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 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:
*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.
The investment giant and indexing pioneer Vanguard has made a lot of noise in Canada this year. Already a big player in the ETF space since entering the Canadian market in 2011, Vanguard added four mutual funds to its line-up this year, plus introduced its new asset-allocation ETFs, a one-ticket solution for investors.
They’ve also added two ultra low cost sustainability ETFs (ESGV and ESGX) to a growing niche in which socially conscious investors typically had to pay a premium.
Now Vanguard is set to launch a robo-advisor service in Canada sometime in the next 18 months. This is sure to have an impact on an already crowded robo-landscape. Indeed, Vanguard has a long track record of lowering investment costs in the spaces they operate. That’s why Morningstar coined the term, the Vanguard Effect, describing “Vanguard’s sizeable influence on new markets it enters where competitors feel the need to reduce fees in order to remain competitive.”
Already we’ve seen the online discount brokerage firm Questrade revamp its robo-advisor service and slash management fees to just 0.25 percent.
The Vanguard Effect is great news for investors as the continued commoditization of investment management allows investors to capture market returns in a globally diversified portfolio at rock-bottom prices. That beats paying an active manager 2 percent a year for the vanishingly small chance of outperforming the market.
This Week’s Recap:
Earlier this week I shared my financial goals for 2019.
Later I listed 10 financial lessons to share with friends.
The $100,000 a year waitress elicited strong reactions from our Facebook readers. Is it time to rethink our tipping culture?
Weekend Reading:
The investment industry, led by lobbyist group Advocis, continues to push back against adopting investor-friendly reforms such as banning embedded commissions, banning deferred sales charges, and imposing a higher standard of care. As usual, their arguments are fear-based and lacking any evidence. These changes are long overdue.
Why do so many people fall for financial scams? Fraudsters play on different emotions, from greed to kindness.
Maclean’s published its fifth annual bonanza of more than 70 charts to help make sense of the economy in 2019. Of note, Canada’s savings rate reached its lowest level in more than a decade:
Speaking of 2019 forecasts: Every year, the prognosticators come out of hiding. You have to wonder why they bother, given their record.
CPP improvements start in 2019. Here’s how much more you’ll pay, and how much more you’ll get.
Million Dollar Journey’s Frugal Trader shares some year-end tax tips for investors.
Mark Seed from My Own Advisor shares my same skepticism for aged-based annual savings targets.
This frugal retiree could teach a master class on how to live well in retirement without a huge budget.
Financial independence doesn’t mean free time forever. Here’s why early retirement comes with one big clause:
Rob Carrick asks, What if today’s economy is as good as it gets for your personal finances?
The Blunt Bean Counter Mark Goodfield warns of the income tax issues of renting your property as an Airbnb.
Finally, a must read, The New York Times’ Ron Lieber tagged along with his 80-year-old aunt to a steak dinner / annuity pitch to ask some tough questions. The salesman wasn’t pleased.
Have a great weekend, everyone!
The personal finance community can be a bit of an echo chamber, reinforcing and repeating the same ideas on how to save, invest, and spend our money. This sort of tribalism can be intimidating for outsiders who are eager to learn but afraid to ask questions or know where to start, especially when it comes to more complicated topics.
The truth is not all Canadians are financially savvy. That’s why I think it’s our duty as personal finance enthusiasts to move beyond this little corner of the Internet and start talking to our friends and family about money. Pay the knowledge forward, friends!
It’s not easy to talk in real-life about what we do with money, how much we save, how much we spend, and the foolish mistakes we make. But these are crucial conversations to help each other deal with money and the complex decisions about it that we all face.
We can start by sharing the kinds of tips and tricks that helped us build lifelong financial habits and skills. It’s what financial literacy is all about, right?
Here’s a list of my top 10 financial lessons to share with friends.
1. Avoid credit card debt like the plague
It’s impossible to go through life without incurring at least some debt. I’ve had student loans, credit card debt, a car loan, line of credit, and finally a mortgage.
Carrying a balance on my credit card was by far the most harmful to my finances. Making the minimum monthly payment hardly puts a dent into the balance, and 19 percent interest ensures that balance will continue to grow unless you take action.
Tackle it with the debt avalanche or debt snowball method, and once it’s gone commit to never again paying one cent of credit card interest.
2. Track your spending
To free up that additional cash flow you need to understand how much money comes in and how much goes out every month. There’s no other way around it – how else will you know what you can afford to save?
Whether you use a mobile app, budgeting tool, or good old-fashioned Excel spreadsheet, the point is to track every transaction until you can glean some insight into how you spend your money. Use this information to make informed decisions on which areas of your budget you can cut, and where you’d like to direct any additional savings.
Related: Download a free budgeting spreadsheet
3. Automate your savings
The key to building a life-long habit of saving is to make your contributions automatic and as painless as possible. Pick a day that coincides with your paycheque and set up an automatic transfer into your RRSP, TFSA, savings account, or RESP.
It’s called paying yourself first. Start with as little as $25 and increase it annually, or as your budget allows. This powerful strategy works because it treats your savings goals as ‘mortgage-like’ fixed expenses that come out of your account on a specific day.
4. Save a percentage of your income
One common rule of thumb suggests saving 10 percent of your take home pay for retirement. I say save a percentage – any percentage – of your income as long as you start with something and make it automatic.
One cool trick I learned was to bump up that percentage in tandem with a salary increase each year. So, for example, let’s say you earn $50,000 and saved 5 percent of that amount ($2,500). Then you get a 4 percent raise in the New Year, so now you make $52,000. Well, don’t just continue saving $2,500 – bump that up to $2,600 to stay in-line with your 5 percent savings rate.
5. Invest wisely
An overwhelming amount of research shows that the most optimal way to invest is with regular contributions to a low cost, globally diversified portfolio of index mutual funds or ETFs held for the long-term.
The easiest way to get started with indexing is with an all-in-one balanced fund. Tangerine has a great line-up of low cost balanced mutual funds to choose from. There are no account fees, no minimum account size and once you’re set up the funds are virtually maintenance-free. Management expense ratios (MER) on these funds are 1.07 percent, or about half that of most bank mutual funds.
You can reduce your costs even further with a bit more effort on the front-end. Open a discount brokerage account and then purchase one of Vanguard’s all-in-one balanced ETFs. Again, you’ll get a globally diversified portfolio of stocks and bonds. The MER on these ETFs are 0.25 percent.
Finally, you can strike a balance between low cost and minimal effort by choosing a robo-advisor to manage your investments. You’ll get a similar low cost, broadly diversified portfolio of index funds. Just add new money regularly and the robo-advisor will automatically rebalance your portfolio for you. Expect to pay about 0.70 percent in fees.
One more important point: Don’t go chasing higher returns with speculative ideas, or try timing the top or bottom of the market. Stay invested, rebalance once or twice a year, and try not to pay too much attention to the financial news media.
6. Ask for a better deal
Maybe it’s in our polite Canadian nature to just accept the first offer that comes our way. But we’re leaving money on the table when we don’t ask for a better deal. How good of a deal can you get? That depends on whether you’re negotiating for a higher salary or just trying to save a few bucks on your cable bill. Just remember the answer is always no unless you ask.
One or two questions can make a major difference in your bottom line, especially when it comes to big-ticket purchases like a home or vehicle, or better yet when it comes to your negotiating your salary.
7. Avoid buying too much house or car
Tens of thousands of dollars have been wasted because home builders and real estate agents invented terms like “starter homes” and “trading up”. Buy a home that will suit you for the next decade or more, and stay put.
That goes for cars, as well. I like a new car as much as the next guy, but if you can’t afford to pay it off in 3-4 years max, you can’t afford the car. Drive your vehicle for at least a decade or more so you can enjoy some car-payment free years.
To integrate these two tips I’d suggest one more: Live close to where you work. While this isn’t realistic for everyone, there are several benefits including spending less money at the pump and getting home before dark.
8. Simplify your finances
In an attempt to optimize every part of my finances I forgot to account for the pain-in-the-ass factor – the time wasted researching individual stocks, hunting down credit card offers or savings account promotions, transferring money back and forth between a no-fee bank and a full service bank.
There’s something to be said about finding a simple solution that you can stick with, even if it’s not the most optimal solution for your wallet.
9. Do your research
It can be intimidating to walk into a bank, car dealership, or furniture store and wondering whether the person across the desk is looking out for your best interests or their own.
When the seller has more or better information than the buyer, it creates an imbalance of power. The more you know about the products and services you buy, the better the deal you’ll get.
As a general rule, when you don’t have any specific idea of an item’s value, do some research. Go online, investigate, and ask around. Not for every day decisions like the price of chewing gum, but you should probably dig around for a few hours before going to a car dealership.
10. Save on the big things, spend on the things you enjoy
People often stress over gas prices, bank fees, and cell phone bills while ignoring some of the ways they can potentially save thousands of dollars.
Listen, I’m not a big latte fan, but if you enjoy an expensive coffee then who am I to criticize? Spend on things that bring you joy (or that save you time) and then try to save money in other areas to offset your splurges
Take out a variable rate mortgage instead of a 5-year fixed rate mortgage, avoid mortgage life insurance and other creditor insurance products, switch from expensive bank mutual funds into index funds or ETFs, avoid expensive name brands when a generic brand will do, and don’t fall for deceptive or misleading advertisements.
Your turn: What’s on your list?