Weekend Reading: VEQT and Chill Edition

By Robb Engen | December 7, 2024 |

Weekend Reading: VEQT and Chill Edition

One question I’m often asked about my investment approach is when it makes sense to switch my portfolio from 100% global equities (represented by Vanguard’s All Equity ETF – VEQT) to something less risky that includes bonds and/or cash.

In other words, does it make sense to switch from VEQT to VGRO to possibly VBAL as you enter retirement?

A traditional rule of thumb for asset allocation is for investors to hold a percentage of equities equal to 100 minus their age. A 60-year-old, therefore, would hold just 40% of their portfolio in equities and 60% in bonds.

More risk-seeking investors might adapt that rule to be 110 or 120 minus their age, but that would still mean holding a maximum of 60% equities at age 60.

Target date funds took this approach and ran with it, creating a diversified one-fund solution designed to automatically decrease its equity exposure as you get closer to retirement.

Take BlackRock’s LifePath Index Funds, made popular in defined contribution pension plans across Canada and the US. Contributors pick a fund that most closely aligns with their desired retirement date and over time the fund adjusts its asset mix from aggressive to balanced to conservative.

Indeed, the LifePath Index 2025 Fund is made up of 40% global equities and 60% bonds.

Self-directed investors in Canada don’t generally have access to purchase target date funds, and so the closest approximation would be to invest in VEQT in their 30s, sell it and buy VGRO in their 40s, sell it and buy VBAL in their 50s, and sell it and buy VCNS in their 60s. Something like that, anyway.

Scott Cederburg, an associate professor of finance at University of Arizona, challenges this traditional thinking around “lifecycle investing” with his latest research. He tried to determine the optimal asset allocation to achieve the highest retirement consumption and bequests.

“An optimal lifetime allocation of 33% domestic stocks, 67% international stocks, 0% bonds, and 0% bills vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests.”

Cederburg compared this all-equity strategy to a two benchmarks: a balanced strategy with 60% domestic stocks and 40% bonds and a target-date fund that employs an age-based, stock-bond strategy.

Interestingly, a couple using the balanced strategy must save 19.3% of income (i.e., nearly twice as much) to achieve the same retirement and final estate outcome as a couple investing in the optimal strategy and saving just 10% of income.

The couple investing in the target date fund must save 16.1% (i.e., 61% more) to match the expected utility of the optimal all-equity strategy.

Vanguard’s All Equity ETF (VEQT) is the closest approximation we can get to Cederburg’s optimal lifetime allocation.

VEQT holds:

  • Canadian equities = 30%
  • US equities = 46%
  • International equities = 17%
  • Emerging market equities = 7%

My takeaway from this research is to not only buy and hold VEQT throughout my working years but also to maintain that 100% global equity allocation all throughout retirement. It’s to literally VEQT and chill, for life.

By doing so I can either get away with saving less throughout my working years to achieve the same retirement outcome as a more conservative investor, or I can get away with spending more in retirement and/or giving more away to my kids if I maintain a similar savings rate.

But I understand the psychological challenge of holding 100% stocks throughout retirement. We don’t have any pension income, so we’ll rely on significant withdrawals from our various accounts throughout retirement. That won’t feel good in the years that stocks are down.

But the Cederburg research takes those poor performing years into account, and the all-equity investors for life are still better off if they can keep their emotions in check.

For those who can’t, I still recommend a two-fund solution where you continue to hold the same risk appropriate asset allocation fund with 90% of your retirement assets, but just add a 10% allocation to a high interest savings ETF to meet your withdrawal needs. This “bucket” approach can typically cover 1-3 years’ worth of expected withdrawals in retirement.

After all, the best investing approach is going to be the one you can stick with for the long-term.

Here’s Ben Felix with a closer look at why it might be time to rethink lifecycle asset allocation:

This Week’s Recap:

Last week I explained when it makes sense to hire a full service financial advisor, even as a backup plan for DIY investors.

From the archives: building if/then statements into your financial plan.

Promo of the Week:

I got the call from Wealthsimple saying that they’re finally rolling out self-directed corporate accounts next week! I’ve got an appointment set-up with a “gold glove” team member to assist with the transfer of our existing corporate investing account from Questrade (a transfer that I’m perfectly capable of doing on my own, mind you, but the account type still does not appear to be available to open online so perhaps some extra handholding is still required).

In any case, the timing is great because we’re moving just under $500,000 over to Wealthsimple, which will qualify me for an iPhone 16 Pro or a MacBook Pro with M4 chip. Merry Christmas to me!

There’s still time to register for this promotion (until December 13th) and by registering you’ll have 30 days to deposit or transfer $100,000 or more over to Wealthsimple.

Open a Wealthsimple account here.

Once the corporate account is transferred I’ll have eliminated Questrade from our lives and just have an outstanding RESP at TD Direct Investing left to manage. Incidentally, self-directed RESPs are still on the roadmap for Wealthsimple and should be available towards the end of Q1 2025 (so I’m told).

Weekend Reading:

A deep dive into the world of investing with Ben Felix and David Chilton on The Wealthy Barber Podcast. What, you didn’t know The Wealthy Barber is back putting out personal finance content? Subscribe to his newsletter here.

Wealthy older investors with cognitive decline risk losing money. It’s one reason you need a Trusted Contact Person (Globe and Mail subs):

“A recent study suggests that how well we perceive our own cognitive decline can have a huge impact on our retirement success. It also found that the financial losses that can result from being unaware of cognitive decline are most felt by wealthier investors who are active in the stock market.”

Why John Bogle was wrong about expected future returns and what it means for young investors.

What you’re getting wrong about dividend investing – a look at the pros and cons of this popular income investing strategy:

  • Con:

“What investors don’t realize is that stock prices do adjust for those dividends that are paid. I might have a full-size bar and a bite-size, but my full-size bar has shrunk just a little bit and I have the same amount of chocolate as before. So, you and I have the same amount of chocolate, but my fallacy is that I’ve got a little piece that you don’t have, so I somehow have more.”

  • Pro:

“You always have this option to create income by selling shares of stocks that you own. But that creates a whole other set of questions: Which shares do you sell from your portfolio? Then do you have subsequent decision regret because, “Oh, I sold those shares and now those shares have gone up.” And I’m not suggesting in any way that you settle for a suboptimal strategy or anything like that, but simply saying from a psychological standpoint: Dividend investors don’t face those questions because they are receiving that regular income from their portfolio without having to sell shares.”

The Ontario Securities Commission (OSC) and the Canadian Investment Regulation Organization (CIRO) are undertaking a joint review of sales practices in bank branches amid worries about “potential investor harm due to alleged high-pressure sales practices for mutual funds at some Canadian banks.”

Finally, congratulations to Nick Maggiulli on getting engaged – and here’s his excellent take on things you can’t buy.

Have a great weekend, everyone!

Weekend Reading: When To Hire A Financial Advisor Edition

By Robb Engen | November 30, 2024 |

When To Hire A Financial Advisor Edition

A few months ago I made an offhand remark in a weekend reading update that caught the attention of several readers:

“You might be surprised to hear that if something happened to me, my wife has been instructed to hand everything over to PWL Capital. That’s how much I believe in the good work that group is doing.”

Apparently that surprised some of you. I understand that it’s a surprising statement coming from an advice-only planner who is a big proponent of self-directed investing.

Here’s one recent email from a long-time reader:

Hi Robb,

I keep going back to this comment which you made a while ago. I’m not sure if anyone else has noticed or reacted. So as a “fee-only advisor,” and a “one-fund” investor I am curious as to how you have arrived at this decision. What is it about PWL that made you arrive at this decision to let go and let someone else carry the load? 

To start, I don’t have any affiliation at all with PWL Capital – I talk them up because I really respect the work they do for their clients, for DIY investors, and for the financial planning community in Canada (truly leaders in their field). 

The fact is my wife is a brilliant woman who understands our financial situation and investing approach, but she has little-to-no interest in managing our long-term financial plan.

And while I’ve taken great steps to simplify our financial life so that, in theory, someone could take the reins after I’m gone, we still have a complex situation with a corporation and multiple account types. 

It’s not just about continuing to hold VEQT or XEQT across all accounts. It’s the tax planning that complicates things, and where a firm like PWL can help ensure the correct compensation (salary/dividends from the corporation, withdrawals from personal accounts, timing of government benefits) is used throughout her lifetime to meet financial goals for herself and our kids.

For some context, imagine I tragically get hit by a bus in 12 years. At that time, we have a net worth of $5.66M, and $2.2M of that is in our corporation.

Does this look like a simple situation for someone to begin their DIY planning and investing journey?

Meanwhile, PWL is out there leading the charge on evidence-based financial planning (plans before products) and investing. They use one-fund solutions from Dimensional Fund Advisors, that have a tilt towards small cap and value stocks that have (theoretical) higher expected returns than a market-cap weighted index fund.

“PWL’s service includes goals / values identification, asset allocation, portfolio management, retirement planning, tax planning, and estate planning. We view all planning and advice through both utilitarian and emotional well-being lenses.”

They charge reasonable fees (well under 1%, since it’s on a sliding scale based on investable assets) and that fee would be easily made up in peace of mind for my wife to not have to think about this, and for the precision-like tax planning to help my wife and kids meet their spending needs and live their best lives in the most efficient and effective way.

I realize that paying fees of $25,000 per year might sound outrageous to some of you – but to put that into context it’s just 0.57% per year to work with a firm and advisor team that I completely trust to look after my family’s best interests.

A reasonable alternative might be to transfer everything to Wealthsimple’s robo-advisor (managed) solution and use their financial planning and advisory service. The cost would be similar (0.40% management fee + the cost of the ETFs used in their model portfolios). Let’s call that plan ‘B’ in case PWL gets bought out by an evil bank or something.

But what I like about PWL is their commitment to finding and funding a good life for their clients. They put planning, goal setting, and well-being first, and then they’re at the cutting edge of best practices to help clients meet those goals in the most tax efficient way.

That sounds like a pretty good recipe for successful outcomes.

This Week’s Recap:

Last week I shared an update to our 2024 financial goals and a look ahead to our goals for 2025.

I was happy to contribute to this article on why some retirees are reluctant to spend money when they can afford to (Toronto Star subs).

Promo of the Week:

Get an iPhone or Macbook when you register and move $100,000 or more to Wealthsimple. 

  • Register by December 13th
  • Transfer or deposit $100,000 or more within 30 days of registering
  • Once you qualify you can choose an iPhone or a Mac starting January 15th
  • Deposit $100,000 – $299,999 and you’ll get an iPhone 16 or a MacBook Air.
  • Deposit $300,000 – $499,999 and you’ll get an iPhone 16 Pro or a MacBook Pro.
  • Deposit $500,000+ and you’ll get an iPhone Pro Max or a MacBook Pro with M4 Pro chip.

Get another $25 when you fund any Wealthsimple account with my referral code: FWWPDW

Transfer or deposit at least $100,000 of qualifying funds into your Self-directed Investing, Managed Investing, or Cash account within 30 days of registering.

Weekend Reading:

Here are five costly mistakes to avoid in your 40s for a better retirement.

The psychology of retirement income – from saving to spending.

From CTV news, here’s how to switch from saving for your golden years to spending.

Aaron Hector shares what the REAL OAS deferral enhancement means.

How often should you update your financial plan? Jason Heath explains why a financial plan is never final.

Ben Felix looks at Trump’s win and expected stock returns (the Presidential puzzle):

A Wealth of Common Sense blogger Ben Carlson looks at the 30% up years in the stock market.

The biggest risk to your retirement might not be what you think (spoiler, it’s inflation).

The Loonie Doctor takes an in-depth look at a common problem – transferring a managed taxable account to a self-directed brokerage and capital gains tax versus fee savings.

Finally, a recurring theme, why retirees struggle with the transition from saving to spending.

Have a great weekend, everyone!

2024 Financial Goals Check-up

By Robb Engen | November 23, 2024 |

2024 Financial Goals Check-up

I’ve been blogging for nearly 15 years and one reason I keep things going here (admittedly more infrequently than I’d like) is that I thoroughly enjoy looking back at old articles, especially when it comes to financial goals. In fact, one of my favourite posts of all time is a 2019 net worth update when I optimistically quipped, “2020 is going to be a great year!”.

Too funny.

Setting financial goals can be tricky because you need to make some assumptions about the future – that you’ll earn what you think you’re going to earn, spend what you think you’re going to spend, and save what you think you’re going to save without too many surprises along the way.

But a year is a long time and life can be surprising. Heck, just look at the last five years and what has changed around the world and in your own lives.

At the end of 2019, I had just quit my day job and decided to go all-in on my financial planning business and freelance writing. Then a global pandemic hit, markets crashed, and I was questioning everything.

But it turned out the shift to Zoom and more work-from-home freedom was a tremendous boon for our business. With travel plans on hold for two years, we saved a bunch of money and reconsidered our living situation. We built a new house that fit our new lifestyle (office, home gym, closer to the kids’ new schools).

Annual goal setting is just a microcosm of financial planning. You have a general idea of what you want out of life, and chart a course to get there. Short-term planning is a little more certain than planning many decades in advance. But it still requires regular monitoring, not only to see if you’re on the right track but if those goals are still your top priorities. Again, life can be surprising.

Last year I listed our financial goals for 2024:

  1. Give ourselves another pay raise for 2024. We plan on increasing our wages by 10%.
  2. Reorganize kids’ RESPs to follow the Justin Bender RESP strategy. That means selling e-Series funds and setting up a risk appropriate ETF portfolio for each child. We’re also switching to annual contributions (January) and making one catch-up contribution for our oldest child. Total contributions of $7,500 in 2024.
  3. Revenge travel part two. We plan on taking a hot holiday in February, an epic trip through Europe in July (including a Taylor Swift concert in Zurich!), and a return to Scotland later in the year.
  4. Invest excess profits in the corporate investing account (targeting $90,000).
  5. Renew mortgage, taking the best of either a short-term fixed rate (1-2 years) or 5-year variable rate when it comes up for renewal in May.

Checking in a year later, how did we do?

Well, we recognized a glaring hole in our plan. Our TFSAs. So, we actually increased our income significantly more than expected this year (40%) to help facilitate our TFSA snowball (refilling our TFSAs as quickly as possible). My wife and I will have each contributed $28,000 to our empty TFSAs this year.

We did reorganize our kids’ family RESP account, selling off the long-held TD e-Series funds and buying VEQT and VSB for our oldest daughter and XEQT and XSB for our youngest daughter. We did the catch-up contribution of $2,500 for our oldest daughter and contributed a total of $7,500 in January. I’m really pleased with this transition, as it’s dead-simple to manage and separate each child’s share of the account.

We thoroughly enjoyed our trips this year, soaking up the sun in Cancun, traversing across four countries this summer, and enjoying a relaxing stay in Edinburgh this fall.

Our business hit record revenue this year, which allowed us to meet our higher personal income needs and come reasonably close to reaching our corporate investing target. We’ll contribute $70,000 to our corporate investments. Again, we changed this up on the fly to prioritize a faster TFSA catch-up. Paying a bit more personal tax now is worth getting money into our TFSAs to grow tax-free for longer.

Finally, we did renew our mortgage in April but ended up going with a 3-year fixed rate term at 4.94%. That term was projecting to save the most money at the time, since we had yet to see an interest rate cut from either the Bank of Canada or the U.S. Federal Reserve. Had our renewal come up later in the summer we might have opted for a variable rate. Oh well.

What’s in-store for 2025? Here are our top financial goals for the year ahead:

  1. Contribute $28,000 each to our TFSAs as part of our TFSA snowball (aggressive catch-up) strategy.
  2. Contribute $5,000 to our kids’ RESP in January and rebalance the portfolio for their age 16 and 13 years.
  3. Take three trips (Cancun in February, Italy in April, and England/Scotland/possibly Finland in the summer).
  4. Earn enough business revenue to meet our personal income needs (same as 2024) and contribute $80,000 to our corporate investments.
  5. Pay for bi-weekly cleaning, summer lawn care, and winter snow removal to allow more time for work, leisure, and family.
  6. Reach the $2M net worth milestone (a stretch goal that is only possible with another strong year of market returns).

We’re painfully aware that our kids are fast approaching their post-secondary years and life could look dramatically different in the near future. We’re thinking carefully about the trips we want to take with them while they’re still under our roof, and about where they might want to attend school when the time comes.

We’re building up our financial resiliency by maxing out our TFSAs again, maxing out the kids’ RESPs, and likely holding more cash than usual in our business just in case. In case of what? In case post-secondary is more expensive than anticipated. In case we have a chance to take a bucket list trip together. In case we want to move again (not anytime soon, I hope!) and follow our kids wherever life takes them.

Financial planning is about setting up future-you with options. Goals and priorities might change. We always want to be in a strong financial position so we can adapt, if needed.

How did you do with your financial goals in 2024? Have you thought about your 2025 goals yet? Let me know in the comments.

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