No Stupid Investing Questions

I write a lot about investing and always try my best to use plain language and real life examples to explain investment strategies, describe different products, and identify best practices. But I fully recognize that investing is a foreign concept to many people, especially if you’re new to investing or have always handed over your savings to a mutual fund sales person at the bank.

I answer reader questions about investing every day and have heard variations of the same basic questions over and over again. That’s totally fine, it’s better to ask a ‘stupid’ question than pretend you already know the answer (or worse, make a mistake with that lack of knowledge).

This article aims to answer many of these investing questions in hopes we can use it as an FAQ of sorts for new investors.

Q. What’s the difference between management fee and MER?

Mutual fund and ETF investors will notice two different costs listed on their fund fact sheet. One is the management fee, which is the amount paid to the fund manager. The second is the management expense ratio or MER. This includes the management fee, plus operating expenses for marketing, legal, auditing, and other administrative costs.

When a new ETF is introduced, the management fee will be published but the total MER will not be known for 12 months.

What’s not included in the MER is the fund’s trading costs, which are identified separately as the trading expense ratio or TER. The TER may be very small, even zero in the case of some ETFs, but it could also be quite large.

VEQT charges a management fee of 0.22%. Its MER is 0.25%, and its TER is 0%. Total fee = 0.25%

Compare that to Horizons’ HGRO, which has a management fee of 0%, an MER of 0.16%, and a TER of 0.18%. Total fee = 0.34%.

Q. Asset allocation ETFs like Vanguard’s VEQT are “funds of funds”. Will I pay two levels of MER: One for VEQT and one for the underlying ETFs?

No. Vanguard’s All Equity ETF (VEQT) charges a management fee of 0.22% and has a MER (total fee) of 0.25%. From the VEQT ETF fact sheet:

“This Vanguard fund invests in underlying Vanguard funds and there shall be no duplication of management fees chargeable in connection with the Vanguard fund and its investment in the Vanguard fund.”

VEQT’s management expense ratio of 0.25% is higher than if you were to hold the four underlying ETFs on their own. But the advantage of holding an asset allocation ETF like VEQT is that it automatically rebalances its holdings so that you don’t have to.

The confusion about double-dipping fees likely comes from the robo-advisor model, where the robo-advisor charges a management fee of, say, 0.50% plus the MER of the ETFs used to build your portfolio.

That’s why a DIY investor who is comfortable opening a discount brokerage account and executing a trade can reduce their investment fees by holding an asset allocation ETF instead of using a robo advisor.

Q. Should I diversify outside of an asset allocation ETF?

An asset allocation ETF is designed to be a one-ticket solution. Indeed, it may be the only investment product you need in both your accumulation and decumulation phase.

We’re taught not to put all of our eggs in one basket. But consider Vanguard’s Balanced ETF (VBAL). It holds 12,642 stocks, plus another 16,553 bonds from all over the world. That’s a pretty big basket!

Let’s look at the underlying Vanguard funds and their allocations:

This is an extremely well diversified portfolio all wrapped up into one easy-to-use product. So, the question is more about which asset allocation ETF is most appropriate for your risk tolerance and time horizon – not whether you should add even more diversification to this investment.

When does it make sense to hold more than one asset allocation ETF? When you’re trying to reach an asset mix that isn’t available in a single balanced ETF. For example, if your risk profile suggests a 50/50 balanced portfolio you could hold equal amounts of VBAL and VCNS (Vanguard’s Conservative ETF). Similarly, to reach a 70/30 asset mix you could hold equal amounts of VGRO (Vanguard’s Growth ETF) and VBAL.

Q. These asset allocation ETFs don’t have a lengthy track record or performance history. Should I invest in a relatively new product?

Asset allocation ETFs were first introduced by Vanguard in 2018. But the concept isn’t new.

First of all, balanced mutual funds have been around for decades. Second, the underlying ETFs used to build an asset allocation ETF likely have a much longer track record. Finally, the stock and bond indexes tracked by these ETFs have been around for a long time and so the fund can be back-tested to determine how well it would have performed had it existed for the last 25 years.

In fact, PWL Capital’s Justin Bender has done exactly that on his Canadian Portfolio Manager blog. There, you’ll find the theoretical annualized returns of each of the Vanguard and iShares asset allocation ETFs dating back 25 years.

One reason this question comes up so often is because the mutual fund industry has taught us to look up a fund’s long-term performance to determine its quality. But this was done (ineffectively) to help investors identify top fund managers. We compared the performance to that of other mutual funds – not to its benchmark index.

With an ETF that’s passively tracking an index there’s no need to see a lengthy track record of performance. It’s designed to mirror the performance of a specific market index, which should have a long history of its own. 

Instead, what investors should be looking at in an ETF is its tracking error, or the difference between the ETF returns and the benchmark index returns.

For example, Vanguard’s Total Market Index ETF (VUN) has annualized returns of 16.12% since inception. Its benchmark is the CRSP US Total Market Index, which returned 16.53% annually during the same period. VUN has a cost (MER) of 0.16%, which leaves a tracking error of 0.25%.

A high tracking error (after fees) means the ETF may not be reflecting the returns of its underlying index very well. If an investor was trying to decide between two ETFs tracking the same index, the one with the lower tracking error could be the better choice.

Q. Are robo advisors safe?

Canadians know and trust that our big banks are financially stable. But what about upstart robo advisors? Will your money be safe if you move to a digital investing platform?

The short answer is, yes. Robo advisors use what’s called a custodian broker to hold onto your money. For example, the robo advisor Nest Wealth uses National Bank Independent Network (NBIN) to hold your assets in your name. Nest Wealth only has the right to issue trading instructions and cannot access your money other than to receive its monthly advisory fee.

Your account is also protected by the Canadian Investor Protection Fund (CIPF) for up to $1 million per eligible account in case of member insolvency.

Finally, robo advisors use bank-level security measures and encryption to ensure your data is collected and stored safely.

Q. Can I pick my own investments at Wealthsimple?

It depends on which Wealthsimple platform you’re referring to.

Wealthsimple Invest is the robo advisor platform that offers its clients a pre-packaged (and risk appropriate) portfolio of ETFs that are automatically monitored and rebalanced. Clients cannot choose their own investments within this platform. All you can control is the risk level or asset mix used to build your portfolio.

Wealthsimple Trade is the commission-free self-directed trading platform where clients can buy and sell stocks and ETFs without paying fees.

One is a digitally managed portfolio that you can’t change (outside of your risk level), the other you’re on your own to trade and build your own portfolio. The other key difference is that Wealthsimple Trade does not have as wide a variety of account types, with only RRSPs, TFSAs, and taxable accounts available at this time.

Q. I have a large lump sum to invest. Should I invest it all at once or spread it out over a period of time?

The mathematical answer says that it’s best to invest the lump sum immediately and all at once. Vanguard studied this in a 2012 paper and found that immediate lump sum investing beat dollar cost averaging about 66% of the time. That’s because markets historically increase about two out of every three days. Having the money invested for a longer period of time improves the odds of capturing positive returns.

However, we’re not all emotionless robots and, behaviourally, it’s much more difficult to invest a large sum of money all at once. Loss aversion tells us we’d prefer to avoid losses rather than acquire an equivalent gain. The pain of losing is about twice as strong as the pleasure of winning. There’s also the fear that our decision may turn out to be wrong in hindsight, making us more averse to taking on risk.

Even though investing smaller amounts gradually over time is a less optimal way to invest a lump sum, it might feel better from a behavioural perspective.

If you decide to take this approach it’s best to design some rules around your gradual entry into the market. Set a pre-determined investing schedule so that you avoid relying on your intuition around when markets ‘feel’ safe.

What that looks like in practice could be taking a $100,000 lump sum and investing $20,000 per month for five months until you’re fully invested. Take that one step further by selecting the specific day of the month when you’ll deploy each tranche (e.g. the 15th of every month).

Finally, if you’re nervous about investing a lump sum perhaps your risk tolerance isn’t as high as you think. Instead of waiting, or dollar cost averaging, go ahead and invest the lump sum all at once but reduce your allocation to stocks (say, a 40/60 asset mix instead of a 60/40 mix) to make investing the lump sum feel less risky.

Final Thoughts

There are no stupid questions when it comes to investing. We’re all learning and trying to navigate our way through an often confusing and noisy environment. 

That’s one reason why I prefer a simple investing approach using the following principles:

  • Low cost
  • Broadly diversified
  • Risk appropriate
  • Automated where possible (deposits, withdrawals, rebalancing)
  • Holding the same asset mix across all of my accounts

You can do this on your own with a single asset allocation ETF, with help from a robo-advised portfolio of ETFs, or with your bank’s own index mutual funds

That said, we all have our own unique circumstances or legacy portfolios that aren’t exactly easy to untangle. If you have an investing question, leave it in the comments below so we can all learn together or send me an email and I’ll respond to you directly.

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32 Comments

  1. Robb Engen on March 17, 2021 at 4:35 pm

    *The management fee versus MER answer has been updated from an earlier version that incorrectly stated trading costs were included in the MER. They’re actually included separately in something called TER (trading expense ratio).

    • Dan on March 17, 2021 at 5:01 pm

      Can you recommend a all in one ETF that would generate a minimum 5% dividend yield.

      • Robb Engen on March 17, 2021 at 5:37 pm

        Hi Dan, the closest thing would be Vanguard’s Retirement Income Fund (VRIF) which pays a 4% distribution and targets a 5% annual return.

        You’d have to look to a dividend specific ETF like Vanguard’s Canadian High Dividend Yield ETF (VDY) which has a yield of 4.9%. The trouble with VDY is it’s limited to 44 Canadian companies, so it’s not very diversified.

  2. Connie on March 17, 2021 at 5:43 pm

    Looking for the latest up to date listing of robo advisors and info on choosing one. Thanks

  3. Kent on March 17, 2021 at 7:29 pm

    Rob,

    I enjoy reading your blog posts and the comments in response. I am a latecomer but new investor so I appreciate this back to the basics post.

    I hold my investments with a robo advisor and currently make no withdrawals. I am retired but my wife has four years until she retires.

    My basic question is: “What type of account should the funds be invested in once we are both retired and require retirement income?”

    Perhaps your answer could be a future blog post outlining some options ( robo advisor or DIY) and, using yourself as an example, outline any DIY retirement transition you plan for your own funds ( RRSPs, TFSAs, non-registered VQET accounts). Hope this is clear and any response will be helpful to new investors looking ahead.

    Take care.

    • Robb Engen on March 18, 2021 at 9:53 am

      Hi Kent, thanks for your comment. I like your suggestion that I share my own retirement income strategy in a future blog post. I have a rough idea but haven’t quite mapped it out yet so it will be useful for me, too.

      To answer your question, it really depends on your retirement income needs and other income sources (workplace pension, CPP, OAS, other savings). The risk profile might change for your RRSP/RRIF in retirement, but it’s perfectly sensible to continue investing those funds with a robo advisor.

      In fact, I think robo advisors are a bit of a hidden gem for retirees. You get reduced fees at a time when they would be the most costly. Your investments are on auto-pilot, and you can even automate withdrawals to get deposited directly into your chequing account. Finally, you have access to a human advisor (portfolio manager) to discuss your retirement income plan and make any changes as needed.

      I’ve written a case study here showing how Wealthsimple manages a portfolio for one of their retired clients. It’s worth a read: https://boomerandecho.com/wealthsimple-case-study-robo-advisor-retirement/

  4. Betty Therriault on March 17, 2021 at 9:00 pm

    Thank you Rob. I always enjoy your posts. I wonder if you could suggest a portfolio of one or two ETFs for different age groups. Maybe in increments of 5 or 10 years.

    • Robb Engen on March 19, 2021 at 12:36 pm

      Hi Betty, thanks for the kind words. I would start with this investor questionnaire to determine your risk appropriate asset mix: https://www.vanguardcanada.ca/individual/questionnaire.htm#/

      The asset allocation ETFs offer a perfect ‘step-down’ approach to your risk management.

      VEQT: 100% equities 0% bonds
      VGRO: 80% equities 20% bonds
      VBAL: 60% equities 40% bonds
      VCNS: 40% equities 60% bonds
      VCIP: 20% equities 80% bonds

      Ideally we’d be able to invest in a “target-date” fund that gradually (and automatically) moved you into a more conservative portfolio as you get closer to retirement. I haven’t come across a good DIY target date fund, but they do exist in employer sponsored savings plans.

      • Betty Therriault on March 19, 2021 at 3:47 pm

        Thanks Rob. I did take the Vanguard questionaire but I don’t think it was designed for me .
        I have been retired for almost 30 years. I have 2 portfolios now been handled by a FA charging 1.1% per month. Since I don’t require any income from them, I am considering returning to handling it myself and selecting a couple of EFTs ..

  5. Liliane Dunham on March 18, 2021 at 5:21 am

    Hi Rob
    I would like to open a custodial account for my 17 yr old daughter. I’m having a hard time finding information on this.
    I already have a wealth simple invest acct, does she need her own acct that I open for her at wealth simple?
    Or would you recommend opening an investment acct like itrade and invest in an all in one Vanguard VEQT automatically?
    Is there a minimum to start investing in either one as I was thinking $50 bi weekly?
    Thank you
    Liliane

    • Robb Engen on March 19, 2021 at 12:41 pm

      Hi Liliane, you need to be the age of majority to open your own investing account in your name.

      You could open an informal trust account for your daughter and invest on her behalf. Questrade offers these account types.

      However, know that any investment earnings are attributed back to you.

      Since your daughter is already 17 it might be less of a hassle to wait a year and then have her open a TFSA to invest.

  6. Bill on March 18, 2021 at 7:59 am

    Retired couple
    50k cash to invest
    Can you recommend something better than GIC’s etc
    but that is very safe
    Thanks
    Bill

    • Robb Engen on March 19, 2021 at 12:47 pm

      Hi Bill, cash and GICs offer the safest, risk-free rate of return. As you know, that’s not very much at all these days with interest rates so low.

      The best high interest savings account rate right now is at Canadian Tire (believe it or not) at 1.8%: https://www.highinterestsavings.ca/chart/

      Of course, high interest savings rates can and do change so there’s no guarantee it stays that high. But 1-year GICs don’t pay much more than 1.5% at the moment.

      Bill, anything more aggressive than this means taking on more risk, including the chance to lose money in the short-term.

      Consider the time horizon for accessing this money. If it’s longer than 3-5 years then go ahead and add it to a low cost, globally diversified, risk appropriate investment portfolio. If the money will be used for short-term needs then I’m afraid you’ll need to stick with a safe and risk-free high interest savings account or GIC.

  7. Bob S on March 18, 2021 at 9:07 am

    Regarding Lump Sum Investing versus Dollar Cost Averaging:
    First, Ben Felix of PWL Capital has done a deep dive into this topic and reached the same conclusion: See his paper here https://www.pwlcapital.com/wp-content/uploads/2020/07/Dollar-Cost-Averaging-vs-Lump-Sum-Investing.pdf
    Secondly, neither Vanguard nor Ben mention another aspect of Dollar Cost Averaging, namely Confirmation Bias. If someone is newer to investing or otherwise questioning whether they should be investing at all, should the market drop shortly after investing the first tranche, then that could serve as confirmation that the decision to invest was not “wise” and may even further delay investing the remainder.
    I like your compromise suggestion of investing in the lower risk (but also lower expected return) ETF such as VCIP orVCNS, however, that should be followed up with transitioning those holdings over to VBAL, VGRO or VEQT at a later date(s).

    • Robb Engen on March 19, 2021 at 12:52 pm

      Hi Bob, thanks for linking to Ben’s paper on the topic.

      You’re right that all kinds of behavioural issues are at play with this decision, and none of them will feel good when markets fall in the day(s) after you invest any amount.

      That’s why the ‘lower risk’ approach is such a smart idea because if you’re feeling anxious about the decision to invest then your risk tolerance is likely much lower than you think.

  8. Kim Kearney on March 18, 2021 at 9:12 am

    Hi Robb,

    Finally, a clear explanation of the differences between ME, MER and TER, thank you!

    In the HGRO example, it is surprising to see the proportion of the TER to the overall fee. When researching prospective ETFs where can I find the TER %? I researched HGRO in both my TD Direct Investing account and the HGRO Factsheet and I could not find that information.

    Where can prospective ETF investor’s find the costs associated with TER?

    I really appreciate the help you give to new investors, thanks again

    Kim

    • Robb Engen on March 19, 2021 at 12:55 pm

      Hi Kim, my pleasure.

      You need to dig pretty deep into the fund’s prospectus to find the TER. It’s misleading to include the management fee, the MER, but not the TER – which can be significant in the case of the Horizons’ ETFs.

      Here’s the Vanguard ETF prospectus where you’ll find these fees disclosed on page 33: https://www.vanguardcanada.ca/advisors/products/documents/7299/CA

      And, here’s the Horizons’ list of ETFs and total costs: https://www.horizonsetfs.com/horizons/media/pdfs/educational/2020_MERsTERs.pdf

      I guess the TER is not known until the end of the year. Most of these ETFs follow a rules-based approach to rebalancing and so they’ll trade more frequently if there are large price movements up and down throughout the year. That, and they need to deploy new fund flows as well as more investors add new money to the ETFs.

      Vanguard seems to be absorbing these trading costs for their asset allocation ETFs. Horizons has that unique swap-based structure where a counterparty actually holds the underlying investments directly so that investors don’t receive any distributions (that’s what makes them very tax efficient in a non-registered account). However, the counterparty doesn’t do this for free, which is likely why the TER is much larger for these ETFs.

  9. Bob on March 19, 2021 at 7:30 am

    Good morning Rob,

    I very much enjoy reading your blog and the comments in response. I am curious about what the tax implications are of holding VEQT…I do my own taxes and before I take the plunge I was wondering about foreign taxes or even US withholding tax…will it complicate my tax return more than a normal T-5 or T-3 slip?

    Also, can Vanguard be purchased anywhere or is it Robo Advisor/Investment firms only and not at the banksetc.

    As always, thanks for your time and insights, sincerely

    Bob

    • Robb Engen on March 19, 2021 at 1:42 pm

      Hi Bob, thanks for the kind words. If you’re holding VEQT in a non-registered (taxable) account then foreign withholding taxes will apply for US and international dividends.

      The good news is the amount you paid will appear on your T3 and T5 slips and you can recover some or all of it by claiming a foreign tax credit on your return.

      Here’s a lengthy explanation: https://www.taxtips.ca/filing/foreigntaxcredit.htm

      • Lana on March 19, 2021 at 2:12 pm

        To follow up on this Robb, when you say recover the tax by claiming a foreign tax credit, how does one do that exactly? I use Simpletax to do my own taxes and invest in XUU and XEC in my taxable account. In 2020 I was issued a T3 form by Questrade. I believe I selected the T3 form on Simpletax and just inputted the numbers from my T3 form as prompted by the tax software. Do I need to be doing any sort of manual calculation or select any sort of special options in my tax software to claim the foreign tax credit? It’s not clear to me in my completed tax filing if I received a foreign tax credit. Do XUU and XEC not qualify for the credit? Can you do a blog post outlining how to claim the foreign tax credit, with screenshots? Thank you.

      • Bob on March 20, 2021 at 6:07 am

        Thank you and yes, it would be in a non registered account as the TFSA and the RRSP are maxed out.

  10. Barb on March 19, 2021 at 3:28 pm

    Hi Rob, confirmation please.

    First question Mar 27, 21
    Difference between management fee and MER.
    First example: VEQT. Mgm fee.. 22%
    MER. . 25%
    TER. 0%
    Would total cost be. 47% not. 25%, I believe it’s a typo kind of mistake. Thanks! Barb

    • Robb Engen on March 19, 2021 at 4:26 pm

      Hi Barb! No, not a typo at all.

      Remember, the published MER already includes the management fee, plus operating expenses for marketing, legal, auditing, and other administrative costs.

      Total fee for VEQT = 0.25%

  11. Dox on March 19, 2021 at 6:42 pm

    Hi Robb! Love your site!
    Your reply to Bill’s question was exactly what I was looking for being a 72 yr old GIC refugee. I won’t be needing the cash short-term and I’ve already committed a third to VCIP & VCNS but this slow crawl in rising interest rates might carry on for for the foreseeable future (3 ~ 5 years) with the large portion of bonds continually taking it on the chin. Would some VDY for dividend income to boost income be a good idea provided I maintain my 75/25 ratio of F.I /Equity or should I just trust the all-in-one portfolio make-up. Thanks for your input!

  12. Steve Bridge on March 20, 2021 at 8:18 am

    Hi Robb,

    Great post! I smiled a little bit because I get these exact questions quite regularly. Loved your answers!

    Keep up the great work!

    Steve B.

  13. David @ Filled With Money on March 22, 2021 at 7:07 pm

    No stupid investing questions, indeed. The most important number that investors should focus on is the management fee. If it’s greater than 0.1% there better be a really good reason for that otherwise you should pass!

    A coworker was contributing to his daughter’s college fund and turns out it had a management fee of 0.9%. They should go to jail for robbery.

  14. Ritchie Rental on March 24, 2021 at 5:05 am

    Hi Rob – really enjoy your blogs and have for many years. Thanks!

    I’m wondering if there are online courses that you would recommend for young investors? My granddaughter is 12 going on 22 and is talking about how she would like to have shares in a certain company (I won’t mention the name). It seems the perfect opportunity, when there is interest to provide that education/information. Not sure how long it will last but thought it would be good to strike when the iron is hot/

    Thank you – Ritchie

  15. John in Kitchener on March 28, 2021 at 7:51 pm

    Hi Rob, great column as usual. I followed the link to the retiree using a robo-advisor and it might be something that would help us. I retired in late 2019 and started my OAS in 2020. I had pre-paid some of my 2020 income taxes on the advice of my accountant though I knew my only income would be 6 months of OAS and my usual dividend income. I also made my final RRSP (spousal) contribution so I expect to get a tax refund.

    Next year we’ll be setting up RRIFs to get the pension credit and are now beginning to see what staging our income is all about. Interesting to work through the tax return and see the difference that taking more or less income from the non-registered account versus withdrawing from an RRSP can make. About 50% of our income is in the form of taxable dividends which when grossed up can make a difference to the bottom line. We plan on taking OAS but delaying CPP for a few years since the bonus is paying us more than anything else we have and we do not have any other guaranteed income.

    This is all a pre-amble to a question – will a robo-advisor choose the most tax efficient withdrawls to meet our income objectives.

    Thank you.

    • Robb Engen on April 19, 2021 at 2:40 pm

      Hi John, the robo advisor will work with you to determine your retirement income needs and help you determine which accounts to draw from to meet those needs. The investments held inside your robo-advised portfolios are all low cost individual ETFs, which will be sold off in a way that maintains your original target asset mix.

      Or, you can work with a fee-only planner who can help you come up with an appropriate retirement income strategy and then you can direct the robo advisor to follow that plan by setting up the required automatic withdrawals from your accounts.

      In short, your situation is highly customizable and you can get guidance from a human portfolio manager or dictate exactly what you want (assuming you at least meet the RRIF minimum mandatory withdrawal).

  16. JC on April 3, 2021 at 5:21 pm

    Are we sure that converting $2,000 per year from an RRSP account to a RIF starting at 65 years old is necessary to be entitled to the pension credit? Would simply withdrawing $2,000 per year from RSSP account starting at 65 years old also entitles us to claim the pension credit?

    This above question assumes that they are no employer pension.

    • Robb Engen on April 19, 2021 at 2:35 pm

      Hi JC, RRSP withdrawals are not considered “eligible” for pension income. It needs to be from a RRIF, and the recipient needs to be at least 65.

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