Welcome to the Money Bag, where I 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 any money topic that’s on your mind.

This edition of the Money Bag answers your questions about the performance of index tracking ETFs, what to buy for a first-time investment, clarifying the MER on asset allocation ETFs, taking CPP early, and whether it still makes sense to hold bonds in your portfolio.

First up is Melanie, who likes the idea of investing in low cost ETFs but is concerned about the lack of performance data. Take it away, Melanie:

Couch Potato Returns

Hi Robb, I have read a lot about the ease and benefit of switching to a “Couch Potato” like portfolio. I personally would love to switch to something easier than managing my own portfolio but I rarely have seen real information on the performance of these portfolios and am therefore hesitant to switch.

I’m wondering if you could tell me about the actual performance of these so-called Couch Potato portfolios?”

Hi Melanie, thanks for your email.

It’s common to question the past performance of a portfolio of ETFs, given that many of them are relatively new and don’t have a long track record.

The first thing to understand is that the Couch Potato style ETF portfolios that I’m talking about track specific market indexes like Canada’s TSX, the S&P 500 in the U.S., and other large indexes around the world. Those indexes have been around for many many years and so if your ETF portfolio is simply trying to replicate the performance of those indexes then it should be very easy to perform a back-test and see exactly how they would perform had they existed for the last 25 years or so.

The good news is that Justin Bender at PWL Capital has done the work for us and back-tested all of the Vanguard and iShares asset allocation ETFs to show their theoretical performance over time.

You’ll see, for example, that Vanguard’s 60/40 ETF portfolio (VBAL) has a 25-year annualized return of 6.82%, which is quite good.

I have also tracked the performance of index mutual funds, which typically cost a bit more than ETFs but take a similar approach.

19-Year Old’s First Investment

Next up is Garrett, who wants some advice for his daughter’s first investment:

Hey Robb,

My daughter is a 19-year-old university student. She has not opened a TFSA yet, but she has $12,000 (saved tips from her job) ready to invest. I was thinking of just having her purchase a ETF for Canadian Banks… thoughts?

Hi Garrett, first I’m going to assume that your daughter does not need this money for any other purpose other than long-term investing. Money needed in the next 1-3 years to pay for school, buy a car, or for a house downpayment should be kept in a high interest savings account.

Your question reminds me that there’s a sub-Reddit called “Just Buy VGRO” that sort of tongue-in-cheek answers this question for first-time investors.

VGRO is all about low cost, broad diversification, and no rebalancing required. And, if she opens her TFSA account through a platform like Wealthsimple Trade, she won’t incur any fees or commissions to buy the ETF.

The other go-to platform for first-time investors is Wealthsimple Invest (the robo-advisor platform), where they will simply allocate the $12,000 into a portfolio of low cost index ETFs.

Best thing for her to do is open the account and buy something diversified so that she never has to worry about monitoring or rebalancing.

The problem with a bank ETF like BMO’s Equal Weight Banks Index ETF (ZEB.TO) is that it owns just six Canadian banks – not exactly diversified. And, it comes with an MER of 0.55%, which is relatively expensive for just six holdings.

Compare that to VGRO, which holds 12,649 stocks and 17,209 bonds from all over the world. It costs a measly 0.25%. Now you know why they say, “Just Buy VGRO.”

Asset Allocation ETF Fees

Speaking of VGRO, John wants to know if asset allocation ETFs (like VGRO) charge two layers of management fees:

Hi Robb, 

You’re a big proponent of asset allocation ETFs like VBAL, VGRO, and VEQT. My question is this: Since these ETFs contain 6-7 other ETFs, do you get charged the MER for those underlying holdings (in addition to the MER for the asset allocation ETF)?

Hi John, great question and one that I’ve received often from readers. The answer is no, you don’t pay additional fees for the underlying holdings of the ETFs. What you see is all there is.

You’re right that asset allocation ETFs like VBAL, VGRO, and VEQT are “wrappers” that contain several other Vanguard ETFs that represent different asset classes and regions. 

VBAL holds these seven Vanguard ETFs:

• Vanguard US Total Market Index ETF
• Vanguard Canadian Aggregate Bond Index ETF
• Vanguard FTSE Canada All Cap Index ETF
• Vanguard FTSE Developed All Cap ex North America Index ETF
• Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
• Vanguard US Aggregate Bond Index ETF CAD-hedged
• Vanguard FTSE Emerging Markets All Cap Index ETF

The benefit of investing in VBAL is that it automatically rebalances to maintain its target asset mix. This means you don’t have to buy and sell individual ETF holdings on your own.

Yes, each of the individual ETFs has its own management fee. But Vanguard packaged up all seven of these ETFs into one “asset allocation” ETF and just charges a flat fee (MER) of 0.25%. That’s it.

Taking CPP Early

Here’s Farhan, who wants to know if he should take his CPP early or wait until 65:

Hi Robb, I am 61 years old and retired in March of this year. I am currently drawing a pension from OMERS. My wife is 60 years old and drawing a long-term disability claim from insurance and CPP disability.

My question is, should I take my CPP now or wait until I turn 65? Thanks!

Hi Farhan, thanks for your email. The answer really depends on other aspects of your finances. Do you need the income now, or can you get by on your OMERS pension, your wife’s disability income, and/or some personal savings for the next four years?

The math really favours waiting to take CPP at 65 and, if you can, defer taking CPP until age 70. You’re penalized 0.6% for every month that you take CPP earlier than 65. That means if you take it now you’ll get 28.8% less than you would if you waited until 65.

Now, many people argue that it’s better to take CPP as soon as possible because you never know if/when you’ll meet an untimely demise. But that ignores the fact that a 60-year-old male has a 50% chance of living until age 89, and a 25% chance of living until age 94.

Deferring CPP is a way to ensure that you don’t run out of money if you happen to live a long and healthy life. CPP benefits are indexed to inflation and payable for life.

Why Should I Own Bonds?

Finally, Colin wants to know if bonds still have a place in his portfolio, given that interest rates have nowhere to go but up:

Hi Robb, can you explain why anyone should own a bond fund right now? The unit values have gone up because interest rates have gone down. If rates go back up, unit values will fall.

Perhaps it’s better to hold 25% cash for the fixed component, or to buy GICs

I have 15% of my investments sitting in High Interest Savings, which now only pay 0.5%. Better than nothing but still appalling. Any suggestions?

Hi Colin, it’s certainly counterintuitive to hold bonds when rates have nowhere to go but up, but we’ve also been saying that for quite some time now and bonds haven’t performed that poorly:

Bonds are the ballast that protect your portfolio from the overall volatility of the market. A 60/40 balanced portfolio is still up on the year (2%) and had about half the volatility of an all-equity portfolio. There’s a behavioural component at work there – bonds help you stay the course.

That said, there is a good argument to keep your fixed income in GICs instead of bonds. The problem is that GIC rates aren’t all that attractive either.

High interest savings rates are also abysmal these days, but it’s the best option for a risk-free return. You’ll need to look outside the big banks and towards a credit union or online bank to find better yields.

I use EQ Bank, which pays an every day rate of 1.7%, plus a $20 bonus when you open an account and deposit $100. 

Do you have a money-related question for me? Hit me up in the comments below or send me an email. 

I’ve been reading Morgan Housel’s work for years and sharing his thoughtful lessons about money and investing. He has the rare ability to tell stories that connect the past with the present, while unpacking all the useful tidbits that apply to our own lives and personal finances.

That’s why I was excited to read Mr. Housel’s new book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. This terrific piece of writing reads like a collection of stand-alone short stories, brilliantly woven together by Mr. Housel to explore our relationship with money and how that connects with life’s bigger picture.

I can’t do the book justice with a simple review. Instead, I’ll say that The Psychology of Money is a highly enjoyable read with 238 pages full of incredible insight, history lessons, and wisdom.

I’ll also highlight two of the ideas that really resonated with me.

The first has to do with stock picking. Mr. Housel points out that most public companies are duds, a few do well, and a handful become extraordinary winners that drive the vast majority of the stock market’s returns. He cites data from the Russell 3000 Index that shows, since 1980, forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered.

Effectively all of the index’s overall returns came from 7% of the companies that outperformed by at least two standard deviations.

The percentage of companies experiencing catastrophic loss across industries from 1980-2014 included:

• Technology – 57%
• Telecom – 51%
• Energy – 47%
• Consumer discretionary – 43%
• Health care – 42%
• Industrials – 35%
• Materials – 34%
• Consumer staples – 26%
• Financials – 25%
• Utilities – 13%

Yes, even boring public utilities had a failure rate of more than 1 in 10.

The example shows just how difficult it is to pick winning stocks. But the important takeaway is that the Russell 3000 index increased more than 73-fold since 1980. The 7% of companies that drove the returns were more than enough to offset the duds.

We see this happening today as large technology companies such as Amazon, Apple, Facebook, and Microsoft have been driving the stock market recovery while the vast majority of stocks are still down and struggling. 

This lesson isn’t about trying to identify the 7% of stocks that will outperform in the future. No, it’s to simply buy the entire index so you don’t have to guess which individual stocks will be future winners.

The second lesson from The Psychology of Money that stuck with me is about change:

“An underpinning of psychology is that people are poor forecasters of their future selves.”

Think about where you’ll be five years from now or even 10. There’s a good chance you believe the future will look very much like the present. Now think about where you were five or 10 years ago. What changed? Probably a lot.

What about our future career aspirations? We may dream of one day becoming a doctor or lawyer, but after putting in years of work you may find the career isn’t as rewarding as you’d hoped. 

Only 27% of college grads have a job related to their major. 29% of stay-at-home parents have a college degree. The key is to acknowledge that someone in his or her 30s may think about life goals in a way their 18-year-old self would never imagine.

It’s important to make long-term financial plans. But both you and the world around you are going to change. Acknowledging this makes it easier to adapt. Breaking down your long-term financial plan into 5 or 10 year blocks of time may be more useful and practical.

That’s just a taste of the many lessons the author explores in The Psychology of Money. Do yourself a favour and pick up a copy today.

This Week(s) Recap:

Last week I wrote about VRIF – Vanguard’s new retirement income ETF. I received a ton of comments and emails about this product.

This week I shared three easy ways to build an investment portfolio on the cheap.

Over on Young & Thrifty I wrote a quick start guide to trading Bitcoin, and also looked at the history of Bitcoin.

As part of my research for those two posts, along with other future cryptocurrency assignments, I opened a Wealthsimple Crypto account (don’t do this) and bought $100 worth of Bitcoin and Ethereum (don’t do this either).

I needed to find out why Wealthsimple launched a cryptocurrency trading platform – the first regulated exchange in Canada – and understand how these coins are traded and why.

While it was extremely interesting to study and test drive the crypto platform, my takeaway is that trading Bitcoin and Ethereum (as well as other crypto assets) is extremely risky and volatile. This is not a replacement for stocks, gold, or fixed income in a portfolio. It’s pure speculation and should be treated as such.

Promo of the Week:

The Canadian Financial Summit is back! This year’s online personal finance conference takes place from October 14 – 17, 2020. 

Where else can you see 25+ of your favourite Canadian personal finance experts (including yours truly) in one place?

It’s also completely, 100% FREE – and you don’t have to get out of your pyjamas to check it out!

I’m joining speakers such as Kevin McCarthy (creator of the TFSA), Rob Carrick, Ellen Roseman, Kristy Shen & Bryce Leung (the dynamic early retirement duo) and more.

[see the full speaker list to look for your favourites]

You can catch me on October 16th speaking about how to identify major gaps in your financial plan. In addition to my session, you can watch these great sessions throughout the week on:

• How to retire early and on your own terms
• How to invest better, easier, and more efficiently
• How to earn more money by creatively advertising innovative side gigs
• How to see through financial jargon meant to confuse you
• How to check your “retirement readiness”
• How to avoid crippling fees and terrible advice
• How to legally avoid Canadian taxation when you move for work or retirement
• How to use Financial Technology (FinTech) to save major cash
• How to drawdown your nest egg in retirement & what a safe withdrawal rate is

The Summit will kick off with a live webinar on October 14th and is absolutely free to view for that weekend.

If you want to check out the videos after their free window has passed (and get access to a whole smorgasbord of bonus resources and video sessions) then you’ll want to sign-up for the All Access Pass. Don’t miss out on the Early Bird Pricing, as the price jumps as the Summit begins.

How do you sign up?

Just click here to claim your free tickets and browse this year’s fantastic speaker line-up.

I hope to see you there!

Weekend Reading:

Credit card issuers seem to be ramping up their offers and our friends at Credit Card Genius have put together a list of first year free credit card deals. This is one of the key promos I look for when signing up for a new card.

Here’s Morgan Housel with a look at obvious things which nobody ever observes and that are easy to ignore.

The Irrelevant Investor Michael Batnick offers a more detailed take on how much money you should have saved for retirement.

Morningstar’s Holly Black also looks at how much money you should be saving – and shares the popular 50-30-20 approach to budgeting and saving.

I really enjoyed this gem from blogger Nick Maggiulli on how much lifestyle creep is okay:

“Once you spend more than 50% of your future raises, then you start delaying your retirement.”

The Canadian Couch Potato Dan Bortolotti shares his take on Vanguard’s new VRIF Retirement Income ETF. It looks like he’ll have much more to say on this topic as well.

Millionaire Teacher Andrew Hallam explains how to help your children become financial powerhouses. I like the idea of setting up an informal trust for your child.

Here’s PWL Capital’s Ben Felix explaining why a small number of large-cap growth stocks are dominating stock returns and what to expect from these companies over the next decade:

Fortress Real Properties convinced 14,000 investors to pour nearly $1 billion into its syndicated mortgages between 2009 and 2017 – promising double-digit returns. Fortress was accused of misleading investors, who lost big on projects that were never completed. After years of investigation, Fortress got away with a $250,000 administrative fine – even after pocketing $320 million in fees and commissions.

Michael James shared his own experience with Fortress, explaining how a friend asked for advice about the promised 12% annual return.

A Wealth of Common Sense blogger Ben Carlson wonders if the Ford F-150 is partially responsible for the retirement crisis. 

Finally, a look at billionaire Chuck Feeney who has donated $8 billion to charity in his quest to die broke.

Have a great weekend, everyone!

I ditched my financial advisor more than a decade ago and started investing on my own. I was fed up with paying high fees for underperforming mutual funds. Dividend paying stocks were growing in popularity and so I decided to take the plunge and build my own portfolio of blue-chip companies.

Several years later I realized my folly; it’s hard to pick winning stocks. It’s even more difficult to consistently pick winners and avoid losers over the long term. Overwhelmingly, the academic research showed that passive investing using low cost index funds or exchange-traded funds (ETFs) has a much better chance of outperforming active investing that focuses on stock picking and market timing.

I bought into the research, sold my dividend stocks, and set up my new investment portfolio using two low cost, broadly diversified ETFs. More recently I moved to an all-in-one solution with Vanguard’s VEQT.

Today, investors have many more choices available to build an investment portfolio on the cheap. I’ll show you three ways to lower your investment costs, diversify your portfolio, and reduce the time you spend worrying about investing.

1). Use a Robo Advisor

A traditional financial advisor or wealth manager might cost an investor between 1.5 to 2.5 percent in management fees each year. Then along came robo-advisors to disrupt the portfolio management model and drive down costs to less than 1 percent.

A robo-advisor helps you build a portfolio based on your risk tolerance, experience, and time horizon. Once your model portfolio is built all you have to do is make regular contributions and the robo-advisor will allocate your cash into the appropriate investments.

The robo-advisor takes care of rebalancing your money whenever the portfolio drifts away from its original allocation (due to market movements or from your own contributions).

Competition is heating up in the robo-advisor space with the likes of Wealthsimple, Nest Wealth, Justwealth, ModernAdvisor, Questwealth, and WealthBar all vying for your investment dollars. BMO SmartFolio has been around for a while and more recently RBC launched its own robo-platform with RBC InvestEase.

Related: How My Wife Saved Money With a Wealthsimple RRSP

2.) Invest in index funds

An index fund tracks a stock or bond market and aims to deliver market returns minus a very small fee. All of the big banks offer index funds, typically at half the cost (or lower) than their traditional equity or bond mutual funds.

Related: Yes, You Can Retire Up To 30% Wealthier

One popular set of index funds is TD’s e-Series funds. These funds can only be purchased online but they offer tremendous savings over their actively managed mutual fund cousins. Investors can find e-Series funds for Canadian equities, Canadian bonds, as well as U.S. equities and International equities all for fees of about 0.50 percent or less.

Another solid set of index funds comes from Tangerine’s Investment Funds. These are one-fund solutions that come in five flavours; with the traditional 60 percent equities, 40 percent bonds balanced portfolio being its most popular. The expense ratio on Tangerine’s funds comes in at 1.07 percent – higher than TD’s e-Series funds, but still a bargain compared to the industry average.

Investors who use dollar cost averaging and make regular contributions throughout the year should consider index funds over ETFs. That’s because investors can buy and sell mutual funds without incurring any commission charges or fees, whereas ETFs may be subject to trading fees, depending on your broker.

3.) One-ticket ETF solutions

It’s never been easier to build an extremely low cost and globally diversified portfolio with just one investment product. The one-ticket ETF solution was first introduced to Canada by Vanguard. Since then, Horizons ETFs, iShares, BMO, and TD have all launched their own suite of all-in-one balanced ETFs.

Vanguard offers five of these ETFs, each with an MER of 0.25 percent. The most conservative allocation is 20 percent equities and 80 percent fixed income, while the most aggressive has 100 percent allocation to equities.

For retirees, check out Vanguard’s new VRIF income fund solution.

Horizons lists three asset allocation ETF portfolios; one with a 50 / 50 split between stocks and bonds, one with 70 percent equities and 30 percent bonds, and the other with a 100 percent allocation to stocks. The MER on these ETFs is between 0.15 percent and 0.19 percent.

iShares offers five asset allocation ETFs that mirror Vanguard’s line-up, from a 20/80 income ETF to a 100 percent equity ETF. All five of their balanced ETFs come with a MER of 0.20%.

BMO lists three asset allocation ETFs, starting with a conservative 40/60 option, a balanced 60/40 option, and a growth 80/20 option. All three come with a MER of 0.20%.

Finally, TD recently introduced its own suite of asset allocation ETFs. The three products include a conservative 30/70 option, a balanced 60/40 option, and an aggressive 90/10 option. The management fee is 0.25%.

Related: Wealthsimple Trade Review – Canada’s Only Zero-Commission Trading Platform

Final thoughts

I wish these options would have been available to me back when I first started investing. Now it’s easier than ever to build an investment portfolio on your own. You can invest on the cheap, too, if you know where to look. Hint: It’s not with the big banks and investment advisors who sell you on their stock picking and market timing expertise.

Indeed, you can build a hands-off portfolio for less than 1 percent a year with a robo-advisor. Or, with slightly more effort, open a discount brokerage account and buy a one-ticket ETF solution for less than 0.25 percent a year.