savings invested in the company that also employs you. Ask any former Nortel or Enron employees about that.
By all means, take advantage of employer-matching programs and discounted stock purchase plans. But once your shares exceed 5% or so of your overall portfolio, it’s probably best to move them to a more diversified basket of investments.
Our friends at Credit Card Genius share the best credit card offers, sign-up bonuses, and deals for April.
Check out my interview with My Own Advisor Mark Seed about my journey to financial independence through entrepreneurship.
Barry Choi at Money We Have explains how to invest in index funds.
Jason Zweig at the Wall Street Journal says investors shouldn’t be fooled by the stock market’s newest magic trick:
“What happened? Did hundreds of fund managers start popping genius pills? No, although marketing departments are probably gearing up to tout their brilliance. Instead, the ghastly losses of early 2020, when stocks fell by 34%, have just disappeared from trailing one-year returns.”
A Wealth of Common Sense blogger Ben Carlson looks at what happens after the stock market is up big.
Global’s Erica Alini takes a look at average incomes relative to average home prices across markets over the last 40 years.
On The Evidence Based Investor blog, Larry Swedroe explains why older investors handled last year’s volatility worst.
PWL Capital’s Justin Bender explains how to calculate your money-weighted rate of return:
Jason Heath says Canadian inheritances could hit $1 trillion over the next decade, and both bequeathers and beneficiaries need to be ready.
Here’s why retirees should avoid being frugal with their savings:
“Having a comprehensive financial plan that considers assets, cash flow, taxes and lifestyle needs and wants is recommended for people to worry less about money in retirement, and maybe spend more.”
The always insightful Morgan Housel shares the big lessons of the last year.
Finally, a great reminder to stop thinking about what you’re retiring from and start thinking about what you’re retiring to.
Enjoy the rest of your weekend, everyone!
Retirees face a myriad of questions as they head into the next chapter of their lives. At the top of the list is whether they have enough resources to last a lifetime. A related question is how much they can reasonably spend throughout retirement.
But retirement is more than just having a large enough pile of money to live a comfortable lifestyle. Here are some of the biggest questions facing retirees today:
Should I pay off my mortgage?
The continuous climb up the property ladder means more Canadians are carrying mortgages well into retirement. What was once a cardinal sin of retirement is now becoming more common in today’s low interest rate environment.
It’s still a good practice to align your mortgage pay-off date with your retirement date (ideally a few years earlier so you can use thee freed-up cash flow to give your retirement savings a final boost). But there’s nothing wrong with carrying a small mortgage into retirement provided you have enough savings, and perhaps some pension income, to meet your other spending needs.
Which accounts to tap first for retirement income?
Old school retirement planning assumed that we’d defer withdrawals from our RRSPs until age 71 or 72 while spending from non-registered funds and government benefits (CPP and OAS).
That strategy is becoming less popular thanks to the Tax Free Savings Account. TFSAs are an incredible tool for retirees that allow them to build a tax-free bucket of wealth that can be used for estate planning, large one-time purchases or gifts, or to supplement retirement income without impacting taxes or means-tested government benefits.
Now we’re seeing more retirement income plans that start spending first from non-registered funds and small RRSP withdrawals while deferring CPP to age 70. Depending on the income needs, the retiree could keep contributing to their TFSA or just leave it intact until OAS and CPP benefits kick-in.
This strategy spends down the RRSP earlier, which can potentially save taxes and minimize OAS clawbacks later in retirement, while also reducing the taxes on estate. It also locks-in an enhanced benefit from deferring CPP – benefits that are indexed to inflation and paid for life. Finally, it can potentially build up a significant TFSA balance to be spent in later years or left in the estate.
Should I switch to an income-oriented investment strategy?
The idea of living off the dividends or distributions from your investments has long been romanticized. The challenge is that most of us will need to dip into our principal to meet our ongoing spending needs.
Consider Vanguard’s Retirement Income ETF (VRIF). It targets a 4% annual distribution, paid monthly, and a 5% total return. That seems like a logical place to park your retirement savings so you never run out of money.
VRIF can be an excellent investment choice inside a non-registered (taxable) account when the retiree is spending the monthly distributions. But put VRIF inside an RRSP or RRIF and you’ll quickly see the dilemma.
RRIFs come with minimum mandatory withdrawal rates that increase over time. You’re withdrawing 5% of the balance at age 70, 5.28% at age 71, 5.40% at age 72, and so on.
That means a retiree will need to sell off some VRIF units to meet the minimum withdrawal requirements.
Replace VRIF with any income-oriented investment strategy in your RRSP/RRIF and you have the same problem. You’ll eventually need to sell shares.
This also doesn’t touch on the idea that a portfolio concentrated in dividend stocks is less diversified and less reliable than a broadly diversified (and risk appropriate) portfolio of passive investments.
By taking a total return approach with your investments you can simply sell off ETF units as needed to generate your desired retirement income.
When to take CPP and OAS?
I’ve written at length about the risks of taking CPP at 60 and the benefits of taking CPP at 70. But it doesn’t mean you’re a fool to take CPP early. CPP is just one piece of the retirement income puzzle.
The research favours deferring CPP to age 70 if you have enough personal savings to tide you over while you wait. This may or may not apply to you.
One reader comment resonated with me when he said, “my plan is to take CPP at age 70 but that doesn’t mean the decision is set in stone. I’m going to evaluate my retirement income plan every year and determine whether or not I need it.”
There’s less incentive to defer OAS to age 70 but it’s still sensible if you’re still working past age 65 or if you have lived in Canada less than 40 years.
Otherwise, the bird in the hand approach is reasonable – taking OAS at age 65 while deferring CPP up to age 70.
When to convert to a RRIF?
You must convert your RRSP to a RRIF in the year you turn 71 and then begin withdrawals the next calendar year. But you can convert all or a portion of your RRSP into a RRIF before then. Here’s when it might make sense:
If you are between age 65 and 71 and don’t have any pension income, you could convert some of your RRSP into a RRIF and start drawing $2,000 per year from the RRIF. This strategy will allow you to claim the pension income tax credit.
Another potential advantage of converting to a RRIF earlier than 71 is that your financial institution won’t withhold tax on the minimum withdrawals. Of course, it’s still taxable income and you’ll pay your share at tax time.
This Week’s Recap:
Earlier this week I told investors that it would be ludicrous to invest in complicated model portfolios. Twitter agreed:
New | Why It Would Be Ludicrous To Invest In These Model Portfolios https://t.co/qpdn6TNrS8
— Boomer and Echo (@BoomerandEcho) March 27, 2021
I also answered some basic (but common) investing questions I get from readers and clients.
The MoneySense guide to the best ETFs in Canada is out again and I was once again pleased to join the panel of judges and share my thoughts on the top ETFs for investors.
Promo of the Week:
The American Express Cobalt Card is arguably the best ‘hybrid’ rewards card in Canada. Earn 5x points on groceries, dining, and food delivery, plus 2x points on transit and gas purchases.
New Cobalt cardholders can earn 30,000 points in their first year (2,500 points for each month in which you spend $500) plus, you can earn a welcome bonus of 15,000 points when you spend a total of $3,000 in your first 3 months.
I use the Amex Cobalt card and transfer the Membership Rewards Select points to the Marriott Bonvoy rewards program.
Our friends at Credit Card Genius share a great tip that you can convert your Air Canada Buddy Pass into 30,000 Aeroplan miles. An awesome perk since it’s unlikely we’ll get to use those Buddy Passes in the near future.
A great post by Nick Maggiulli (Of Dollars and Data) on the downsides of the FIRE lifestyle. Once you achieve it, then what?
In his latest Evidence Based Investor column, Larry Swedroe explains the risks of buying individual stocks.
Downtown Josh Brown doesn’t pull any punches when it comes to investing in SPACs, digital currencies, or non-fungible tokens:
“The grotesque spectacle of broke twenty-somethings lining up to buy a pointless digital trinket invented out of thin air by the World’s Richest Man prompted this post.”
PWL Capital’s Justin Bender shows do-it-yourself investors how to calculate their time-weighted rate of return.
Here’s the accompanying video:
Michael James on Money shares an incredible roadmap for a lifelong do-it-yourself investing plan.
Could you retire on $300 a month in Mexico? Andrew Hallam takes a look at international living on the cheap.
Morgan Housel says that virtually all investing mistakes are rooted in people looking at long-term market returns and saying, “That’s nice, but can I have it all faster?”
Morningstar’s Christine Benz looks at another burning question facing retirees: How much should you worry about inflation in retirement?
Here’s writer Sarah Hagi’s misadventures in trading stocks on Wealthsimple Trade.
A nice segue into William Bernstein saying that free stock trading is like giving chainsaws to toddlers:
“Pray that you don’t get really lucky, because if you get really lucky, you may convince yourself that you’re the next Warren Buffett, and then you’ll have your head handed to you when you’re dealing with much larger amounts later on.”
Indeed, as Robin Powell writes, there’s more to life than trading stocks.
Experts caution investors to lower their future expected returns based on today’s high stock valuations and low bond yields. The Monevator blog offers some suggestions for investors to focus on instead of blindly sticking 12% into your calculations and praying you get that return.
The caring economy is the chokepoint of recovery: So, what’s the plan to value the people we know are essential to our well-being?
Morgan Housel is back with a list of five investing super powers. Ok, the fifth one is not really a super power.
Finally, a wild recap of the time when Home Capital Group almost went bankrupt, only to be saved by Warren Buffett.
Have a great Easter weekend, everyone!
Arguably no one has done more to educate Canadian do-it-yourself investors than the PWL Capital teams of Dan Bortolotti and Justin Bender, and Benjamin Felix and Cameron Passmore.
It began more than a decade ago with Dan’s incredibly popular Canadian Couch Potato blog and podcast. Since then, Dan teamed up with PWL’s Justin Bender, who has his own Canadian Portfolio Manager blog in addition to a podcast and YouTube channel dedicated to helping DIY investors.
More recently, PWL’s Ottawa team of Felix and Passmore launched their own successful Rational Reminder podcast, which complements Ben’s Common Sense Investing YouTube channel (which now boasts nearly 200,000 subscribers).
It’s an incredible amount of content dedicated to helping Canadians become better investors.
Their advice at its core is to follow an evidence-based investing approach that starts (and usually ends) with a low cost, globally diversified, and risk appropriate portfolio of index funds or ETFs. Simplify this even further by investing in a single asset allocation ETF that automatically rebalances itself.
Indeed, Justin Bender says,
“These simple one-fund solutions are ideal for the majority of DIY investors.”
Dan Bortolotti says,
“Since their appearance in early 2018, asset allocation ETFs have become the easiest way to build a balanced index portfolio at very low cost.”
And, Ben Felix says,
“Total market index funds are the most sensible investment for most people.”
Keeping it Simple
Dan’s writing was influential in my own journey from dividend investing to full-fledged indexing. But I took a long-time to switch to indexing because the product landscape was less than ideal.
In the early 2010’s, Dan’s model portfolios often consisted of six to 12 different ETFs. All one had to do was look at the comments left on his articles by investors who agonized over whether to add 5% to REITs, 2.5% to gold, or put an extra tilt to their U.S. holdings. Meanwhile, these were often new investors with less than $10,000 in their portfolio.
Then Vanguard introduced a groundbreaking ETF called VXC (All World, except for Canada). Now a Canadian investor could set up a low cost, globally diversified portfolio of index funds with just three ETFs (VCN for Canadian equities, VAB for Canadian bonds, and VXC for global equities).
I took the plunge and sold my dividend stocks to purchase a two-fund (all equity) portfolio consisting of VCN and VXC. Ben Felix said that, “back in 2017, the simplest portfolio around was Robb Engen’s four-minute portfolio, which consists of only two equity ETFs.”
Then, in 2018, Vanguard again changed the game when it launched a suite of asset allocation ETFs designed to be a one-fund investing solution. That’s when I switched my two-fund solution over to my new one-fund solution with Vanguard’s VEQT.
Tangled up in Plaid
It would be great if the debate ended there, but this is investing and many of us are wired to look for an edge to boost our returns. Accepting market returns is difficult because we’re constantly distracted by shiny objects, and doom & gloom forecasts, not to mention the notion that when markets are booming or crashing we feel like we need to do something.
Index investors are not immune to this. Not content with a total market, all-in-one solution, some indexers look to reduce their fees even more by holding U.S. listed ETFs and performing the currency conversion tactic known as Norbert’s Gambit.
Justin Bender’s model portfolios include ‘ridiculous’, ‘ludicrous’, and ‘plaid’ options designed to squeeze out some extra return by reducing fees.
Bender’s Ludicrous Model Portfolio
|Vanguard Canadian Aggregate Bond Index ETF||VAB||40.00%|
|Vanguard FTSE Canada All Cap Index ETF||VCN||18.00%|
|Vanguard U.S. Total Market Index ETF||VUN||8.27%|
|Vanguard Total Stock Market ETF (U.S. listed)||VTI||16.54%|
|Vanguard FTSE Developed All Cap ex North America Index ETF||VIU||12.44%|
|Vanguard FTSE Emerging Markets All Cap Index ETF||VEE||1.58%|
|Vanguard FTSE Emerging Markets ETF (U.S. listed)||VWO||3.17%|
Bender’s Plaid Model Portfolio
|BMO Discount Bond Index||ZDB||29.29%|
|Vanguard FTSE Canada All Cap Index ETF||VCN||16.85%|
|Vanguard U.S. Total Market Index ETF||VUN||10.71%|
|Vanguard Total Stock Market ETF (U.S. listed)||VTI||16.06%|
|Vanguard FTSE Developed All Cap ex North America Index ETF||VIU||19.60%|
|Vanguard FTSE Emerging Markets ETF (U.S. listed)||VWO||7.49%|
Again, the idea here is to reduce the cost of your index portfolio and reduce or eliminate foreign withholding taxes. The plaid portfolio takes into account your after-tax asset allocation, recognizing that a portion of your RRSP is taxable and doesn’t fully belong to you.
And it’s true. By selecting certain individual ETFs over the all-in-one asset allocation ETF an investor can save a not-so-insignificant 0.28% in an RRSP (VBAL’s MER + foreign withholding tax = 0.42% while the combination of individual ETFs in Bender’s model portfolio costs just 0.09% MER + 0.05% FWT).
WTF (What the Factor)?
The PWL team of Felix and Passmore use funds from Dimensional Fund Advisors to build their client portfolios. These funds target the five known risk factors used to explain the differences in returns between diversified portfolios.
The risk factors include market (stocks beat t-bills), size (small cap stocks beat large cap stocks), value (value stocks beat growth stocks), profitability (companies with robust profitability beat companies with weaker profitability), and investment (companies that invest conservatively beat firms that invest aggressively).
Since it’s not possible for a Canadian DIY investor to access Dimensional Funds, Ben proposed a model portfolio designed to target the five factors.
Felix Five Factor Model Portfolio
|BMO Aggregate Bond Index ETF||ZAG||40.00%|
|iShares Core S&P/TSX Capped Composite ETF||XIC||18.00%|
|Vanguard U.S. Total Market Index ETF||VUN||18.00%|
|Avantis U.S. Small Cap Value ETF||AVUV||6.00%|
|iShares Core MSCI EAFE IMI Index ETF||XEF||9.60%|
|Avantis International Small Cap Value ETF||AVDV||3.60%|
|iShares Core MSCI Emerging Markets IMI Index ETF||XEC||4.80%|
This factor-tilted portfolio is slightly more expensive than Bender’s ludicrous option but the main objective of Felix’s Five Factor model portfolio is to increased expected returns.
Ben does present a compelling case for indexers to tilt their portfolios towards these factors to potentially juice expected long-term returns.
What index investors need to determine is whether that juice is worth the squeeze. I’d argue that it’s not.
The Behavioural Argument To Avoid Complexity
I have a huge amount of respect and admiration for what Dan & Justin, and Ben & Cameron have done for individual investors. But I think these model portfolios should be locked behind a pay wall, only to be accessed by investors who can demonstrate the experience, competence, and discipline needed to execute the strategy. That includes:
- Having a large enough portfolio for this to even matter.
- Using an appropriate investing platform that allows you to hold USD, perform same-day currency conversions, and keep trading commissions low.
- Creating an investing spreadsheet that’s coded to tell you what to buy and when to rebalance.
- Being an engineer or mathematician who not only loves to optimize but who also understands exactly what he or she is doing (and why).
- Having the conviction to stick with this approach for the very long term, even through periods of underperformance.
- Being humble enough to admit that you’re probably not going to execute this strategy perfectly.
Beginner investors shouldn’t worry about U.S. listed ETFs or factor tilts when they first start building their portfolio. It’s only once your portfolio gets into the $250,000 territory that you’ll start to see any meaningful savings in MER and foreign withholding taxes. Focus on your savings rate.
The investing platform matters. Wealthsimple Trade offers commission-free trades but doesn’t allow clients to hold US dollars, making it expensive to buy U.S. listed ETFs. Questrade is a more robust trading platform for DIY investors, and allows for free ETF purchases, but it takes a few days to process Norbert’s Gambit transactions leaving investors exposed to opportunity costs while they wait. Some platforms, like RBC Direct Investing, allow for same-day Gambits but also charge $9.95 per trade.
A investing spreadsheet, like the one Michael James has created for himself, takes decisions like what to buy and when to rebalance away from the investor and replaces them with a rules-based approach. This is critical, as humans are not likely to make good decisions consistently over time – especially in changing market conditions.
“Statistical algorithms greatly outdo humans in noisy environments.” – Daniel Kahneman
Multi-ETF investing models were designed by incredibly smart people who put in the research to create an optimal portfolio. It certainly looks elegant on a spreadsheet to see such precise allocations to emerging markets, international stocks, or U.S. small cap value stocks. But that precision gets thrown out the window when markets open the next day and start moving up and down.
Your carefully optimized portfolio is now live and immediately out of balance. Behavioural questions abound. When to rebalance? Where to add new money? What happens when I run out of RRSP or TFSA room?
In the case of the five factor model portfolio, how will you react if this approach doesn’t outperform a traditional market weighted index portfolio? Small cap value stocks have been crushed by large cap growth stocks for many years. How long will investors wait for the risk premium to come through?
My own investing journey and experience reviewing hundreds of client and reader portfolios tells me that the vast majority should be invested in low cost, globally diversified, risk appropriate, and automatically rebalancing products. Today, the easiest way to do that is with a single asset allocation ETF or through a robo advisor.
Again, one just has to look at the comment sections of their blogs and videos to find that these complicated portfolios lead to many more questions than answers. Dan likely realized this and simplified his Canadian Couch Potato blog model portfolios to include just the single-ticket asset allocation ETFs or TD’s e-Series funds.
But it’s clear that inexperienced investors are trying and failing to implement the more complicated portfolios in real life. In fact, it’s possible we’ll see thousands of Bender and Felix investing refugees flocking back to a one-ticket solution in the years to come.
That’s why the ridiculous, ludicrous, plaid, and five factor model portfolios should have been kept under wraps. Index investors don’t need more complicated solutions when they can beat the vast majority of investors with a simple, single-ticket asset allocation ETF.