Weekend Reading: Another Money Bag Edition

Welcome to another edition of Weekend Reading. I continue to get dozens of emails from readers every week and I’m pleased to share some of those questions and answers with the broader community so we can all learn from each other.

Today, we’ll look at investing FOMO and regret, where to park your cash savings, and whether to buy or rent in Vancouver (or any expensive market). Let’s open up the money bag and take a look:

I regret being too conservative with my investments

From Donna:

Hi Robb,

I have two portfolios with Questwealth, one is TFSA worth $77,000 in a growth portfolio, and the other is an RRSP worth $275,000 in a balanced portfolio.

I changed the RRSPs to balanced but I regret that now when I see the growth of 12% in my TFSA and only growth of 6% in my balanced portfolio. Would it be too much of a knee-jerk reaction to change my RRSP back to a growth portfolio or should I just leave it? I retire in three years and will start using some of that money soon after.

Hi Donna, thanks for your email. What you’re describing is quite common in investing. We look back in hindsight and wish we would have done something different with our portfolio. But the stock market could have easily lost money in 2021, in which case you would have been happier with your RRSP balanced portfolio and regretted having the growth portfolio in your TFSA.

Classic “performance chasing” is when investors look at what performed well in the past year and change their portfolio to “chase” that performance. But we know that past performance is no guarantee of future performance. In fact, in many cases that hot stock or ETF that did well last year will perform poorly the next year.

To give you some perspective, a balanced portfolio of 60% stocks and 40% bonds would have an expected annual rate of return of about 4.6%, while a growth portfolio of 80% stocks and 20% bonds would have an expected rate of return of about 5.3%.

In both cases your portfolio outperformed expectations. You should be thrilled with that result – your investments did what they were supposed to do, and more!

Finally, I presume the reason your RRSP is in a more conservative (balanced) portfolio compared to your TFSA is because you expect to start withdrawing money from it soon after you’ve retired. It should be in a less aggressive portfolio because you have a shorter time frame.

Meanwhile, perhaps your TFSA won’t be touched for another 10 years or more and so it may have a longer runway to grow and compound. In this case, it’s reasonable to hold a more aggressive portfolio due to the longer time horizon.

Bottom line: Your investments surpassed expectations in 2021 and you should continue to stay the course rather than chase higher returns.

Where to park cash savings?

From Randy:

I’m aiming to keep 6-12 months worth of expenses in cash. Where should it be placed? Bank rates are abysmal, but I want to have quick access in case of an emergency. Any suggestions?

Hi Randy, you’re right that you need to look outside the big banks to find higher interest rates on your savings deposits.

The best place I’ve found is EQ Bank’s Savings Plus Account. It’s an online bank, but it has some chequing account functionality, meaning you can pay bills and send e-Transfers – all for free. Just link it with your main bank account and you’re good to go.

EQ Bank currently pays 1.25% interest, which is pretty close to the top of the market. Best of all, no promotional periods or teaser rates or anything. Just a (relatively) high everyday rate you can count on. Your deposits are also CDIC insured for up to $100k per account.

Buying or renting in Vancouver?

From Sean:

Hey Robb, I hope you are well!

I received an interesting question the other day and would be curious about your thoughts. The question was whether to buy or rent in the current Vancouver market. My response stemmed from your article about renting vs buying from last year. As I thought more about it, I wasn’t as sure if renting was the best. The other variable in the question was the renting now option with a possibility of buying at a future date (one to two years later) when income increased. Hopefully, there was some price compression (although I see this as speculative).

I recognize the strength in the Vancouver (and Toronto) market, and the other variables such as desirability play a role. Curious to know if you have any additional thoughts.

Hi Sean, thanks for your email. It’s tough to say what would be the better choice. A lot of housing bears have been proven wrong over the last 10-12 years in Canada (more specifically in Toronto and Vancouver).

If you’re looking for price predictions you’ve come to the wrong place. I have no idea where housing prices are headed. All I know is if you plan on living in Vancouver long term, and you can afford to buy a home and carry the mortgage costs (while still being able to live, and save for the future), then buying can be a sensible option.

I recently reviewed an excellent new book called The Rule of 30. It says you should aim to save 30% of your gross income, minus mortgage/rent payments, minus extraordinary short-term expenses like daycare. This lets young parents off the hook a bit when it comes to saving for retirement while they battle high mortgage costs and childcare.

I’d also recommend testing out this rent-buy calculator developed by long-time blogger John Robertson.

I’d value renting for lower costs but also flexibility if you think you might leave the city for a job opportunity (for example). Ultimately buying a house should be a lifestyle decision and not necessarily a financial decision.

This Week’s Recap:

I updated and re-posted this guide on TFSA contribution limits with the new annual limit for 2022.

For those looking for last minute stocking stuffers of the personal finance variety then look no further than these excellent books:

• The Rule of 30
• Reboot Your Portfolio
• Money Like You Mean It
• Die With Zero

On the fiction side I really enjoyed reading Andy Weir’s Project Hail Mary.

Promo of the Week:

Do it yourself index investors have a new (and free) resource to help them answer burning questions like how much to save, how much they can safely spend in retirement, and how well their portfolio will hold up using a range of historical outcomes. 

The project was created by engineer and DIY couch potato investor Kurt Friesen. Check out Index Goose to simulate your retirement portfolio with index ETFs.

I’ve ran several simulations myself and like the ability to customize your scenario based on how long you want the portfolio to last, a worst-case ending balance, annual increases to contributions or withdrawals, expected rates of return, and more.

This new tool even got a nice recommendation and mention from Canadian Couch Potato blogger and PWL Capital portfolio manager Dan Bortolotti:

Thanks for the mention, Dan!

Dan Bortolotti of the Canadian Couch Potato blog, and Portfolio Manager at PWL Capital, mentions Index Goose in PWL e-Newsletter: pic.twitter.com/XyxA1693BE

— Index Goose (@IndexGoose) December 18, 2021

Weekend Reading:

Our friends at Credit Card Genius explain the ins and outs of the Cineplex SCENE and Scotia Rewards merger, plus (of course) how to maximize the Scene+ program.

I was a guest on the latest Globe & Mail Stress Test podcast talking about investing trends as we head into 2022.

I was also invited to be a guest on the Financial Planning for Canadian Business Owners podcast with Jason Pereira where we discussed situations when DIY investors might seek the help of a fee-only or full-service advisor.

Of Dollars and Data blogger Nick Maggiulli shares his favourite investment writing from 2021. Some gems in there for sure.

Somewhat related to my answer about investing regret, Millionaire Teacher Andrew Hallam explains why the best funds of 2020 are sinking ships today.

Michael James on Money shares his thinking on what to do about crazy stock valuations from the perspective of a DIY investing retiree.

I enjoyed these musings from investment advisor Markus Muhs on financial advice for those aged 70 and beyond.

Finally, in an excerpt from her excellent book, Money Like You Mean It, Erica Alini explains how to ask for what you want when negotiating a new salary.

Have a great weekend, everyone!