**This is a sponsored post written by me on behalf of Alterna Bank. All opinions are my own.

Canadians are usually an optimistic bunch come tax season, with the majority of tax filers expecting to get a refund. In fact, many of us count on a tax refund to pay off debt, cover the cost of a vacation, or to further our savings goals.

Most financial experts, including me, will tell you that getting a tax refund is not necessarily a good thing – more like a case of bad tax planning.

A tax refund means that you paid more than your fair share of taxes throughout the year, essentially lending the government an interest-free loan with your own money!

That doesn’t stop the majority of us from getting excited – down right giddy – over the prospect of receiving a big, fat, juicy tax refund. But, given the knowledge that a tax refund is just the government giving back your hard-earned dollars, what you do with that refund can make a big difference in your finances.

What To Do With That Tax Refund?

Let’s say after filing your taxes you expect to receive a $3,600 refund later this spring. What that really means is you overpaid your taxes by $300 per month last year.

Now think about what you want to do with that refund. $3,600 is a lot of money to receive in a lump sum and it’s precisely the type of refund that gets people thinking about buying a new television or going to Las Vegas for an epic long-weekend.

We’ve already established that getting a big tax refund is not a good thing. It means you’re paying too much tax, or more likely, your employer is withholding too much tax at the source.

If you make regular RRSP contributions, for example, or expect to pay a lot in child-care expenses, then you should fill out form T1213 (Request to Reduce Tax Deductions at Source) and then ask your employer to reduce the amount of taxes withheld on your paycheque.

With proper tax planning like this you might have been able to save that $300 per month last year. In this case, would you sock away $300 every month to save up for a new TV or a trip to Vegas in the spring? Probably not. So why do we feel it’s okay to spend our tax refund on a large impulse purchase?

Want a more responsible plan for your refund? Here’s a list of smart things to do:

• Pay off credit card debt
• Pay down a line of credit
• Put a lump sum onto your mortgage
• Spend some and invest the rest
• Invest it back into your RRSP
• Contribute to your TFSA
• Contribute to your child’s RESP
• Donate it to a registered charity

Another option is to do nothing. What I mean by that is you might not have a financial goal that requires your immediate attention, but you’ll eventually need to access the cash.

Maybe you need to start an emergency fund or build on an existing one. Or, perhaps you want to buy a house in two or three years and need to add to your down-payment fund. Maybe you’re planning a summer holiday and need to save some cash for a few months.

In this case the best place to park your refund is inside a high interest savings account – one that gives you a chance to earn a decent interest rate.

One to consider is Alterna Bank, which has a Tax-Free eSavings Account and High Interest eSavings Account that both pay 2.35%* interest. Both accounts have no fees and no minimum balance requirements which makes them ideal for short-term savings. Online banks like Alterna consistently offer higher every day interest rates with no gimmicks and no teasers. Equally as important, they are CDIC insured.

Final thoughts

Although we tend to get excited about the idea of a large tax refund hitting our bank account in April it’s important to understand where that tax refund comes from – you are paying too much in taxes throughout the year.

Getting a tax refund is not an excuse to throw caution to the wind and spend more just for the sake of spending. In fact, if you’re serious about getting the most out of your RRSP contributions then the responsible thing to do is to take your entire refund and put it right into your RRSP.

Less optimal, but perhaps equally responsible is to put that refund into your TFSA or onto your mortgage as a lump sum payment.

Finally, if you just want a place to stash your cash and earn some interest for the short-term, look for a high interest savings account.

Remember, a tax refund is not a windfall or free money from the government. It’s your money! You lent it to the government and now they’re giving it back to you. Now is your chance to put that money to good use.

*Interest is calculated daily on the closing balance and paid monthly. Interest rate is annualized and subject to change without notice.

Canadian investors tend to suffer from home bias – a preference to hold more domestic stocks over foreign equities. This is actually true of investors in most countries, but it’s particularly troubling in Canada where our stock markets are highly concentrated in the financial and energy sectors.

The federal government could be partially to blame for our home bias tendencies. As recently as 2005 the government imposed a limit on the amount of foreign content allowed in RRSPs and pension plans. This cap was introduced in 1971 to help support the development of Canada’s financial markets but was scrapped in the 2005 federal budget, freeing Canadians up to invest abroad.

It’s well known that Canada makes up less than 4 percent of global equity markets (2.7 percent, to be exact), yet 60 percent of the equities in Canadian investors’ portfolios are in domestic securities.

Even most model ETF and index fund portfolios have Canadian investors overweighting domestic equities, holding anywhere from 20-40 percent Canadian content.

The result is a portfolio that is more volatile and less efficient than one with international equity diversification. Indeed, investors with a Canadian home bias are taking risks they could have diversified away by increasing their allocation to global equities.

My two-ETF portfolio

So how does my portfolio stack up? When I switched to my two-ETF solution, made up of Vanguard’s VCN (Canadian) and VXC (All World, ex-Canada), I chose to have an allocation 20-25 percent Canadian stocks and 75-80 percent international stocks.

That allocation would be relatively easy to monitor and rebalance if it was simply help in my RRSP. Whenever I added new money to my RRSP, I’d simply buy the ETF that was lagging behind its initial target allocation.

But I complicated things recently when I started contributing again to my TFSA. I wanted to treat my TFSA and RRSP as one total portfolio and keep the same asset mix in place. Since my RRSP was much larger than my TFSA, I decided to hold mostly foreign content (VXC) in my RRSP while putting Canadian stocks (VCN) in my TFSA.

This worked out great for several years but now I’ve run into a second problem; I’m contributing to my TFSA at a much faster pace than my RRSP. That’s because I’ve maxed out all of my unused RRSP contribution room and, due to the pension adjustment, I get a measly $3,600 per year in new contribution room.

Meanwhile I still have loads of unused TFSA contribution room and so I’ve been socking away $12,000 per year for the past two-and-a-half years. I hope to continue at that pace for many more years until I’ve completely caught up on all that available contribution room.

The result is a portfolio that is becoming increasingly more tilted to Canadian equities. At this rate, if I continue filling my TFSA with VCN, my portfolio will have more than 30 percent Canadian content in five years, and nearly 40 percent Canadian content in 10 years.

My Home Bias Solution

I’m considering a change to my two-fund portfolio. With the introduction of Vanguard’s new all-equity asset allocation ETF – VEQT – I could turn my two-fund solution into a true one-fund solution and make investing even more simple.

Not so fast, though. When I looked under the hood of VEQT to see the underlying ETFs that it holds, I noticed a heavy tilt towards Canadian equities:

• Vanguard US Total Market Index ETF – 39.1%
• Vanguard FTSE Canada All Cap Index ETF – 30.1%
• Vanguard FTSE Developed All Cap ex North America Index ETF – 23.3%
• Vanguard FTSE Emerging Markets All Cap Index ETF – 7.5%

I don’t want a portfolio made up of 30 percent Canadian equities. If anything, I want to reduce my exposure to the Canadian market.

Here’s what I’d like to do: Replace VCN with VEQT.

What that means is my RRSP will hold nothing but VXC, while my faster growing TFSA will hold VEQT.

At the end of 2019 my new two-ETF portfolio would look something like this:

Because VEQT is made up of 30 percent Canadian equities I would have approximately 4.9 percent of my overall portfolio weighted to Canadian markets (much more aligned with its global weight).

But as I continue making larger TFSA contributions each year the percentage of Canadian content will gradually increase (just less quickly than if I had been contributing straight to VCN each time).

At the end of 2024 my portfolio would look like this:

The Canadian content from my ever-rising VEQT would still make up just 9.4 percent of my overall portfolio.

By then I’ll have caught up on my unused TFSA contribution room and so I’d only be able to put in the annual TFSA maximum.

The growth of VEQT as a percentage of my overall portfolio slows, and so the percentage weighted to Canadian equities only creeps up to around 12 percent by the year 2040.

Final thoughts

I want to tame my home bias for Canadian equities while keeping my portfolio as simple as possible.

By replacing the Canadian equity ETF (VCN) with the new Vanguard 100 percent equity asset allocation ETF (VEQT) I’m able to keep my simple two-fund solution intact.

Meanwhile I solve a potential diversification problem by reducing my home bias to Canadian stocks and maintaining proper global diversification inside my portfolio.

In the last five years we’ve seen the rise of robo-advisors offering low cost online portfolio management to investors large and small. Investors pay a management fee of around 0.50 percent plus another 0.20 percent or so for the robo-advisor to hold the underlying ETFs.

This is a massive improvement from a traditional mutual fund portfolio that investors get from their bank salesperson advisor, where clients pay between 2 and 3 percent MER. But has the investment industry come up with something even better? I think so.

The proliferation of one-ticket ETF solutions like those offered by Vanguard, iShares, and BMO has put major pressure on robo-advisors and their value proposition for investors.

I’ve recommended robo-advisors to fee-conscious investors who might not have the time or inclination to set up their own portfolio of ETFs, which involves opening a discount brokerage, setting up contributions, constructing a diversified portfolio, making trades, and rebalancing periodically.

Investors can get hung up selecting appropriate ETFs for their portfolio, and once they do, it can be endless tinkering (or paralysis by analysis) to set up the right allocation. Once in place, allocations get thrown out of alignment immediately after a new contribution or with normal market fluctuations.

A one-ticket ETF takes away these pain points because it’s one diversified product that constantly rebalances itself. Best of all, the fees on these one-ticket ETF portfolios hover between 0.17 and 0.22 percent.

Paying a robo-advisor 0.50 percent annually for portfolio management is less compelling now that the DIY option is so much more simple with a one-ticket ETF solution. An investor can open a discount brokerage account, set up automatic contributions, and then simply buy one ticker symbol. The one-ticket ETF will take care of the rest.

One-Ticket ETF solutions:

Vanguard

• Vanguard Conservative Income ETF Portfolio (VCIP)
• Vanguard Conservative ETF Portfolio (VCNS)
• Vanguard Balanced ETF Portfolio (VBAL)
• Vanguard Growth ETF Portfolio (VGRO)
• Vanguard All-Equity ETF Portfolio (VEQT)

iShares

• iShares Core Balanced ETF Portfolio (XBAL)
• iShares Core Growth ETF Portfolio

BMO

• BMO Conservative ETF (ZCON)
• BMO Balanced ETF (ZBAL)
• BMO Growth ETF (ZGRO)

Horizons

• Horizons Conservative TRI ETF Portfolio (HCON)
• Horizons Balanced TRI ETF Portfolio (HBAL)

One caveat to mention is that with most robo-advisor services your trades are included, whereas you’ll pay $10 a trade at most discount brokerages. That could be a deal breaker for a new investor who’s making small contributions on a bi-weekly or monthly basis.

I should also point out that the robo-advisor Nest Wealth still offers exceptional value for affluent investors due to its subscription fee model that’s capped at $960 per year. That puts the annual fee on a million dollar portfolio at less than 0.10 percent.

This Week’s Recap:

On Monday I wrote an epic post called how to save money on everything that matters.

Then I got travel fever (or was delirious from shovelling snow in -30C temperatures) and booked a family trip to Maui next February, and an anniversary getaway to Vancouver in the fall. Now we’re looking ahead to the summer of 2020 with visions of exploring Italy.

I’ll come back to reality next week with a post on a potential change to my own portfolio, plus some ideas on what to do with your tax refund.

Promo of the Week:

I like the idea of luxury travel but I don’t want to pay luxury prices on accommodations. That’s why I’ve zeroed-in on the Marriott Rewards program, which was recently rebranded to Marriott Bonvoy (for some reason).

With the rebrand the SPG Card from American Express now becomes the Marriott Bonvoy American Express Card. It comes with a welcome bonus of 61,000 hotel points (with a referral link) when you charge $3,000 to your card in the first three months. The annual fee is $120, but you also receive an annual free night award each year on your card anniversary.

Weekend Reading:

Morgan Housel from the Collaborative Fund blog explains why the subtle art of not caring what others think is a unique and powerful skill.

Planning jointly for retirement with a spouse pays off. Why your biggest tax asset in retirement may be sleeping right beside you.

RRSPs or TFSAs? The usual choice is to contribute to an RRSP but the TFSA might be better for enhanced flexibility. Here’s how to decide between the two.

Liz has just retired and wonders if she should use her investments to pay off her mortgage, despite her advisor’s advice to the contrary.

Successful and miserable. The upper echelon is hoarding money and privilege to a degree not seen in decades. But that doesn’t make them happy at work.

Ben Carlson takes to LinkedIn to ask why are people miserable at work?

Now we compare can ourselves to every humblebragger from around the globe and it’s making many of us miserable because everyone’s life is perfect on the Internet and our real life is flawed. This is a game you’ll never win because the other side is always cheating.

Here’s Dale Roberts to remind us that the biggest stock market collapse in our lifetime is now a distant memory.

Retirement is the hardest, nastiest problem in finance. Nick Magguilli explains why asset allocation is the easiest retirement choice you can make.

One of the oldest questions in investing is whether you should own individual bonds, GICs, or bond funds to get your fixed income exposure. PWL Capital’s Ben Felix does an excellent job explaining the pros and cons of each:

Michael James channels his inner Warren Buffett when it comes to his views on debt.

Rob Carrick explains how new “round-up” features can help save money in much the same way as the old-fashioned change jar.

Finally, a highly enjoyable read from VICE blogger Hayden Vernon, who tested the savings technique that promises retirement at 40. (Hint: It did not go well.)

Have a great weekend, everyone!