Weekend Reading: Burning Questions Facing Retirees Edition

By Robb Engen | April 3, 2021 |
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Weekend Reading: Burning Questions Facing Retirees Edition

Retirees face a myriad of questions as they head into the next chapter of their lives. At the top of the list is whether they have enough resources to last a lifetime. A related question is how much they can reasonably spend throughout retirement.

But retirement is more than just having a large enough pile of money to live a comfortable lifestyle. Here are some of the biggest questions facing retirees today:

Should I pay off my mortgage?

The continuous climb up the property ladder means more Canadians are carrying mortgages well into retirement. What was once a cardinal sin of retirement is now becoming more common in today’s low interest rate environment. 

It’s still a good practice to align your mortgage pay-off date with your retirement date (ideally a few years earlier so you can use thee freed-up cash flow to give your retirement savings a final boost). But there’s nothing wrong with carrying a small mortgage into retirement provided you have enough savings, and perhaps some pension income, to meet your other spending needs.

Which accounts to tap first for retirement income?

Old school retirement planning assumed that we’d defer withdrawals from our RRSPs until age 71 or 72 while spending from non-registered funds and government benefits (CPP and OAS).

That strategy is becoming less popular thanks to the Tax Free Savings Account. TFSAs are an incredible tool for retirees that allow them to build a tax-free bucket of wealth that can be used for estate planning, large one-time purchases or gifts, or to supplement retirement income without impacting taxes or means-tested government benefits.

Now we’re seeing more retirement income plans that start spending first from non-registered funds and small RRSP withdrawals while deferring CPP to age 70. Depending on the income needs, the retiree could keep contributing to their TFSA or just leave it intact until OAS and CPP benefits kick-in.

This strategy spends down the RRSP earlier, which can potentially save taxes and minimize OAS clawbacks later in retirement, while also reducing the taxes on estate. It also locks-in an enhanced benefit from deferring CPP – benefits that are indexed to inflation and paid for life. Finally, it can potentially build up a significant TFSA balance to be spent in later years or left in the estate.

Should I switch to an income-oriented investment strategy?

The idea of living off the dividends or distributions from your investments has long been romanticized. The challenge is that most of us will need to dip into our principal to meet our ongoing spending needs.

Consider Vanguard’s Retirement Income ETF (VRIF). It targets a 4% annual distribution, paid monthly, and a 5% total return. That seems like a logical place to park your retirement savings so you never run out of money.

VRIF can be an excellent investment choice inside a non-registered (taxable) account when the retiree is spending the monthly distributions. But put VRIF inside an RRSP or RRIF and you’ll quickly see the dilemma. 

RRIFs come with minimum mandatory withdrawal rates that increase over time. You’re withdrawing 5% of the balance at age 70, 5.28% at age 71, 5.40% at age 72, and so on.

 That means a retiree will need to sell off some VRIF units to meet the minimum withdrawal requirements.

Replace VRIF with any income-oriented investment strategy in your RRSP/RRIF and you have the same problem. You’ll eventually need to sell shares.

This also doesn’t touch on the idea that a portfolio concentrated in dividend stocks is less diversified and less reliable than a broadly diversified (and risk appropriate) portfolio of passive investments.

By taking a total return approach with your investments you can simply sell off ETF units as needed to generate your desired retirement income.

When to take CPP and OAS?

I’ve written at length about the risks of taking CPP at 60 and the benefits of taking CPP at 70. But it doesn’t mean you’re a fool to take CPP early. CPP is just one piece of the retirement income puzzle.

The research favours deferring CPP to age 70 if you have enough personal savings to tide you over while you wait. This may or may not apply to you.

One reader comment resonated with me when he said, “my plan is to take CPP at age 70 but that doesn’t mean the decision is set in stone. I’m going to evaluate my retirement income plan every year and determine whether or not I need it.”

There’s less incentive to defer OAS to age 70 but it’s still sensible if you’re still working past age 65 or if you have lived in Canada less than 40 years.

Otherwise, the bird in the hand approach is reasonable – taking OAS at age 65 while deferring CPP up to age 70.

When to convert to a RRIF?

You must convert your RRSP to a RRIF in the year you turn 71 and then begin withdrawals the next calendar year. But you can convert all or a portion of your RRSP into a RRIF before then. Here’s when it might make sense:

If you are between age 65 and 71 and don’t have any pension income, you could convert some of your RRSP into a RRIF and start drawing $2,000 per year from the RRIF. This strategy will allow you to claim the pension income tax credit.

Another potential advantage of converting to a RRIF earlier than 71 is that your financial institution won’t withhold tax on the minimum withdrawals. Of course, it’s still taxable income and you’ll pay your share at tax time.

This Week’s Recap:

Earlier this week I told investors that it would be ludicrous to invest in complicated model portfolios. Twitter agreed:

I also answered some basic (but common) investing questions I get from readers and clients.

The MoneySense guide to the best ETFs in Canada is out again and I was once again pleased to join the panel of judges and share my thoughts on the top ETFs for investors.

Promo of the Week:

The American Express Cobalt Card is arguably the best ‘hybrid’ rewards card in Canada. Earn 5x points on groceries, dining, and food delivery, plus 2x points on transit and gas purchases. 

New Cobalt cardholders can earn 30,000 points in their first year (2,500 points for each month in which you spend $500) plus, you can earn a welcome bonus of 15,000 points when you spend a total of $3,000 in your first 3 months.

Sign up for the Cobalt card here.

I use the Amex Cobalt card and transfer the Membership Rewards Select points to the Marriott Bonvoy rewards program.

Weekend Reading:

Our friends at Credit Card Genius share a great tip that you can convert your Air Canada Buddy Pass into 30,000 Aeroplan miles. An awesome perk since it’s unlikely we’ll get to use those Buddy Passes in the near future.

A great post by Nick Maggiulli (Of Dollars and Data) on the downsides of the FIRE lifestyle. Once you achieve it, then what?

In his latest Evidence Based Investor column, Larry Swedroe explains the risks of buying individual stocks.

Downtown Josh Brown doesn’t pull any punches when it comes to investing in SPACs, digital currencies, or non-fungible tokens:

“The grotesque spectacle of broke twenty-somethings lining up to buy a pointless digital trinket invented out of thin air by the World’s Richest Man prompted this post.”

PWL Capital’s Justin Bender shows do-it-yourself investors how to calculate their time-weighted rate of return

Here’s the accompanying video:

Michael James on Money shares an incredible roadmap for a lifelong do-it-yourself investing plan.

Could you retire on $300 a month in Mexico? Andrew Hallam takes a look at international living on the cheap.

Morgan Housel says that virtually all investing mistakes are rooted in people looking at long-term market returns and saying, “That’s nice, but can I have it all faster?

Morningstar’s Christine Benz looks at another burning question facing retirees: How much should you worry about inflation in retirement?

Here’s writer Sarah Hagi’s misadventures in trading stocks on Wealthsimple Trade.

A nice segue into William Bernstein saying that free stock trading is like giving chainsaws to toddlers:

“Pray that you don’t get really lucky, because if you get really lucky, you may convince yourself that you’re the next Warren Buffett, and then you’ll have your head handed to you when you’re dealing with much larger amounts later on.”

Indeed, as Robin Powell writes, there’s more to life than trading stocks.

Experts caution investors to lower their future expected returns based on today’s high stock valuations and low bond yields. The Monevator blog offers some suggestions for investors to focus on instead of blindly sticking 12% into your calculations and praying you get that return. 

The caring economy is the chokepoint of recovery: So, what’s the plan to value the people we know are essential to our well-being?

Morgan Housel is back with a list of five investing super powers. Ok, the fifth one is not really a super power.

Finally, a wild recap of the time when Home Capital Group almost went bankrupt, only to be saved by Warren Buffett.

Have a great Easter weekend, everyone!

Why It Would Be Ludicrous To Invest In These Model Portfolios

By Robb Engen | March 27, 2021 |
Posted in

Why It Would Be Ludicrous To Invest In These Model Portfolios

Arguably no one has done more to educate Canadian do-it-yourself investors than the PWL Capital teams of Dan Bortolotti and Justin Bender, and Benjamin Felix and Cameron Passmore.

It began more than a decade ago with Dan’s incredibly popular Canadian Couch Potato blog and podcast. Since then, Dan teamed up with PWL’s Justin Bender, who has his own Canadian Portfolio Manager blog in addition to a podcast and YouTube channel dedicated to helping DIY investors.

More recently, PWL’s Ottawa team of Felix and Passmore launched their own successful Rational Reminder podcast, which complements Ben’s Common Sense Investing YouTube channel (which now boasts nearly 200,000 subscribers).

It’s an incredible amount of content dedicated to helping Canadians become better investors. 

Their advice at its core is to follow an evidence-based investing approach that starts (and usually ends) with a low cost, globally diversified, and risk appropriate portfolio of index funds or ETFs. Simplify this even further by investing in a single asset allocation ETF that automatically rebalances itself.

Indeed, Justin Bender says,

“These simple one-fund solutions are ideal for the majority of DIY investors.”

Dan Bortolotti says, 

“Since their appearance in early 2018, asset allocation ETFs have become the easiest way to build a balanced index portfolio at very low cost.”

And, Ben Felix says,

“Total market index funds are the most sensible investment for most people.”

Keeping it Simple

Dan’s writing was influential in my own journey from dividend investing to full-fledged indexing. But I took a long-time to switch to indexing because the product landscape was less than ideal.

In the early 2010’s, Dan’s model portfolios often consisted of six to 12 different ETFs. All one had to do was look at the comments left on his articles by investors who agonized over whether to add 5% to REITs, 2.5% to gold, or put an extra tilt to their U.S. holdings. Meanwhile, these were often new investors with less than $10,000 in their portfolio.

Then Vanguard introduced a groundbreaking ETF called VXC (All World, except for Canada). Now a Canadian investor could set up a low cost, globally diversified portfolio of index funds with just three ETFs (VCN for Canadian equities, VAB for Canadian bonds, and VXC for global equities).

I took the plunge and sold my dividend stocks to purchase a two-fund (all equity) portfolio consisting of VCN and VXC. Ben Felix said that, “back in 2017, the simplest portfolio around was Robb Engen’s four-minute portfolio, which consists of only two equity ETFs.”

Then, in 2018, Vanguard again changed the game when it launched a suite of asset allocation ETFs designed to be a one-fund investing solution. That’s when I switched my two-fund solution over to my new one-fund solution with Vanguard’s VEQT.

Tangled up in Plaid

It would be great if the debate ended there, but this is investing and many of us are wired to look for an edge to boost our returns. Accepting market returns is difficult because we’re constantly distracted by shiny objects, and doom & gloom forecasts, not to mention the notion that when markets are booming or crashing we feel like we need to do something.

Index investors are not immune to this. Not content with a total market, all-in-one solution, some indexers look to reduce their fees even more by holding U.S. listed ETFs and performing the currency conversion tactic known as Norbert’s Gambit.

Justin Bender’s model portfolios include ‘ridiculous’, ‘ludicrous’, and ‘plaid’ options designed to squeeze out some extra return by reducing fees. 

Bender’s Ludicrous Model Portfolio

SecuritySymbolAsset Mix
Vanguard Canadian Aggregate Bond Index ETFVAB40.00%
Vanguard FTSE Canada All Cap Index ETFVCN18.00%
Vanguard U.S. Total Market Index ETFVUN8.27%
Vanguard Total Stock Market ETF (U.S. listed)VTI16.54%
Vanguard FTSE Developed All Cap ex North America Index ETFVIU12.44%
Vanguard FTSE Emerging Markets All Cap Index ETFVEE1.58%
Vanguard FTSE Emerging Markets ETF (U.S. listed)VWO3.17%
Total100.00%

Bender’s Plaid Model Portfolio

SecuritySymbolAsset Mix
BMO Discount Bond IndexZDB29.29%
Vanguard FTSE Canada All Cap Index ETFVCN16.85%
Vanguard U.S. Total Market Index ETFVUN10.71%
Vanguard Total Stock Market ETF (U.S. listed)VTI16.06%
Vanguard FTSE Developed All Cap ex North America Index ETFVIU19.60%
Vanguard FTSE Emerging Markets ETF (U.S. listed)VWO7.49%
Total100.00%

Again, the idea here is to reduce the cost of your index portfolio and reduce or eliminate foreign withholding taxes. The plaid portfolio takes into account your after-tax asset allocation, recognizing that a portion of your RRSP is taxable and doesn’t fully belong to you.

And it’s true. By selecting certain individual ETFs over the all-in-one asset allocation ETF an investor can save a not-so-insignificant 0.28% in an RRSP (VBAL’s MER + foreign withholding tax = 0.42% while the combination of individual ETFs in Bender’s model portfolio costs just 0.09% MER + 0.05% FWT).

WTF (What the Factor)?

The PWL team of Felix and Passmore use funds from Dimensional Fund Advisors to build their client portfolios. These funds target the five known risk factors used to explain the differences in returns between diversified portfolios.

The risk factors include market (stocks beat t-bills), size (small cap stocks beat large cap stocks), value (value stocks beat growth stocks), profitability (companies with robust profitability beat companies with weaker profitability), and investment (companies that invest conservatively beat firms that invest aggressively).

Since it’s not possible for a Canadian DIY investor to access Dimensional Funds, Ben proposed a model portfolio designed to target the five factors.

Felix Five Factor Model Portfolio

SecuritySymbolAsset Mix
BMO Aggregate Bond Index ETFZAG40.00%
iShares Core S&P/TSX Capped Composite ETFXIC18.00%
Vanguard U.S. Total Market Index ETFVUN18.00%
Avantis U.S. Small Cap Value ETFAVUV6.00%
iShares Core MSCI EAFE IMI Index ETFXEF9.60%
Avantis International Small Cap Value ETFAVDV3.60%
iShares Core MSCI Emerging Markets IMI Index ETFXEC4.80%
Total100.00%

This factor-tilted portfolio is slightly more expensive than Bender’s ludicrous option but the main objective of Felix’s Five Factor model portfolio is to increased expected returns.

Ben does present a compelling case for indexers to tilt their portfolios towards these factors to potentially juice expected long-term returns.

What index investors need to determine is whether that juice is worth the squeeze. I’d argue that it’s not.

The Behavioural Argument To Avoid Complexity

I have a huge amount of respect and admiration for what Dan & Justin, and Ben & Cameron have done for individual investors. But I think these model portfolios should be locked behind a pay wall, only to be accessed by investors who can demonstrate the experience, competence, and discipline needed to execute the strategy. That includes:

  • Having a large enough portfolio for this to even matter. 
  • Using an appropriate investing platform that allows you to hold USD, perform same-day currency conversions, and keep trading commissions low. 
  • Creating an investing spreadsheet that’s coded to tell you what to buy and when to rebalance.
  • Being an engineer or mathematician who not only loves to optimize but who also understands exactly what he or she is doing (and why).
  • Having the conviction to stick with this approach for the very long term, even through periods of underperformance.
  • Being humble enough to admit that you’re probably not going to execute this strategy perfectly.

Beginner investors shouldn’t worry about U.S. listed ETFs or factor tilts when they first start building their portfolio. It’s only once your portfolio gets into the $250,000 territory that you’ll start to see any meaningful savings in MER and foreign withholding taxes. Focus on your savings rate.

The investing platform matters. Wealthsimple Trade offers commission-free trades but doesn’t allow clients to hold US dollars, making it expensive to buy U.S. listed ETFs. Questrade is a more robust trading platform for DIY investors, and allows for free ETF purchases, but it takes a few days to process Norbert’s Gambit transactions leaving investors exposed to opportunity costs while they wait. Some platforms, like RBC Direct Investing, allow for same-day Gambits but also charge $9.95 per trade.

A investing spreadsheet, like the one Michael James has created for himself, takes decisions like what to buy and when to rebalance away from the investor and replaces them with a rules-based approach. This is critical, as humans are not likely to make good decisions consistently over time – especially in changing market conditions.

“Statistical algorithms greatly outdo humans in noisy environments.” – Daniel Kahneman

Multi-ETF investing models were designed by incredibly smart people who put in the research to create an optimal portfolio. It certainly looks elegant on a spreadsheet to see such precise allocations to emerging markets, international stocks, or U.S. small cap value stocks. But that precision gets thrown out the window when markets open the next day and start moving up and down.

Your carefully optimized portfolio is now live and immediately out of balance. Behavioural questions abound. When to rebalance? Where to add new money? What happens when I run out of RRSP or TFSA room?

In the case of the five factor model portfolio, how will you react if this approach doesn’t outperform a traditional market weighted index portfolio? Small cap value stocks have been crushed by large cap growth stocks for many years. How long will investors wait for the risk premium to come through?

Final Thoughts

My own investing journey and experience reviewing hundreds of client and reader portfolios tells me that the vast majority should be invested in low cost, globally diversified, risk appropriate, and automatically rebalancing products. Today, the easiest way to do that is with a single asset allocation ETF or through a robo advisor.

Again, one just has to look at the comment sections of their blogs and videos to find that these complicated portfolios lead to many more questions than answers. Dan likely realized this and simplified his Canadian Couch Potato blog model portfolios to include just the single-ticket asset allocation ETFs or TD’s e-Series funds.

But it’s clear that inexperienced investors are trying and failing to implement the more complicated portfolios in real life. In fact, it’s possible we’ll see thousands of Bender and Felix investing refugees flocking back to a one-ticket solution in the years to come.

That’s why the ridiculous, ludicrous, plaid, and five factor model portfolios should have been kept under wraps. Index investors don’t need more complicated solutions when they can beat the vast majority of investors with a simple, single-ticket asset allocation ETF. 

No Stupid Investing Questions

By Robb Engen | March 17, 2021 |
Posted in

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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