Reboot Your Portfolio: 9 Steps to Successful Investing with ETFs is a new book written by Canadian Couch Potato blogger and PWL Capital portfolio manager Dan Bortolotti.
Simply put, this book is the definitive guide to building an index investing portfolio today, brought to you by the author who is synonymous with this low cost, passive investing approach.
If you’re new to index investing, Reboot Your Portfolio takes you through everything you need to know from the research on active versus passive investing, the difference between ‘average’ returns and ‘market’ returns, how to pick an appropriate asset mix, which investments to avoid, how to avoid analysis paralysis, and how to select the right ETFs to meet your goals.
You’ll also learn about more tactical strategies, like how to choose the right discount broker (or robo advisor), how to transfer your existing accounts, tricks of the trade on how to place an order, use DRIPs, when it makes sense to use US-listed ETFs, and whether to adopt a ‘smart-beta’ approach to your indexing strategy.
One of the challenges of writing specifically about how to invest in ETFs is naming the specific funds to use to build the portfolio. New products are constantly coming to market (or closing shop), costs change, and so a newly published guide can quickly become stale.
Dan deftly avoids talking about specific ETFs throughout the book by emphasizing process over products. In fact, selecting your ETFs doesn’t even come up until step 5, after setting your financial goals, identifying your savings rate, finding the right asset mix between stocks and bonds, and determining an appropriate geographical representation for your portfolio.
I like this approach because there’s so much more to investing than saving 0.04% MER by picking this fund over that one. The book offers a complete roadmap to becoming a successful index investor with ETFs.
Yes, product selection is important and Dan explains how to pick the right ETF(s), but the principles of keeping costs low, diversifying broadly, staying within your risk tolerance, and tuning out the noise is ultimately what matters more.
Dan started blogging around the same time I did (2010) and his writing was a huge influence on my own investing journey. I was a stock picker for many years, if you recall, focusing on Canadian dividend payers. Dan’s excellent writing, not just around the merits of index investing but also on busting dividend myths, helped me eventually switch to an indexing strategy and I haven’t looked back.
I think I would have switched sooner if the ETF product landscape was as evolved as it is today. Dan’s Couch Potato model portfolios often contained 7-10 individual ETFs, which I thought (and still think) was far too complicated for a supposedly lazy portfolio.
Today, index investors can build a low cost, globally diversified, and risk appropriate portfolio with just a single ETF.
Related: Exactly How I Invest My Own Money
The book isn’t just for index investing newbies. There’s something for everyone. I love the analogies Dan uses throughout the book and I’ll share some of my favourite ones that I plan on incorporating into my conversations with clients.
On risk tolerance:
You may have been asked to consider scenarios such as: “If your fund dropped in value by 10% in one year, would you sell, buy more, or do nothing?”
Dan says such hypothetical scenarios can only tell you so much. “It’s like being asked, how long could you keep your arm in a bucket of ice water before the pain caused you to remove it?” Could you really make a useful estimate?
He says unless you have experience submerging your limbs into freezing liquids, you can only guess. In the same way, no investor truly knows his pain threshold until he’s watched his portfolio get ravaged.
On home country bias:
Some investors argue that Canada’s market is too small to justify an equal share alongside the US and overseas markets. But Dan says there are good arguments for over-weighting Canadian equities that have nothing to do with patriotism.
A 2014 Vanguard paper found that the least volatile equity portfolios (for Canadian investors) contained between 20% and 40% Canadian stocks.
Ironically, this Vanguard report was actually designed to encourage investors to hold a smaller share of Canadian equities, not a larger one. Their data suggested the average Canadian investor held about 60% of their equities in domestic stocks.
On investing a lump sum:
Investors may feel paralyzed by the thought of investing a large lump sum: “What if I invest it all today and the market drops 5% next week? I’m going to feel like an idiot.”
Dan says this decision might be easier if you reframe it. Imagine you received a $200,000 cash inheritance and you’re nervous about investing it because you feel stocks are overvalued and bonds will suffer if interest rates rise. Should you hold onto the cash until it feels right to invest?
“Now flip the question around and imagine you instead inherited a $200,000 portfolio of stocks and bonds. Would you immediately sell everything and sit on the cash? This is exactly the same decision presented in two different ways, yet most people would likely answer yes to the first and no to the second. If you wouldn’t be willing to sell your inherited stocks and bonds, then you shouldn’t be reluctant to invest your cash.”
In Reboot Your Portfolio Dan shows exactly why he’s an award winning journalist and has a cult-like following online. This book is a must read if you’re curious about index investing, looking to take the plunge into ETFs, or even if you’re already a dedicated indexer.
Dan was generous enough to offer Boomer & Echo readers a chance to win a free copy of Reboot Your Portfolio. Just leave a comment below and let me know what type of investor you are (bank managed mutual funds, robo advisor, individual stocks, ETFs, or some hybrid approach).
I’ll leave the contest open until Friday November 12th at 5 p.m. EST and then announce the winner in the next edition of Weekend Reading.
More from Dan Bortolotti:
Dan returns to MoneySense to share how overcome investing FOMO.
Preet Banerjee interviews Dan (the godfather of index investing in Canada) on the Mostly Money podcast.
Promo of the Week:
My friend and travel expert Barry Choi has released a beginner’s guide to travel hacking for lazy people.
Barry’s tips have directly improved my own travel hacking techniques and allowed me to save thousands of dollars on flights and hotels, not to mention levelling up my game to be able to book business class tickets and other luxury perks.
This 10-part guide (or full e-book) teaches you everything you need to do to maximize your credit card rewards (earning) and maximizing the redemption of these rewards (burning).
Weekend Reading:
Speaking of travel hacking, here’s a free tip from our partners at Credit Card Genius – the best bonus value EVER from RBC Avion Visa Infinite card.
Earlier this week I offered a sensible RRSP versus TFSA comparison.
On Young & Thrifty I shared the smart and lazy millennial’s approach to investing using all-in-one ETFs.
Robin Wigglesworth says it’s time to relearn lessons about the power of passive investing.
Rob Carrick shares six things a brutally honest banker would tell you about mortgages, HELOCs, and market-linked GICs:
“The problem with Financial Literacy Month is that it allows the conversation about smart money habits to be co-opted by the very companies that effectively force us to raise our financial literacy game. Mostly, the big banks.”
Global’s Erica Alini interviews Ben Felix and Bridget Casey about how to protect your savings from inflation.
Millionaire Teacher Andrew Hallam calls crypto investing the world’s largest behavioural experiment.
Of Dollars and Data blogger Nick Maggiulli discusses the fear and loathing in cryptoland.
Here’s Ben Felix explaining how to decide between renting and buying a home:
Fee-only planner Jason Heath walks through how to draw money out of your corporation in retirement.
Finally, here’s Rick Steves on the return of travel and why it matters.
Enjoy the rest of your weekend, everyone! Don’t forget to leave a comment for a chance to win a copy of Reboot Your Portfolio.
Should you contribute to your RRSP or your TFSA? It’s one of the most frequently asked questions here and on other financial forums, yet the answers couldn’t be more divided. Furthermore, there is a growing sentiment among Canadians that somehow RRSPs are a government scam because you’ll be forced to pay tax on any withdrawals in retirement. That leads many to (sometimes) incorrectly declare that a TFSA is the better savings vehicle for retirement due to the tax-free treatment of withdrawals.
Let’s start by clearing up one important fact in the RRSP vs TFSA debate: The accounts are mirror images of each other. When you put money in an RRSP and invest the tax refund, you’re using pre-tax dollars. The money grows inside a tax sheltered account and then you pay taxes on your withdrawals years later in retirement.
The opposite is true of a TFSA – you contribute with after-tax dollars but won’t have to pay taxes when you take money out. If you’re in the same tax bracket when you withdraw from your RRSP as you were when you made the contributions, the RRSP and TFSA work out to be exactly the same.
RRSP vs TFSA Comparison
Here’s a simple chart that David Chilton used in The Wealthy Barber Returns to help drive this point home:
| TFSA | RRSP | |
| Pre-tax income | $1,000 | $1,000 |
| Tax | $400 | n/a |
| Net contribution | $600 | $1,000 |
| Value in 20 years @ 6% growth | $1,924 | $3,207 |
| Tax upon withdrawal (40%) | n/a | $1,283 |
| Net withdrawal | $1,924 | $1,924 |
Two important caveats to keep in mind:
- You need to invest the tax refund in order for RRSPs to work out as designed. Unfortunately, most Canadians spend their refund and so they don’t end up with as much money in their retirement account.
- A TFSA is flexible in that you can take out money at any time without penalty. For Canadians who use a TFSA as their primary retirement savings vehicle that means resisting the temptation to raid the account whenever “something” comes up. You should also replace the ‘S’ in TFSA with an ‘I’ and make sure to invest that money for the long-term.
Obviously, for high income earners who expect to retire in a lower tax bracket, it makes more sense to contribute to an RRSP. For low income earners, or for young people with higher income potential later on in their careers, TFSA contributions make better sense now.
Related: How much of your income should you save?
Another advantage in favour of RRSPs is its higher annual contribution limits – 18% of your income up to a maximum of $27,830 in 2021 – compared the TFSA contribution limit of just $6,000.
One potential downside is that withdrawals from a large RRSP portfolio could trigger higher clawbacks from means-tested government benefits such as Old Age Security and the Guaranteed Income Supplement. TFSA withdrawals in retirement, on the other hand, don’t count as earned income and won’t affect your eligibility for OAS and GIS.
Fans of the Tax Free Savings Account trumpet the “tax-free” withdrawal stage while conveniently ignoring that contributions were made with after-tax dollars. And anti-RRSP zealots look to the big tax liability in retirement while ignoring all the deductions and years of tax-sheltered growth.
Final Thoughts
So who wins the great RRSP vs. TFSA comparison? It’s easy to say that you should max out both accounts every year, but realistically, unless you are blessed with a six-figure (plus) income, most of us will have to choose.
As Chilton concluded, it depends:
- If you go the RRSP route, don’t spend your refund.
- If you go the TFSA route, don’t spend your TFSA.
- Whatever route you go, save more!
Personally, I prioritized maxing out my RRSP contribution room when my income was in the $75,000 – $95,000 range. I maxed out my TFSA for the first three years (2009-2011) before draining the account to top-up our house downpayment in 2012. Then we bought a car and paid that off over four years – so I did not contribute to my TFSA from 2012-2016. I spent the next several years catching up on my unused TFSA contribution room, but by then I had already caught up on my unused RRSP room, so I was able to shift those extra contributions to my TFSA and fill it up faster.
Related: So you’ve made an RRSP contribution. Now what?
Now I’m onto the next debate – once you’ve maxed out both your RRSP and TFSA, what’s next?
Our family switched to a plant-based diet two years ago. We have our reasons – a dairy intolerance was the driving force but there’s also environmental concerns, the ethical treatment of animals, a healthier diet, etc. We’ve never looked at it from a financial perspective, mostly because we haven’t noticed much of a change in our grocery spending. Fresh fruit and vegetables are expensive, as are protein supplements.
But if you have noticed the items in your grocery cart are getting more and more expensive then maybe it’s time to re-think your regular diet of meat and dairy.
That seems to be happening already. Sales of beef, chicken, and pork are all down significantly this year as meat prices continue to rise and more plant protein options arrive on the scene.
According to the Food Professor, Sylvain Charlebois, prices for milk, butter, and yogurt are expected to soar next year:
Just announced last night: Dairy farmers will get 8.4% more for their milk, more than 12% for butter starting February 1 2022. Milk, butter, yogurt prices will likely skyrocket in the new year. https://t.co/HEfkLKaClv pic.twitter.com/Bj7HX2WKIH
— The Food Professor (@FoodProfessor) October 30, 2021
Everyone has their own shopping habits and preferences, so your basket of goods will likely vary from mine. If prices for gas, lumber, and meat are rising but you work from home, don’t plan on building a deck or fence, and eat a lot of plant-based proteins then you probably won’t feel the pain as much as a daily commuter who’s in the middle of a renovation and eats beef, chicken, and pork on the regular.
We’re not preachy vegans here to tell you to change your diet. You do you. But if concerns about your health, the environment, and the ethical treatment of animals haven’t persuaded you to eat more plants then perhaps the soaring cost of meat and dairy will.
If you want to add more plant-based meals to your life then a good “in-to” book for you to try is Mostly Plants: 100 Delicious Flexitarian Recipes from the Pollan Family.
Their motto is, “Eat food, not too much, mostly plants.”
Jillian Harris and Tori Wesszer’s book, Fraiche Food, Full Hearts, is also worth a read.
Our biggest challenge with a plant-based diet is finding appropriate and healthy meal options at restaurants – especially when we travel. Also, living in southern Alberta, the plant-based selections at the grocery store are sparse at best (although the dedicated shelf space is getting bigger).
But you can absolutely make delicious meals with plant-based ingredients. We’ve come a long way from the sawdust veggie burgers of the past.
Readers: Have you changed your diet at all to combat rising food prices? Let me know in the comments.
This Week’s Recap:
In my last post I reviewed The Rule of 30, an excellent new book by retirement expert Fred Vettese.
We were grateful to receive an extra copy of the book to give away to a lucky reader who commented on the review. Congratulations to Jessica, who commented on October 20th at 10:45 p.m. I’ll be in touch this week to send you a free copy of The Rule of 30.
From the archives: The Misguided Beliefs of Financial Advisors.
Promo of the Week:
I’m still amazed how much cash Canadians have sitting around in their big bank chequing and/or savings account earning nothing. I get it, there’s comfort and safety in having your money with one of the big five or six banks. But there are so many other options to increase your interest rate by 100x or more so you are at least attempting to tread water with inflation.
My go-to option is EQ Bank’s Savings Plus Account, which pays 1.25% interest. EQ Bank is an online bank and an offshoot of Equitable Bank, which has been around since 1970. Deposits at EQ Bank are insured by CDIC for up to $100,000 per insured category, per depositor.
I like EQ Bank because it pays an everyday high rate (within the top 3-5 of the market leaders at all times). I don’t want to bother moving my money around to different institutions chasing short-term interest rate promotions (looking at you, Tangerine).
Weekend Reading:
Our friends at Credit Card Genius share an incredible 17 easy ways to collect extra cash back.
“If you had just put ten thousand dollars into…” – Ben Carlson looks at the 10 most dangerous words in investing.
New York Times columnist Ron Lieber mansplains why women may be better investors than men.
The good news about retirement income? A lower starting withdrawal rate doesn’t guarantee you’ll have to live on less.
The Canadian Couch Potato Dan Bortolotti is back with a new book – It’s Time To Reboot Your Portfolio. I’ve pre-ordered a copy and will share my review later this year.
A great post and lesson from Millionaire Teacher Andrew Hallam, when speculation crashes.
Preet Banerjee offers a beginner’s explanation on the Evergrande crisis. This is the Chinese company that owes $300 billion to creditors:
Here’s Morgan Housel on why there’s rarely a time when the people who were right in hindsight didn’t sound a little crazy at one point.
Why high interest instalment loans are becoming increasingly more common among Canadians with low credit scores or short credit histories.
Des Odjick shares her personal story about how to financially prepare for a pet emergency.
The Evidence-Based Investor Robin Powell explains why the FAANG stocks have been so dominant.
Will your nest egg last if you retire today? Michael James shares how he thought about market returns when timing his own retirement.
Twitter went wild when its CEO Jack Dorsey tweeted that hyperinflation “is happening”. Pragmatic Capitalism author Cullen Roche explains why that is not the case at all.
The New Yorker revisits Tim Ferriss’s The 4 Hour Work Week, and why its message may have been uncannily prescient about today’s work-from-anywhere trend.
Finally, everything you want is out of stock or more expensive. Global’s Erica Alini explains what’s happening with our supply-chain woes.
Have a great weekend, everyone!