Becoming A Better Investor: Managing Asset Allocation In Multiple Accounts
Each one of your goals (saving for a down payment on a home, RESPs) should have its own asset allocation. If you have only a single retirement account it’s pretty straightforward to select your investments and keep them balanced in the future. But, investors are most likely to have multiple accounts for their retirement goals.
Many of us may have some combination of RRSPs, LIRAs, TFSAs, company defined contribution pension plans, non-registered investments and, if you’re married you double some, or all, of these accounts.
To manage them effectively, it’s important to treat them as a single portfolio.
First determined the optimum asset allocation of stocks and fixed income that reflects your needs for returns balanced against your tolerance for risk. Then, take a look at all your retirement accounts together.
Justin Bender of PWL Capital created a custom spreadsheet to help track asset allocation across multiple accounts. Download the spreadsheet to Excel and use the instructions here.
Select your investment types
Work out the percentage of each investment type you want to hold in each asset class e.g. if your fixed income allocation is 30% you might want to have 20% in a corporate bond and 10% in short-term bond ETFs.
Keep your number of individual holdings to a minimum. Holding a lot of investments within multiple accounts can become problematic.
Strategically fill each account
It certainly simplifies things if you hold all the same investments in each of your individual accounts. But, rather than trying to duplicate your asset plan in each investment vehicle, you should ideally consider investing each asset class in the most tax-efficient account:
- Bonds, GICs, REITs go in your RRSP or TFSA
- US and global equities are best in your RRSP
- Canadian stocks are the first choice for a non-registered account
You can start with the account that has the most limited choices such as a defined contribution pension plan, or an account that has no more contribution room (LIRA). If these accounts are small, you may limit them to just one asset class or even a balanced fund.
Your largest accounts (e.g. RRSPs) will likely need to hold two or more investments (funds) from each of your asset classes so you can do all your rebalancing in just one or two accounts through your future contributions.
Asset allocation in multiple accounts: Two examples
Many variables make each investors profile unique, but here are two basic examples:
1. Felicity is 26 years old. She has a defined contribution pension plan through her work. She also has an ETF portfolio in a self-directed RRSP. She is comfortable with an asset allocation of 20% fixed income and 80% equities.
- Pension plan – $5,000
- RRSP – $20,000
Asset Allocation: Fixed Income 20% or $5,000
- Canadian Equity 40% or $10,000
- US Equity 20% or $5,000
- Global Equity 20% or $5,000
Defined contribution plans allow you to invest in your own selection of several mutual fund products. Pension funds are usually set up with insurance companies and – although your employer can negotiate reduced fees – the MERs will be on the high side. The lowest fees will be in money market and bond funds so Felicity will hold her entire fixed income allocation in a Canadian bond fund.
Her RRSP holds ETFs in the other asset classes. If her pension plan bond allocation becomes over weighted, she can then choose to add a Canadian equity fund, or switch to a balanced fund and make changes to her RRSP accordingly.
2. Mel (51) has a RRSP and LIRA. His wife Clara (49) has her own RRSP. They each have a TFSA and have a joint non-registered trading account. Their asset allocation is 50% fixed income and 50% equities.
- Mel’s RRSP – $200,000
- Mel’s LIRA – $120,000
- Mel’s TFSA – $50,000
- Clara’s RRSP – $60,000
- Clara’s TFSA – $50,000
- Joint non-reg. – $20,000
Combined asset allocation: Real return bond 30% or $150,000
- Short term bond 20% or $100,000
- Canadian equity 25% or $125,000
- US equity 15% or $75,000
- Global equity 10% or $50,000
Here’s what their investment may look like in their combined accounts. The rebalancing will be maintained through new contributions (excluding Mel’s LIRA).
| Real return bond | $120,000 | Mel’s LIRA | 30% |
| Real return bond | $ 30,000 | Mel’s TFSA | |
| Real return bond | $ 30,000 | Clara’s TFSA | |
| Short-term bond | $100,000 | Mel’s RRSP | 20% |
| Canadian equity | $ 35,000 | Clara’s RRSP | 25% |
| Canadian equity | $ 20,000 | Mel’s TFSA | |
| Canadian equity | $ 20,000 | Clara’s TFSA | |
| Canadian equity | $ 20,000 | Joint non-registered | |
| US equity | $ 50,000 | Mel’s RRSP | 15% |
| US equity | $ 25,000 | Clara’s RRSP | |
| Global equity | $ 50,000 | Mel’s RRSP | 10% |
Final thoughts
The advantage of consolidating asset classes is it allows you to choose the lowest cost and most tax-efficient investment for each account. This strategy obviously can result in different returns, and even losses, in each separate portfolio, but you need to look at the big picture.
All of your retirement accounts need to be working together and working towards the goals you have set.
Hi Marie,
Good write-up. However, I have to disagree with you that:
“Bonds, GICs, REITs go in your RRSP or TFSA”
Because of the tax-free growth afforded to investments kept in a TFSA, you should keep your assets with the highest chance of capital gains in your TFSA (e.g. equities/stocks). Holding a bond fund in a TFSA is missing its true potential.
Historically, bond funds have done best in RRSPs. However, due to the low-rate environment we’ve been experiencing for some time now, some people have moved their bond funds to their taxable accounts.
Read my book if you want more details on the thought process behind this! I think I sent you (or Robb?) a copy!
Cheers
Thanks for your comments Graeme. I don’t totally agree with you.
If bonds are paying a low rate of 2-3% which is barely keeping up with inflation, why would you give away up to half of that return to taxes in a non-registered account?
Also, RRSPs and TFSAs have no write-off provisions for capital losses, so they are not the place for speculative investments for the average investor. Stories of people who have increased their TFSA holdings into a million dollars through sophisticated trading are anomalies and can lead to unreasonable losses for many who try to duplicate it.
The best use for long-term holdings in registered accounts is to stick with investments such as index funds, ETFs, blue chip stocks and income payers.
Ah, allow me to more fully explain:
“If bonds are paying a low rate of 2-3% which is barely keeping up with inflation, why would you give away up to half of that return to taxes in a non-registered account?”
To be clear, I don’t advocate for this. As you know, there are 3 sources of investment income: capital gains (favourably taxed because of the 50% inclusion rate), dividends (favourably taxed due to the dividend tax credit), and interest (100% taxable, therefore the least tax-efficient of the 3).
RRSP withdrawals are all 100% taxable -> whether they are capital gains, dividends, or interest. This means that dividends and capital gains don’t have a favourable tax status compared to interest in an RRSP. For this reason, the conventional wisdom is to keep interest bearing securities in an RRSP because they are 100% taxable anyways.
However, some people have justified putting interest bearing securities in taxable accounts. Their thinking is that even if interest income is tax-inefficient, there will be so little of it (due to low rates) that it won’t really matter. Proponents of this idea don’t want to waste tax-efficient space on low yielding securities.
” Stories of people who have increased their TFSA holdings into a million dollars through sophisticated trading are anomalies”
Agreed! I am also an advocate of a low-fee, broad based, index-tracking ETF approach. I don’t do speculative investments. However, this doesn’t change the fact that you want to have your highest earning investments (equities) in your account with tax-free growth (TFSA). Over a long enough time period, 6-7% returns of an index will compound, making you glad you withdraw it tax-free.
“Also, RRSPs and TFSAs have no write-off provisions for capital losses,”
Hopefully people aren’t making speculative investments in the first place. Long-term investors (the market trends up over a long enough time horizon) should have no fears about investing with index ETFs in their TFSAs.
As you can probably tell, I could go on and on about this…
I have not read your book but independently came to the exact same conclusion. I have done some simulations and it seems obvious to me to keep the highest expected earning investments in the TFSA because by doing so you maximize the growth of your tax sheltered room.
In addition there are options for fixed income that are not as miserably tax efficient such as ZDB stip bonds or HBB if you are comfortable with the swap risk.
Not sure if my other comment went through or not… But a search will show that my take (bonds should go in an RRSP, but never a TFSA) is pretty universal. For example: http://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/
Cheers
Marie, I think there is a lot of misunderstanding about asset location. It’s important to look at expected return, rather than just tax efficiency. This article explains it well – if the difference in expected return is a lot, say 5%+, the higher return asset goes in tax protected and the lower return asset goes in taxable. If the difference is small, <2%, the reverse. And if in between, it doesn't matter.
http://whitecoatinvestor.com/my-two-asset-location-pet-peeves/
The other point about RRSP and TFSA, that is also a source of confusion is also addressed in this article. We often hear that you lose the benefit of the dividend tax credit and lower capital gains rate if you put Canadian equities in an RRSP. Not so. You are not taxed at all on the growth and dividends in an RRSP, as an RRSP is really two accounts, one is yours and one is the governments, (the size of each depends on your tax rate). With both accounts, all gains are not taxed as the account grows, then when you take money out of your RRSP, the gains of your account are not taxed either, but you give back to the government all of that part of that account. So, in effect your RRSP consists of your account (exactly the same as a TFSA) and the government's account.
Hello, my wife and I left our financial advisor and are about to follow a template comparable to #2. Our investment vehicles performed so poorly that they’ve been liquidated to cash. My question may be beyond the scope of these comments but I’m concerned about the idea that ETF’s popularity having skewed the true value of underlying stocks… If anyone could provide links to articles discussing the impact of etfs on the markets it’d be most appreciated. Best Regards
Yes Scott you are correct. The huge holdings, and the massive buying/selling power of ETFs, as well as mutual fund companies and large pension plans has actually made them the market.
Yikes! Sorry to hear about your luck. You must have had a horrible advisor – the market has been trending up for the last 7 years… in order to lose money, they must’ve been really bad.
“I’m concerned about the idea that ETF’s popularity having skewed the true value of underlying stocks”
This is a concern that many people have, but I’m not worried about it. The risk is that “investments” become a commodity. In this scenario, the market prices in an index would be solely driven by demand for investments, regardless of any individual company’s prospects. There was the flash crash in August 2015 largely blamed on ETFs. But there are enough pension funds, endowment funds, charities, universities, and other entities out there that have different investing needs than individuals do. Read into the “efficient market hypothesis”. I think there will be enough actors perusing arbitrage that stock prices won’t get too detached. Could there be some scary days? Absolutely. But I don’t think it’s a valid reason for long-term investors to stay away from the market entirely.
Hi Scott, the idea that the increasing popularity of ETFs and index funds is leading to some sort of bubble or market inefficiency is pure nonsense.
Check out the latest Couch Potato podcast where this idea is refuted: http://canadiancouchpotato.com/2017/02/08/podcast-5-master-class-with-the-millionaire-teacher/
Thank you
This advice is incorrect.
If you are holding investments over the long term and they have a potential for large capital gains (equity ETF’s etc), they should be held in a TFSA not in unregistered accounts (unless of course you have used up all other contribution room…champagne problems). Interest producing investments are usually held in an RSP and the RSP is the ideal place for the fixed income portion of your portfolio.
When you need to liquidate those investments after a lifetime of saving, the amount of tax you would have to pay would be earth shattering if held in an unregistered account. Unregistered accounts should be reserved for tax efficient investments such as preferred shares or low fee dividend mutual funds.
In terms of ETF’s crashing the market, that is primarily leveraged etf’s I believe.
Great post Marie. It is tricky managing multiple accounts but treating it all as one portfolio really helps. The rebalancing spreadsheet makes setting up the portfolio and managing it quite easy. Thanks
Hi Marie,
I enjoy reading your articles and I think this one is an important issue to clarify for both DIY and professional investors.
I know people with professional advisors who still advise to have all classes in all accounts! Yikes.
I now follow the methodology of only putting certain types of investments in certain accounts. Wished I knew about this 10 years ago!
The concept behind Dan Bortolloti’s spreadsheet is good, but still does not make the process easy enough. A few years ago, I created a spreadsheet (actually a Google Sheet) that would make the task easier and have published it on my blog at http://pabroon.blogspot.ca/2015/03/portfolio-live-investment-portfolio-re.html
In the spreadsheet you specify the overall portfolio percentage and priority of each investment type in each type of account. Depending on your balance in each account, the spreadsheet determines the portfolio percentage in each account type. From this it can tell you what to buy or sell in each account. Not just the overall buy/sell.
The spreadsheet also pulls prices directly from Google Finance, so you enter number of share holdings and the balances are updated automatically. Saving more manual labour.
Personally, in my RRSP/LIRA I prioritize Bond, then International Equity, then US Equity and lastly Canadian Equity. In TFSA, due to withholding of foreign taxes, I prioritize Cdn Equity, then foreign equities and then Bonds. My taxable account gets the leftovers, which depending on balance in each account, is usually Canadian Equity, which receives favourable tax treatment.
As you know, taxes are a big deal so it’s important to get the right investment in the right account.
Steve
Hey guys,
I’m thinking about creating an app for this exact problem and wondering if you guys think its a good idea or not…
It would be similar to the spreadsheet in the post where you would add all your accounts, asset classes and desired allocations (only easier because it wouldn’t be a spreadsheet). It would then track the performance of the portfolio over time and show you how to rebalance things or make new contributions.
Would anyone use this??
Absolutely great idea that many would use. The spreadsheets that are out there are time consuming and I would think a barrier to use. Providing a simple to use ap that could easily display current status and rebalancing direction would be well received.