This post is sponsored by RBC InvestEase Inc. All views and opinions expressed represent my own and are based on my own research of the subject matter.

Young investors want a simple solution to manage their investments at a low cost and with minimal hassle. They want automated advice and professional guidance – but on their own terms – without having to make an appointment.

A robo-advisor could be the perfect fit. These digital platforms have changed the investment landscape for the better by offering investors a portfolio of low-cost ETFs that is monitored by a team of professionals and rebalanced regularly as you add new money and market movements take over.

RBC InvestEase: Investing Made Easy

RBC is getting in on the robo-advisor revolution with the launch of RBC InvestEase. RBC wants to help investors get started on their path to wealth by offering a host of competitive features including RBC InvestEase.

One of the benefits of a robo-advisor service is how easy it is to set up and fund your account quickly from the convenience of your phone, tablet, or laptop. Just answer a few questions online about what you want to invest for, how much you plan to invest, what your investing timeframe is, along with your feelings about risk.

Based on your answers, you’ll get an investment plan with a recommended mix of ETFs packaged into a portfolio. The ETFs (and cash) recommended for your portfolio depend on your answers to this short online questionnaire.

For example, if you’re investing for retirement and have 30 years to save, you’ll likely get a different portfolio recommendation than if you’re investing for a new car and need the money in five years.

What about the Fees?

Clients pay a management fee of just 0.50 percent on their investment balance, plus the management expense ratios (MERs) charged by the ETF manager. The weighted-average of those MERs is a very reasonable 0.10-to-0.17 percent.

That’s important because investors are starting to warm to the idea that fees matter when it comes to growing their portfolio over the long term.

Getting Started

I talk with younger investors all the time who want to start building an investment portfolio but don’t know how to get started. They don’t have the experience to build a diversified portfolio of ETFs that is suitable for their goals and time horizon. Or they might understand how to allocate their initial lump sum contribution, but freeze up when it comes to making new contributions and rebalancing.

With the RBC InvestEase platform, you don’t need to do your own research on which stocks or ETFs to buy and sell. Once it confirms the portfolio is suitable for you, the team of experts at RBC InvestEase takes care of all the details behind the scenes, making investment decisions for you and keeping you on track through automatic portfolio rebalancing.

Low Cost, Broadly Diversified Suite of ETFs

Let’s talk about those ETFs. RBC InvestEase uses seven low cost products to construct your investment portfolio. From their website, these include Canadian bonds, Global government bonds, and Canadian, U.S., International, and Emerging Market equities. Simple, diverse, and efficient.

• RBC Canadian Short Term Bond Index ETF (Management fee 0.10%)
• RBC Canadian Bond Index ETF (Management fee 0.10%)
• RBC Global Government Bond (CAD Hedged) Index ETF (Management fee 0.35%)
• RBC Canadian Equity Index ETF (Management fee 0.05%)
• RBC US Equity Index ETF (Management fee 0.09%)
• RBC International Equity Index ETF (Management fee 0.20%)
• RBC Emerging Market Equity Index ETF (Management fee 0.25%)

I wanted to see what type of portfolio it would build for me based on my investment experience, time horizon, and risk tolerance. Here’s what it gave me:

That looks quite close to the portfolio I have set up now in my RRSP with a focus on globally diversified equities and long term growth.

Alternatively, if I needed the money in five years for a house down payment, for example, or I was an ultra-conservative and risk averse investor, I might see a portfolio that looks more like this one:

Monitoring and Rebalancing your Portfolio

What I love most about robo-advisors is not just the use of low-cost ETFs but the methodology behind how they manage and rebalance your portfolio. Stuff that you don’t even have to think about.

A robo-advisor can elegantly solve this problem in two ways:

• By periodically rebalancing your portfolio whenever the market value of one or more of your ETFs drifts away from its original target asset allocation. A robo-advisor imposes rules to automatically trim the holdings of a high performing asset class and/or buy more of one that’s lagging behind its benchmark.
• By dispersing any new contributions to the portfolio in a way that keeps your asset allocation in alignment. For instance, if I added $1000 to my portfolio I might have one-third go to Canadian equities, one-third go to U.S. equities, and one-third go to International and Emerging Markets. In this case, using a robo-advisor is more economical than using a discount brokerage since an investor would need to make three separate trades to produce the same results.

Final thoughts

The robo-advisor revolution is clearly here to stay and RBC InvestEase is making a serious run at attracting young investors with the launch of this new platform. After taking the platform for a test-drive and looking under the hood at the fees, products, methodology, and service, I can say with confidence that RBC InvestEase is the real deal.

RBC InvestEase is currently being piloted in Ontario, Alberta, and Saskatchewan, with a national launch planned shortly. Investors can open TFSAs, RRSPs, and non-registered investment accounts, with additional account types available soon.

They also have a limited offer. You can open an account by October 31, 2018 and pay no management fees until March 31, 2019.

How much do I need to retire? How much income can I create from my investment portfolio? These are two of the most common and important questions that retirees will often ask.

Those two questions are certainly related, or let’s say one can determine the other. If you can earn a 7 percent annual return from your investments that will generate much more income compared to investments that only earn a 1 percent return. A $500,000 portfolio generating that 7 percent return could pay out $35,000 per year and maintain the original portfolio balance. You get ‘paid’ that $35,000 and you still have your initial $500,000.

A 1 percent return on your portfolio will only deliver $5,000 per year. Of course you could simply take out the $35,000 per year from your lower yielding portfolio, but over time the money will disappear.

So how much can you ‘safely’ take out of your retirement investment portfolio?

The financial gurus would suggest that spending 7 percent of your portfolio is much too aggressive. The gold standard retirement studies suggest that you can take out 4 percent – 4.5 percent of your portfolio value, inflation adjusted (2-3 percent annual increase in spending) and you will have a high probability of success over a 30 year period. You are creating perpetual income, just as would a pension. In fact, if your investments are positioned sensibly you are mimicking a pension – you are creating your own pension.

It’s an industry standard so much so that they call it – The 4 Percent Rule. 

The 4 Percent Rule: A Safe Withdrawal Rate in Retirement

The 4 percent rule is based on the work of Bill Bengen. The rule has been challenged and studied perhaps more than any other research in the retirement landscape. Mr. Bengen also took another look and challenged his own 4 percent rule in this 2012 article for Financial Advisor Magazine, How Much is Enough? 

Here’s the final thought from Mr. Bengen in that article. While there are no guarantees in life, and in investing, the rule of thumb has held up.

In summary, the 4.5 percent rule (and its infinite variations for time horizon, tax bracket, current market valuations, etc.) may be challenged in coming years. However, it appears to be working now.

The sensible retirement portfolio (pension) will typically consist of two components, a growth component (stocks) and a risk reducing agent (bonds). Durable income is created from enough growth in the stocks in a lower risk or lower volatility arrangement. Investing can be quite simple, even in the more ‘complicated’ retirement funding stage. Once again, we’re back to that simple mix of stocks and bonds. As always, we want to keep our fees as low as possible. This is no time to be paying ‘others’.

But is that 4 percent rule dead? Many think so. The reason for that is that the bond component of the portfolio, well, it kinda stinks these days. Or at least the yield or income from the bonds is nothing to write home about.

Challenges with the 4 Percent Rule

Go back a couple of decades and your basic lower risk investment grades bonds would pay retirees 6-7 percent. The bonds on their own were enough to create durable income in a lower risk environment. Retirees did not need to take on much or any stock market risk. These days it might be difficult to generate more than 3 percent from your bond component. The yield on Canadian Bond Universe Exchange Traded Fund (ETF) XBB from iShares is 3.18 percent.

Yields have started to creep up over the last year, but they are still historically low. And bond yields can stay low. They do not have to go up just because they are down. Bond yields can and have in the past stayed very low for decades. We should always keep in mind that we do not know where bonds will go over time, just as we do not know where stock markets will go over the near term.

And speaking of those stocks, it appears that retirees need some of that growth potential if they’re going to be spending at that 4 percent rate, inflation adjusted. The problem there is that many write that stocks are ‘expensive’. We’ve had a long stock market run (at least in the US where we’re in the midst of the second longest stock market run in history) and those stocks also might not deliver ‘like they used to’. Vanguard suggests we might only see 3-5 percent returns for portfolios over the next decade or more.

While inflation is expected to remain low, investors should expect the nominal rate of return on their investments to be in the range of 3 to 5 percent, compared with historical averages of 9 to 11 percent, a panel of Vanguard economists said.

So, we’ve got bonds that might not do their thing. We’ve got stocks that might not do their thing. Yikes! So much for that 4 percent rule, or are too many of the experts crying wolf? I checked in with James Gauthier, the Chief Investment officer at JustWealth, one of the leading Canadian robo advisors.

Here’s what James had to say…

“… we review our longer-term forecasts annually, and our estimates for longer-term equity returns is 7 percent – this is below historical returns (if you go back far enough), but has been a pretty consistent estimate for us over the past few years. Our estimate for bonds is 3% which is again below historical returns, but it has moved up modestly from previous years as yields have begun to creep up off their lows established a few years ago.”

I’d have to agree that stocks might continue to ‘do their thing’. There is decent economic growth in Canada, the US, and around the globe. We should keep in mind that many of the stock market naysayers are referring to those US markets. The Canadian stock market (TSX) has not experienced that mostly uninterrupted roaring bull market run. Many will write that the Canadian and International markets are poised to outperform the US markets over the next several years.

Once again, we’re back to simple portfolio construction, that’s why we hold Canadian companies, US companies and International companies, and we manage the risk with bonds.

When you buy a stock or stock market fund or ETF you are buying a current yield, just as a bond delivers a yield. Today, the Canadians companies are ‘making you more’ (current yield) than those US companies. And that basket of International companies is making you more than the US basket.

Embracing the 4 Percent Rule

I would suggest that Canadian retirees still embrace that 4 percent rule. That means for every $100,000 that you hold in your portfolio(s), you might withdraw and spend $4000 – $4500. That 4 percent rule or guideline will also allow you to estimate how big a portfolio you might need in retirement to reach your spending needs or goals.

There’s no guarantee of success of course in anything that is investment related, but based on stock and bond market history, there is a very decent ‘chance’ of success. And here’s the thing, as a retiree you don’t have to sign on to the 4 percent rule in stone. If the stock markets do all tank in concert for many years, and the bonds are not offering enough support, you can adjust your spending plans – and spend less.

As always, I’d suggest that retirees and near-retirees consult with an advisor to ensure they they’re on track and to check that the portfolio is set up in favourable fashion to create durable income. You can use a fee-only advisor, meaning that you can pay a one time fee for the advice that you need, and then you can move on to self direct your investment portfolio. An advisor will also ensure that you are set up to withdraw your funds in the most tax efficient manner.

Thanks for reading. Happy investing. Happy retiring.

And thanks to Robb for allowing me to share some thoughts with readers of Boomer and Echo.

Dale is a still-recovering former advertising writer and creative director. He then moved on to become an advisor on lower fee index funds. These days Dale helps Canadians find the many sensible lower fee investment options available by way of his site, cutthecrapinvesting.com

I wrote about my mortgage renewal strategy earlier this year. Since we don’t plan on moving in the next five years, my top consideration is to get the best interest rate possible. That meant looking at the best of either a 5-year close variable rate mortgage or a 1-to-2-year fixed rate mortgage. With my mortgage up for renewal at the end of the month it was time to put my strategy to the test.

I do my own research on RateSpy.com to find out what offers other lenders have in the market. I also received a renewal letter from TD offering 2.95 percent on a 5-year closed variable and 3.04 percent on a 1-year fixed rate. With that offer in hand, plus a screenshot of RateSpy’s best 5-year variable rates, I met with TD to negotiate my mortgage renewal.

The advisor was unaware of the renewal letter I received with the 2.95 percent rate. To my surprise she said the best TD could offer was 3.05 percent. I explained the letter and how I was disappointed the bank couldn’t do more to keep my business. Pulling out the RateSpy information I asked if TD could meet me somewhere in the 2.64 percent range or else I’d be taking my business to HSBC.

She got up to speak with her manager and when she came back she said she’d have to send in a request to head office for approval. At this point I’m thinking there’s no way TD’s going to budge and I’m going to have to act on my threat to move my mortgage elsewhere.

Later that afternoon the advisor calls me at the end of her day with good news. They could bring the rate down to 2.70 percent, keeping all of my pre-payment and double-up options intact. I agreed and signed the paperwork the next day.

Did I get the absolute best deal on the market? No. But I got 25 basis points off TD’s best published offer, and I get to keep all of my banking in one place, which, frankly, is convenient and comforting to me.

Truthfully I was prepared to leave if the bank couldn’t come close to my desired rate. That played a big factor in the negotiation. Be willing to walk away. I did, and they called back hours later with an offer good enough for me to sign.

The plan is for this to be the second last time I negotiate a mortgage. The five-year term will take us to 2023. We anticipate having the house paid off completely by the end of 2024. That means renewing for a 1-year open rate that gives us the flexibility to pay off the remaining balance.

Promo of the Week:

Wealthsimple announced it is getting into the discount brokerage business with the launch of a new “zero-commission” trading platform. Wealthsimple Trade is a mobile app that will give investors unlimited zero-commission trades of more than 8,000 stocks and ETFs.

The platform is currently in beta testing and interested users can join the waiting list here. A wider, public launch is expected to roll out later this year. At launch the platform will only support non-registered accounts but the company says it hopes to support more types of accounts in the future.

This Week’s Recap:

This week I wrote about the stock market crash that never came. Some interesting comments on this one. Thanks for sharing!

Weekend Reading:

Here’s more on the latest investing trend where Wealthsimple and Fidelity (south of the border) are shaking-up the investing world by offering trading and managed funds at no cost.

Dan Bortolotti argues that while zero-fee investing is on the rise, it won’t make you a successful investor:

“I just hope investors will maintain a healthy skepticism and recognize that what stands in the way of investing success today is not just fees, but our own behaviour.”

Here’s Dan again with a look at Vanguard’s all-in-one asset allocation ETFs versus a multi-ETF portfolio. He says, “embrace the simplicity.”

PWL Capital’s Ben Felix explains why optimal asset location, the practice of holding certain asset classes, like bonds, in certain account types, like RRSPs, is probably not worth the effort:

A Wealth of Common Sense blogger Ben Carlson dives into the half-life of knowledge – the idea that everything we know has an expiration date.

Why does Ben Carlson think Jerry Seinfeld might be our greatest living philosopher? Read about it in the art of self-control.

Why retirement success means focusing on the paycheque, not a savings number.

Jason Heath answers a reader question about whether it’s worthwhile to make an RRSP contribution at age 70.

Of Dollars and Data blogger Nick Maggiulli looks at the democratization of information:

“Today you are drinking from the firehose of 1s and 0s and it is too difficult to find an informational edge because everyone else and their algorithms are also drinking from that same firehose.”

Why you need a plan when withdrawing from an RESP to pay for school.

Why you should answer yes to these six questions first before investing in real estate.

Finally, infamous short-seller Marc Cohodes has been accused by the Alberta Securities Commission of trying to manipulate the stock price of Calgary-based excavator Badger Daylighting Inc.

Have a great weekend, everyone!