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

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):

“Hey Robb,

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:

20-year returns

*Update: Vanguard later introduced a 100% equity allocation ETF. I’ve now made the switch to VEQT in my own portfolio.

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.

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9 Comments

  1. Steven Oliver on December 13, 2018 at 8:01 am

    Hi Rob,

    How can I be diplomatic in my comments when I feel you have given some very bad advice or conclusion in the Dec 12th Boomer And Echo in which you answer questions about etfs, and also about the lack of a meaningful difference in performance between balance and all equity portfolios.
    The tables you attached show very meaningful differences in in a 50/50, and even a 80/20 split of equity to bonds vs an all equity portfolio.
    Ill also comment on your talking about how well you have done in the last several years with VCN and VXC.

    On the first part, if you only compare 10 year performances, of a 50/50 or 80/20 to the 100 equity, the difference ranges between 3.2% and 1.2% compounded annually.

    On a million dollar portfolio, I am not going to give up 3.2% and 1.2% a year if I can afford the risk to be all equity. on a 1 million dollar portfolio, 3.2% works out to $ 32,000 a year opportunity..could be up to $ 300, 000 over 10 years! on the 80/20 portfolio, you risk losing out on over $ 130,000 a year with compounding.

    So why are you saying the results between balance portfolios and all equity portfolios are the same?

    You also have not realized that bond portfolios in the far distance past of 10-20 years ago made much more income with higher interest rates! So comparing to the past is useless today as we have no evidence we will ever see bonds paying above 5 % again. Right now the best Cdn 10 year bond is paying under 3%.

    Also, you write bout how well you have done with VCN and VXC the past several years, but you must have written this reply well before the recent downturn. Most of your gains should have been wiped out by now over the past few years.

    You revealed you are in your mid 30s and although you know more than most junior investors, your commentary reveals your lack of experience and perhaps education on the matters you respond to.

    Unfortunately, you are probably the only staff member that reads these responses.

    I did appreciate you introducing VGRO , VCN and VXC and I enjoyed reading the charts you attached, but your conclusions were if anything, wrong about performance of balanced vs all equity. All equity has always generated better returns. Bonds can only offset that if their rate is higher than the rate of return of an equity portfolio. Plain and simple.

    • Robb Engen on December 13, 2018 at 10:21 am

      Hi Steven, thanks for your comment. I pointed out that there was no difference in returns for the 20-year period between the balanced portfolio and the all-equity portfolio, which I think most people would find surprising.

      The reader asked whether my two-ETF portfolio (all equity) was appropriate and of course it is appropriate for me and many others, but perhaps a single fund with no rebalancing and slightly lower volatility would help this individual stick to her strategy. Please tell me how you consider that to be very bad advice?

      Yes, I’m aware of the recent long bull market in bonds as interest rates fell. Are we likely to see that again? Who knows? I don’t have a crystal ball. I don’t see anything wrong with a 60/40 or 80/20 portfolio and just because I feel comfortable in all equities doesn’t mean I need to project that onto others.

      As for my portfolio, what makes you think all of my gains have been wiped out with this recent downturn? My portfolio is down 2 percent this year. Not exactly a meltdown or the return of the financial crisis. Overall since 2010 my portfolio is up 8.6 percent per year.

  2. Ken Barry on December 13, 2018 at 8:30 am

    Hi Robb, what do you think of the stock Just Energy. It has a very nice dividend and a very low P/E?

    Thanks
    Ken.

    • Robb Engen on December 13, 2018 at 10:39 am

      Hi Ken, are you asking if I think Just Energy is a good buy? I don’t comment on individual stocks but I will say, looking at the financials, this stock has lost 50 percent in the last three years, and a total return of negative 34 percent in five years (cutting its dividend twice in that time). It has a dividend yield of 10.4 percent and pays out more than it earns. This is also a company that relies heavily on aggressive door-to-door sales and marketing, a practice which is becoming more and more controversial.

      Does that answer your question?

  3. Bob Spartus on December 13, 2018 at 8:14 pm

    I would have to agree that Lawrence is paying fees that are much higher than they should be… for a portfolio of >2M he could probably find a full stack advisory team for 75 to 100bps. The information that he gives is incomplete but I think that he could likely benefit from some advice given his net worth. The over all hit on the fees could be reduced substantially from tax deductions he could receive on non registered investments. He could benefit further from some good tax planning vis a vis non registered investments (agreed that seg funds are not the solution). I disagree that Nest Wealth (or any other Robo for that matter) is a good solution for someone with say 1M in assets to invest. Sure fees matter, but so too does performance – Nest Wealth is unproven and does not provide any performance data on their website. Good advice can be very valuable and easily justify a reasonable fee. I quite like(d) the concept of using a fee only planner – but we did not have a favorable experience when we separated advice and money management – we engaged a very well respected fee only planner for my mother and we subsequently used the investment council she referred us to…all was well until she passed away in 2016. The lack of integration and communication between the two made settling her estate an absolute nightmare and both parties ‘promised’ to communicate on tax, estate planning as well as on a small foundation she had established. In hind sight accountability matters a lot – and with two players in the mix we ended up with a lot time consuming, expensive and really unprofessional finger pointing. Not that this is necessarily everyone’s experience but being ‘cost conscious’ can have it’s limits…

  4. Marko Koskenoja on December 14, 2018 at 8:01 am

    Good questions and answers! I like Money Bag 🙂

  5. Jon Evan on December 14, 2018 at 11:17 am

    Going from accumulation phase of life to de-accumulation i.e. retirement changes things! As you point out the focus shifts to income rather than growth.
    What is paramount is a realistic budget which then determines one’s need for risk. Then decide can the size of the investment portfolio provide that income and at what rate of return if one decides not to drawdown. So, if one has $2M and a 3% return plus pensions can meet one’s budget than there is no need to take on risk and a GIC portfolio can presently meet that income level.
    See this useful article:

    https://www.theglobeandmail.com/investing/globe-wealth/article-how-to-hold-on-to-the-wealth-youve-got/

  6. Nic on December 16, 2018 at 7:30 am

    Weary = tired
    Wary = cautious

  7. Bob Lin on December 16, 2018 at 11:54 am

    Hi Robb, my question is about decumulation, specifically around how much (%) and when to pull the money out of our investments for the year ahead (when we do eventually retire)?

    60% of our income will be from a DB pension, the other 40% being from ETFs (90% equity, 10% bonds) in a LIRA, RRSPs, and TFSAs. We will also have a cash cushion of three years of income in GICs, split up in such a way that one to three months (TBD) money becomes available every one to three months. The GICs will automatically rollover.

    Back to my conundrum: Assuming we are not in a market crash or significant market correction, we don’t plan on touching the cash cushion GICs, so our only options appear to be to pull the dividends out plus sell ETFs, but how often should we do this? Once a year, two or four times a year or every month? The LIRA will be converted to a LIF but that will only cover about 5% of the desired 40% of income from investments. I don’t think an annuity will fit with our plan of wanting to leave something for the kids.

    That was a bit of a ramble I know, but any thoughts would be welcome; perhaps even an article one day.

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