Today I’m answering reader mail for a feature I call the Money Bag. I’ll answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about all the money things you’re dying to know.
To start, we’ve got a question from Lawrence who’s looking for the best way to invest $1M and get a decent return.
Best way to invest $1M and get a decent return
“Hi Robb, I’m 62 years of age, married and both of us are retired. Our income in mostly derived from our investment portfolio. Like many people, I’m disappointed in how our investment portfolio has performed this past year. Of course the markets are largely to blame.
Our portfolio is managed by one of the big bank’s private investment counsel, for a fee of course (1.5 percent annually). Our portfolio – a mix of non-registered, RRSP, LIF and TFSA accounts – is currently valued at about $2.1M. Very recently I’ve become interested in moving about $1M of our non-registered funds away from their management and invest it myself by way of our discount brokerage account. I am looking for the best and easiest methods/vehicles to obtain a decent average return. I’m not looking for home runs – I would be quite content with an average annual return of 7-8 percent.
Is your investment portfolio still parked in two ETFs? i.e. Vanguard’s VCN (Canadian equities) and VXC (the rest of the world). If so, how has that gone for you at this stage? Are you staying the course? Would you perhaps recommend the same strategy for me with $1M?
Our advisor recently recommended that we move $1M of our non-registered funds into a segregated fund, which has a 1 percent annual management fee PLUS a separate $2,500/year active-management fee. I’m becoming weary of all these fees by wealth management firms. The returns never match expectations and “promises” made. I believe at this point that I could no worse investing on my own, if I’m very careful of course.”
Hi Lawrence, thanks for your email. I understand you’re not pleased with how your investments are performing and I wonder if fees are more to blame than market performance? Do you feel you’re getting value for the 1.5 percent fee?
Just doing the math on $2.1M and that’s $31,500 per year! Has that ever been expressed to you in dollar terms? Paying for advice can be worthwhile if you are receiving major financial planning, tax, and estate planning advice. So the question is, are you receiving that, and, is it worth $31,500 per year. I’m going to guess the answer is no.
To answer your question, my two-ETF portfolio is currently down about 2 percent on the year. I’m not panicking. This is perfectly normal. Remember, we’ve been on a nine year bull market run. I know we’re used to seeing double-digit gains in the market but that is not sustainable each and every year. Markets are volatile and we should expect to see them go down or sideways from time to time.
Since 2010 my portfolio has returned an average of 8.6 percent per year. That’s right where we’d hope to be for a long time horizon.
I would be weary of the segregated fund, which comes loaded with fees as you’ve discovered. Be careful with any advisor “promising” anything related to market performance. Nobody knows where markets are headed and so the best course of action with your investments is to stay globally diversified and keep your costs low.
Lawrence, it also sounds like you need to derive income from your portfolio and so I want to point you to this excellent article on how to generate retirement income from a portfolio of ETFs and GICs. It’s a must read for retirees. Read it all the way through, including the examples near the end about how to rebalance it all each year.
Have you looked into Nest Wealth for your stock/bond portion? They are a robo-advisor that can place you into an appropriate portfolio of index ETFs (stocks and bonds from around the world) and they charge just $80 per month. No percentage of assets. That makes them a huge bargain for investors such as yourself with more than $1M in assets to invest. If you slashed your investment costs and then hired an advice-only planner to assist with financial planning, estate, and tax planning for a one-time fee, you’d pay far less in fees, improve your investment outcomes, and get objective, unbiased advice on the rest of your financial needs.
Two ETF Portfolio vs. VGRO
Here’s Jennifer, who wants to know whether she’d be suitable for an all-equity portfolio of ETFs (like my own two-fund solution):
I’ve just discovered you and your site from the Rational Reminder podcast. I’ve been so excited by what I’ve been learning and this fall I opened up a Questrade Account and have moved my TFSA, RRSP and RESP to this self-directed platform. Up until I’d listened to the podcast, I was on track to purchase Vanguard’s VGRO. I love the simplicity and the asset allocation even though I’m 48 and my husband is 44.
Because I’ve come to the investing table later in life, I feel like I’ve got some catching up to do. Your asset allocation of 75 percent / 25 percent in VXC/VCN seemed amazing to me. Am I crazy at my age for considering it? My husband will have a teacher’s pension, but outside of that we have a paid for condo ($600,000), but only $25,000 combined in our RRSPs and TFSAs, and $60,000 in an RESP. Come January, we plan to contribute $1,000 per month to the TFSA.
I would love any input to know if we’re on the right track, and especially if you think it’s too late in life for us to try the two-fund portfolio? I’m not opposed to rebalancing on my own, but I know VGRO is pretty effortless.”
Hey Jennifer, thanks for your email. Vanguard’s asset-allocation ETFs came around after I had already set up my two-ETF portfolio and I haven’t bothered to switch. The main reason is because I prefer to be in 100 equities at this time (I’m 39), but I’m not opposed to switching to VGRO some time down the road. (VGRO is 80 percent stocks and 20 percent bonds).
When in doubt, I’d go with the simple solution and concentrate more on contributing as much as you can. Catch up on your investments by increasing your savings rate, not by trying to eke out an extra bit of return. Trust me, once you go down that path it’s a slippery slope to constantly second guess yourself and tinker with your portfolio far too often.
In fact, when you look at the 20-year returns of these various model portfolios it’s fair to wonder why anyone would go with a 100% equities portfolio when the returns of a more balanced portfolio are nearly identical with way less volatility:
High Cost Funds in Saskatchewan
Here’s a question from Jonathan about investing in labour sponsored investment funds in Saskatchewan. Take it away, Jonathan:
“Hi Robb, I was recently talking with a family member about retirement savings plans and came across a Saskatchewan based firm called Golden Opportunities Fund (a family member was maxing out contributions into this) and also another called Sask Works Venture Fund. These funds are subsidized by government tax credits and support local Sask companies. I thought this might be interesting as its a significant up front tax credit that I can re-invest into something else.
Once I started to dig into the funds, I was quickly angered by crazy fees and 8 year commitment terms for the funds. The funds are extremely under diversified and high concentrated into select companies. One fund invests almost 19% into Aurora Cannabis, and these are supposed to be retirement plans for people!
As you can imagine, my stomach felt sick for my family member to be invested into this fund as a retirement plan. Governments also supports these funds with tax credits which I think is doing a disservice to investors.
My question to you is have you written a blog post in the past about these or know of anyone who has? I have searched but not come up with very much to show my family member another opinion besides the fund sales persons promise of quick cash back and a “retirement savings” plan.”
Hi Jonathan, thanks for your email. I’m glad you’re looking out for your family members. I had not heard of the Golden Opportunity Fund but it looks like a classic Labour Sponsored Investment Fund. It’s legitimate, but highly controversial and the program has been eliminated in some provinces, although obviously not in Saskatchewan. It was a way for governments to assist with riskier venture capital like mining and oil & gas exploration.
When you contribute up to $5,000 in a year you’ll receive a federal tax credit of $750 and a provincial tax credit of $875. As you discovered, your money is tied up for eight years. Selling early means forfeiting those tax credits.
Here’s a good explainer of the risks and costs associated with labour sponsored funds.
This particular fund has only returned 2.9 percent annually since inception in 1999. Not exactly the type of returns you’d be looking for from such a risky venture, and certainly not something I’d want to sink any sizeable amount into, let alone the bulk of my retirement savings!
I’d think of this sector more like the CoPower Green Bonds that I blogged about earlier this year; something to maybe put a small portion of your portfolio towards if you believe in supporting local businesses or whatever the case may be.
The bottom line: Labour sponsored investment funds do provide some tax advantages but not without several risks. This is definitely not a retirement plan, or a quick cash-back scheme at all.
Canadians started piling on the debt after the financial crisis in 2008. Back then our household debt-to-income ratio was sitting around 150 percent ($1.50 owed for every dollar of disposable income). Today that number hovers around 170 percent. We are kicking debt down the road, instead of kicking it to the curb.
It can be reasonable to take on debt for big ticket items such as a mortgage, vehicle, education, or for an investment. We often do so because it’s easier to pay off a loan over time than it is to save enough to pay the full cost upfront. That’s life.
But the pain of debt can be masked by the cheap cost of borrowing. Low monthly payments, interest-only payments, and long amortization periods give the illusion that our debts are manageable. We think a long overdue raise, promotion, tax refund, or some other windfall will solve our money problems, but until then the debts keeps piling up.
We get trapped in an unending cycle of minimum monthly payments and creditors are happy to oblige if it means getting you into a bigger house with a new SUV and an annual trip to the Dominican.
Here are four ways we keep kicking debt down the road:
1.) Minimum payments on your credit card
A cardinal sin of personal finance. We’ve all seen the disclaimers on our credit card statements that say if we only make the minimum payment each month it’ll take a lifetime to pay off your balance in full.
My latest American Express statement had an outstanding balance of $1,086 and the minimum monthly payment was only $10. At that rate it would take 9 years and 1 month to erase the $1,086 debt, and I would have paid another $1,000 in interest charges along the way.
Yet many people do this every single month. It’s easy to see why when you’re living paycheque-to-paycheque and there’s no wiggle room in your budget. A $10 payment gets the credit card company off your back and gives you some breathing room today. Unfortunately it’s your future self who’s forced to pay the bill.
The average credit card debt is hovering around $4,000, according to TransUnion. Most credit cards charge 19.99 percent interest or higher, making this one of the most expensive forms of debt to carry over from month to month.
That’s why I recommend treating credit card debt like a four alarm fire emergency. Slash your spending, pause any savings plans, and divert any extra cash you can towards your credit card balance until it’s gone for good. This is one debt you cannot afford to kick down the road.
Related: Debt avalanche vs. Debt snowball
2.) Interest-only payments on your line of credit
The run-up in housing prices over the last decade has fuelled a borrowing frenzy with Canadians tapping into their home equity at a record pace. Canadian home equity line of credit balances reached $230 billion earlier this year. That’s 3 million HELOC accounts open at an average outstanding balance of about $70,000.
One insidious feature of a HELOC is that it only requires a monthly interest payment. In fact, about 40 percent of HELOC borrowers don’t regularly pay down the principal.
Let’s say you have a $70,000 balance and the interest rate on your HELOC is 4 percent. Your monthly interest payment would be about $233 and each month that amount would be taken from your chequing account and applied to the HELOC balance.
But unlike other loan repayments there is nothing stopping a borrower from transferring that $233 right back to his or her chequing account – a move called “capitalizing the interest.” Also known as kicking debt down the road forever.
A big line of credit balance tends to linger until the mortgage comes up for renewal, in which case the borrower tries to roll the HELOC balance back into the mortgage, or until the homeowner sells the home and the balance is paid off from the sale proceeds.
A HELOC is not an ATM. It can be useful for a specific purpose, such as a home renovation or to buy a car. Using it to supplement your income, though, is a bad idea that will catch up with you eventually.
If you find yourself with a lingering line of credit balance make a plan to pay it off over a reasonable amount of time. Set up automatic transfers from your chequing account each month to match your target pay off date and start whittling down that balance today.
3.) Extending your amortization
You bought a house and took out a mortgage amortized over 25 years. When it comes time to renew in five years, instead of sticking with your amortization schedule at 20 years, your mortgage broker talks you into extending the amortization back to 25 years to keep your payments low.
While it might sound good in theory to give yourself the flexibility of a low payment in case of emergency, it’s too tempting to use that option to free up extra cash flow for lifestyle inflation and spending.
Extending your amortization means never getting any closer to paying off your mortgage. It prioritizes today’s cash flow over tomorrow’s freedom – not something your future self will appreciate when you have to delay retirement until that damn mortgage is paid off.
The smart move is to not only stick to the original amortization schedule on your mortgage but also to reduce it further by changing your payments to bi-weekly instead of monthly, increasing your payment by $50 or $100 when your budget allows it, and taking advantage of your pre-payment privileges when possible.
Making mortgage payments is automation at its finest – forced savings that you won’t miss once it has left your account.
4.) Long-term car loans
Canadian auto debt continues to grow as the average consumer’s auto-loan balance climbed to $20,160 last year. I’m on record saying that Canadians’ obsession with having two brand-new trucks or SUVs in the driveway is killing our finances.
Blame the fact that six and seven year car loans are now the norm.
The trend towards longer term car loans is problematic for two reasons. One, people are getting talked into buying more expensive cars at the dealership. That’s because the focus is about the monthly payment rather than the total cost of financing the vehicle. Longer term loans keep monthly payments affordable and increase the chances of selling an expensive vehicle.
Two, consumers get trapped in a negative equity cycle when they want to trade-in their vehicle before it’s paid off. The existing loan balance gets rolled into the new car loan, and the now more expensive car loan cycle begins.
Breaking the cycle takes sacrifice. Drive your cars longer (10 years+), buy used, only buy as much car as you need, reduce your household vehicles from two to one, and save up and pay cash for your next one.
Successful money management starts with being smart about debt. Kicking it down the road only prolongs the inevitable.
Tackle your credit card balance first, and be relentless. You’ll never get a better guaranteed return than paying down debt at 20 percent interest. Stop treating your home equity like an ATM and start paying down the principal. Don’t wait until you sell your home.
Stick to your amortization schedule and try to pay off your mortgage in 15-25 years. Extending your amortization or taking payment vacations is not a path to prosperity.
Finally, break that auto-loan cycle. Long term financing might make your monthly payments more affordable today, but it’s awfully expensive in the end, especially if you keep trading in your car every 3-5 years.