One of the best things about running my online business is that I can write and offer financial planning from anywhere in the world. No longer tethered to a day job, I planned to test the ‘location independent’ waters this year with some extended travel to see how I could balance work and play.
A global pandemic threw a wrench into those plans, but the idea of a location independent lifestyle still intrigues me. I’ve been inspired by the likes of David Bach, who took his family on a ‘radical sabbatical’ to live in Italy for a year, and friend of the blog Kyle Prevost, who’s moving to Doha, Qatar with his wife to teach at an international school.
Like Kyle, perhaps my wife and I have been watching too many episodes of House Hunters International. We fell in love with Scotland when we visited last summer, but sadly had to cancel our return visit this year. Still, we’ve dreamed about an extended stay there and eventually even moving to Scotland.
We don’t know exactly what this looks like. Our children are still young (11 and 8) and so we’d be uprooting them from their friends and their school. Maybe we continue to travel (when we can travel again) and explore the world until they’re post-secondary age before committing to a move. Or, maybe we try the semester or year-long sabbatical somewhere while they’re still in school. Maybe they attend post-secondary abroad and we simply tag along to live somewhere nearby. Who knows.
Wherever we end up, I know I’ll be able to continue working remotely doing what I love – educating Canadians about personal finance and investing, while also helping clients achieve their financial goals.
Having our own finances in order certainly helps. We’ve maxed out our RRSPs and my TFSA, with plans to accelerate my wife’s TFSA contributions next year. We’re fully funding our kids’ RESP every year. We don’t have a car payment or any other debt besides our mortgage – which has an absurdly low interest rate of 1.45%.
More importantly, we’ve not only survived the first seven months of entrepreneurship, the business has grown by 65% – led by an increase in fee-only financial planning clients. That tells me I made the right decision to leave my day job and that this online and potentially location independent business can thrive in the years to come.
Have you ever taken a sabbatical or thought about living a location independent lifestyle? Let me know in the comments.
This Week’s Recap:
On Thursday I explained how you can retire up to 30% wealthier simply by switching out of your expensive actively managed mutual funds and into index funds.
Over on Greedy Rates I wrote a beginner’s guide to investing in ETFs.
And, on Young and Thrifty, I looked at everyone’s favourite topic these days – day trading stocks.
From the archives: Stop asking $3 questions and start asking $30,000 questions.
Promo of the Week:
One downside to credit card hacking is the impact of new inquiries on your credit score. Every new inquiry tends to lower your score (temporarily) by 10 points or so. Back when I was aggressively applying for credit cards to stockpile travel rewards points, my credit score took a major nose dive.
I haven’t applied for a new card since February and I’ve noticed my credit score has improved quite a bit – up to 752 (that’s high for me).
I use Borrowell to monitor my credit score and check my credit report every month. It doesn’t affect your credit score, and Borrowell uses bank-level encryption to ensure your information stays safe. Get your free credit score here.
Weekend Reading:
Credit Card Genius reports that Canadian household debt-to-income is now at 177%. But should you care?
Global’s Erica Alini looks at how Covid-19 is luring Canadians into the stock market.
The Irrelevant Investor Michael Batnick also looks at why everyone’s trading, even his plumber:
“You can only see your friends doubling and tripling their money for too long before you get sucked in, and that’s just what happened to my plumber.”
On the other hand, Warren Buffett is ‘willing to look like an idiot in the short term,’ according to ‘Wall Street’s biggest influencer’.
Why experts say some older personal finance rules may no longer apply.
Rob Carrick looks at 2020 vs. 2012 vs. 1984 and concludes that young adults have it harder than ever today.
How to make good money decisions in the new normal? Half Banked blogger Des Odjick sold her car.
I opened this article with some musings about quitting my job to live a location independent lifestyle. But I’ve always stopped short of telling people to ditch their 9-5 and follow their entrepreneurial dreams. It’s not for everyone. Blogger Nick Maggiulli agrees, saying there’s nothing wrong with a traditional career.
Jason Heath says the pandemic has put the financial plans of Canadians to the test and also reminded us why we make such plans to begin with.
Ben Felix and Cameron Passmore interview Dr. William Bernstein in their latest episode of the Rational Reminder:
Kind Wealth founder David O’Leary wants socially responsible investors to focus on their mission and values and stop arguing that responsible investments beat the market.
The Eat Sleep Breath FI blog shares the FIRE alternative you may not have considered: semi-retirement. I can get behind that.
Morningstar’s Christine Benz looks at whether retirees should adopt a flexible withdrawal strategy:
“I think most retirement research, most planners that I speak with would suggest that doing a fixed percentage probably isn’t going to work for many retirees. It just results in too many fluctuations in standard of living.”
Less than 1% of Canadians choose to delay CPP. Here’s why the rest are missing out. I’ve also written about the benefits of deferring CPP to age 70.
I enjoyed this post from Jonathan Clements who says he’s a year or two away from tapping his portfolio for income. He shared his thinking around how best to generate income and preserve capital.
Here’s why your retirement asset drawdown strategy should fit your personal story and not some arbitrary rule of thumb.
Finally, Maria at Handful of Thoughts shares why her family goes against traditional personal finance advice and owns three vehicles. Hey, as long as you’re spending on things you value, I say go for it.
Have a great weekend, everyone!
Questrade touched a nerve with financial advisors with a series of commercials highlighting how lower investment fees over time potentially means you can retire up to 30% wealthier. Financial advisor extraordinaire Jason Pereira acknowledged that Questrade was right to go after do-nothing advisors who collect fat commissions, but he claimed the 30% wealthier promise was unrealistic and borderline illegal.
Mr. Pereira’s argument is a good one. Advisors like him (and others who put a client’s best interests ahead of their own) can add tremendous value for clients, but not in the way you might think.
The old school notion of a financial advisor is of someone who adds value through their stock-picking prowess. But that argument falls flat when you see the evidence that the vast majority of actively managed funds fail to beat their benchmarks.
Indeed, investors are better off buying the entire market as cheaply as possible using index funds or ETFs.
PWL Capital’s Ben Felix once told me, “investing has been solved.” “The way for advisors to add value is on planning, behaviour, and transformation.” With that in mind, I can get behind the idea that financial advisors with this mindset do have a net positive impact for their clients, even after fees.
Which brings me to the point of this article. Canadians have $1.6 trillion invested in mutual funds, most of which are of the expensive, actively managed variety. Those actively managed funds aren’t adding value – the vast majority will underperform their benchmark. Furthermore, most bank-advised clients aren’t getting value in other ways – financial planning, goal setting and prioritization, behavioural coaching, etc.
Traditional advisors are still selling (and charging for) investment expertise, but failing miserably at delivering excess returns while offering little-to-no value for things that would truly make a difference for their clients.
The easy answer is to pair a fee-only advisor with a low-cost investment solution (either a self-directed portfolio of globally diversified ETFs, or through an automated portfolio with a robo advisor). This way, you get the planning, coaching, and behavioural nudges you need to succeed financially, plus the benefit of lowering your investment fees. Win-win.
But the sad reality is that financial inertia is powerful and it’s easier to keep your investments at your bank, along with your chequing, savings, and mortgage. I get it.
Retire up to 30% wealthier without moving your investments
What if I told you that you can still retire up to 30% wealthier without moving your investments to a robo advisor or a DIY investment solution? The answer is sitting right there on the product shelf at your bank – yet rarely if ever talked about by your financial advisor.
I’m talking about index funds. That’s right. Every big bank has a suite of index mutual funds available to investors. These funds charge between one-sixth to one-half the cost of the actively managed mutual funds that are typically sold to Canadian investors.
I’ve monitored and tracked the performance of big bank index funds and their actively managed mutual fund cousins for more than 10 years, and in every single case (when comparing to identical benchmarks), the lower cost index funds outperform the active funds.
So, all you need to do is walk into your bank branch, sit down with your advisor, and ask (no, demand) to move your portfolio from actively managed mutual funds to their index fund equivalents.
Below, I’ll show you the exact index funds to buy to build a 60/40 balanced, globally diversified portfolio of index funds at each of Canada’s five big banks. I’ll compare those index funds to the commonly sold actively managed “balanced” mutual fund.
RBC Index Funds
If you’re an RBC client, chances are you have the RBC Balanced Fund (RBF272) in your investment portfolio. The fund has nearly $5 billion in assets under management and comes with a fee (MER) of 2.16%. Returns have been decent, with a 10-year average annual return of 5.3%.
Here’s how to replicate that portfolio using RBC index funds:
| Fund name | Allocation | Fund code | MER | 10-yr return |
| RBC Canadian Index Fund | 20% | RBF556 | 0.66% | 5.6% |
| RBC U.S. Index Fund | 20% | RBF557 | 0.66% | 15.6% |
| RBC International Index Fund | 20% | RBF559 | 0.61% | 6.4% |
| RBC Canadian Bond Index Fund* | 40% | RBF700 | 0.70% | 3.8% |
*Update: You may need to substitute the RBC Canadian Bond Index Fund (RBF700) for the RBC Canadian Government Bond Index Fund (RBF563)
The balanced portfolio of RBC index funds come with a weighted-average MER of just 0.67%. That’s one-third the cost of the RBC Balanced Fund.
The index fund portfolio’s annual returns over the past 10 years would have been 7.04%. Your projected portfolio could potentially be worth $769,809 after 30 years, assuming a starting investment of $100,000.
If you extrapolate the RBC Balanced Fund’s returns over 30 years, your portfolio would be worth $470,815.
A quick word about comparing apples-to-apples: The RBC Balanced Fund is more heavily tilted to Canadian stocks (33%), while holding less U.S. (13%) and International (15%) stocks. Since U.S. equities have outperformed Canadian equities over the past decade, it stands to reason that our index fund portfolio with a 20% allocation to U.S. stocks would outperform.
That said, even if we reduced the expected annual return of the index fund portfolio from 7.04% to 6%, your $100,000 would grow to $574,349 over 30 years. That’s 22% more wealth for your retirement.
TD Index Funds
TD’s e-Series funds are likely the most popular set of bank index funds on the market. But don’t think your TD advisor will tell you anything about them. The e-Series funds are notoriously difficult to buy – and you might just be better off buying them online.
But there’s $8.8 billion invested in TD’s Comfort Balanced Portfolio (TDB886) – a 50/50 balanced fund that comes with a MER of 1.92%. Its 10-year annual rate of return is 5.19%.
Let’s see how that compares to a portfolio of e-Series funds:
| Fund name | Allocation | Fund code | MER | 10-yr return |
| TD Canadian Index Fund e-Series | 20% | TDB900 | 0.32% | 6.0% |
| TD U.S. Index Fund e-Series | 20% | TDB902 | 0.34% | 16.2% |
| TD International Index Fund e-Series | 20% | TDB911 | 0.49% | 8.1% |
| TD Canadian Bond Index Fund e-Series | 40% | TDB909 | 0.51% | 4.1% |
The 60/40 balanced portfolio of TD e-Series index funds comes with a weighted-average MER of just 0.43%. That’s less than one-quarter the cost of the TD Comfort Balanced Portfolio.
The returns are better for e-Series funds, too, at 7.7% per year over 10 years. Projected over 30 years and your portfolio could be worth $925,701.
Compare that to the TD Comfort Balanced Portfolio, where $100,000 turns into $456,282 after 30 years. That’s less than half the balance of the projected e-Series portfolio.
Again, let’s reduce the expected returns to 6% per year. Over a 30-year period, our $100,000 TD e-Series balanced portfolio would grow to $574,349. That’s nearly 26% more wealth for your retirement.
Scotia Index Funds
The Scotia Canadian Balanced Fund (BNS378) has $2.1 billion in assets and comes with a MER of 1.98%. While it positions itself as a Canadian fund, its mandate says up to 49% of the fund’s assets may be invested in foreign securities, making it a good proxy for a global balanced portfolio. Scotia’s Canadian Balanced Fund has a 10-year annualized return of 5.3%.
Scotia quietly has a decent portfolio of index funds to choose from, and so you’ll see below a 60/40 portfolio made up of four Scotia index funds. Note, I’m using the ‘A’ series funds but there are also ‘D’ series funds available for self-directed investors that comes with slightly lower MERs.
| Fund name | Allocation | Fund code | MER | 10-yr return |
| Scotia Canadian Index Fund | 20% | BNS381 | 1.00% | 5.3% |
| Scotia U.S. Index Fund | 20% | BNS382 | 1.07% | 15.2% |
| Scotia International Index Fund | 20% | BNS387 | 1.26% | 6.7% |
| Scotia Canadian Bond Index Fund | 40% | BNS386 | 0.85% | 3.8% |
This portfolio of Scotia index funds comes with a weighted-average MER of 1.01%, which is about half the cost of the Scotia Canadian Balanced Fund.
The index funds would have also returned 6.96% per year for the past 10 years. Projected over 30 years and a $100,000 starting portfolio could be worth $752,734.
Compare that to the Scotia Canadian Balanced Fund, which projected over 30 years would be worth $470,816. That’s nearly 60% more for the index fund portfolio.
If we reduce the index fund returns to 6% per year then we know we’ll end up with $574,349 after 30 years. That’s still 22% more wealth for your retirement with the index funds.
BMO Index Funds
BMO has a ton of mutual funds to choose from, but I decided to use the BMO Asset Allocation Fund (BMO70145) and compare it to a suite of index funds.
The BMO Asset Allocation Fund has $1.4 billion in assets under management and comes with a MER of 2.12%. It charges this fee despite its underlying holdings being comprised of – get this – low cost BMO index ETFs. I mean, c’mon!
The fund’s asset mix is approximately 55% stocks and 45% bonds. It has returned 4.76% per year over the last 10 years.
As for BMO index funds, they’re actually listed in name as ETFs but are available on the mutual fund side of the house. Here’s a balanced portfolio of BMO index fund (ETFs):
| Fund name | Allocation | Fund code | MER | 10-yr return |
| BMO Canadian Equity ETF Fund | 20% | BMO144 | 0.93% | 5.1% |
| BMO U.S. Equity ETF Fund | 20% | BMO722 | 1.00% | 11.8% |
| BMO International Equity ETF Fund | 20% | BMO727 | 1.05% | 5.9% |
| BMO Core Bond Fund | 40% | BMO160 | 1.16% | 3.6%* |
*since inception Nov 2014
The portfolio of BMO index funds comes with a weighted-average MER of 1.06% – exactly half the cost of BMO’s Asset Allocation Fund.
The index fund balanced portfolio would have 10-year annualized returns of 6%. Extrapolated over 30 years and a $100,000 portfolio would be worth $574,349.
Compare that to the more expensive BMO Asset Allocation Fund, which would only be worth $403,520 after 30 years.
That’s 42% more wealth after 30 years for the portfolio of BMO index funds.
CIBC Index Funds
CIBC’s flagship balanced fund is the CIBC Managed Balanced Portfolio (CIB834). This fund is a 50/50 portfolio with $2.9 billion in assets under management. It comes with a MER of 2.25% and has annual returns of 5.9% over the last 10 years.
CIBC has a surprisingly broad set of index funds, including relatively new “passive portfolios” which are like all-in-one asset allocation ETFs and track global markets using index funds.
These one-ticket solutions only go back two years, and the MER is relatively high at 1.33%, so instead we’ll focus on using individual index funds for each market to build our balanced portfolio.
| Fund name | Allocation | Fund code | MER | 10-yr return |
| CIBC Canadian Index Fund | 20% | CIB300 | 1.14% | 5.2% |
| CIBC U.S. Index Fund | 20% | CIB500 | 1.18% | 15.1% |
| CIBC International Index Fund | 20% | CIB510 | 1.25% | 7.2% |
| CIBC Canadian Bond Index Fund | 40% | CIB503 | 1.16% | 3.6% |
This portfolio of CIBC index funds comes with a weighted-average MER of 1.18%, so just less than half the cost of the CIBC Managed Balanced Portfolio.
When it comes to returns, this index fund portfolio would have delivered 10-year annual returns of 6.94% – a full percent higher than the actively managed fund portfolio.
That means the expected balance of a $100,000 portfolio of CIBC index funds after 30 years would be $748,523 compared to the CIBC Managed Balance Portfolio which would have $558,314 after 30 years. That’s 34% more wealth for the CIBC index fund investor’s retirement.
Final Takeaway
It’s no surprise (to me, anyway) that the lower the cost of the index fund portfolio, the higher the outperformance.
Costs matter when it comes to investing. But that doesn’t mean you need to ditch your advisor and move to a self-directed portfolio of ETFs, or even move to a robo advisor, to lower your fees and achieve a better long-term outcome. I mean, if you have the time, skill, and temperament to do so then I say go for it.
But for the vast majority of investors who just want someone else to manage their portfolio, but who are also fee-conscious and don’t want to get ripped off, understand that a lower cost solution is available at your bank.
Indeed, print off this article, or write down the names and fund codes of the index funds I highlighted for your given bank above, hand them to your bank advisor and ask – no, insist – on moving your portfolio from the expensive actively managed mutual funds to a portfolio of index funds.
And, if you find the financial advice lacking in terms of helping you prioritize goals, plan for retirement, and coach your behaviour, then perhaps it’s time to find a fee-only advisor who will look out for your best interests.
Do this and with enough time you will retire up to 30% wealthier than you would have if you stayed in those expensive and underperforming mutual funds. You can take that to the bank.
Usually one needs to read the tea leaves to interpret the Bank of Canada’s forward guidance for interest rates and the economy. Not anymore. New Bank of Canada Governor Tiff Macklem was undeniably clear that record low interest rates are here to stay “for a long time.”
It was no surprise to anyone that the Bank of Canada kept its key interest rate at 0.25% this week. More surprising was the unusually strong signalling that interest rates will stay put until at least 2023.
The Bank’s official statement said it would “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”
Governor Macklem said:
“Canadians and Canadian businesses are facing an unusual amount of uncertainty, so we have been unusually clear about the future path for interest rates.”
This level of clarity is important for homeowners, too, as they think about buying a home or renewing their mortgage. Mortgage rates are incredibly low, with five-year fixed rate mortgages available at less than 2% interest, while 10-year mortgage rates are well under 3%.
A five-year variable rate mortgage is still cheaper than its fixed rate counterpart. Variable rates also come with some degree of certainty that interest rates will hold steady for at least the next three years.
The problem is, with the Bank of Canada holding rates at 0.25%, there’s no upside for variable rate mortgage holders. I happened to benefit when the BoC made its emergency rate cuts this spring – it reduced my own mortgage rate to 1.45%. Variable rate holders won’t be so lucky in the future.
Paying off my mortgage early has never been a major priority in my financial plan. I’d much rather max out my tax sheltered investment accounts first before throwing extra money at my mortgage. Lower rates also mean more of my mortgage payment is going towards the principal balance, rather than to interest costs. That means I’ll achieve mortgage freedom faster without increasing my payments.
This Week’s Recap:
My investment portfolio(s) continue to recover and in some cases climb to new heights. My RRSP is only down 2.51% on the year – a far cry from the decline of -41.41% as of March 22. Hard to believe.
My TFSA is now up 2.14% on the year, thanks to the large lump sum investment I put into the account in mid-April.
I opened my LIRA on May 1st and that account is now up 10.07% since inception. Talk about great lucky timing.
The kids’ RESP account is down 0.32% year-to-date. We contribute $500 monthly (including CESG) to this account.
My RRSP, TFSA, and LIRA are all invested in the Vanguard All Equity ETF VEQT, while my kids’ RESP account is invested in TD e-Series funds.
This week I wrote about making rational versus irrational decisions when it comes to personal finance and investing.
One reader suggested I write an article about how to determine your sustainable spending rate in retirement – or what’s the maximum amount you can spend each year to age 95 without running out of capital. I’ve got some ideas to share with you, so stay tuned for that one.
Promo of the Week / Reader Question
I’ve received a few emails this week asking about how I set up my personal banking system to save on fees and maximize the interest rate on savings. This is how I do it, but your mileage may vary:
My wife and I have a joint chequing account with TD Bank and maintain a minimum account balance to waive the monthly account fees. We have the basic, bare bones account with minimal transactions. That’s because we put all of our transactions onto a rewards credit card and limit the amount of debit transactions and ATM withdrawals.
My wife has a separate no-fee chequing account with Tangerine.
I find Tangerine is still good for no-fee banking, but they’ve really dropped the ball when it comes to offering high interest rates on savings deposits. Outside of short-term promotional rates, the rate on Tangerine’s savings account is a pitiful 0.25%.
That’s why we opened a Savings Plus account at EQ Bank for our emergency savings. The account pays a high everyday rate of 2%, which is at or near the top of the market. Open an account here and fund it with $100 within 30 days and you’ll get a $20 cash bonus for free.
Our investments are held at TD Direct (RESP, LIRA), Wealthsimple Trade (RRSP, TFSA), Wealthsimple Invest (wife’s RRSP), and Questrade (new corporate investment account).
It would be nice to have all of our banking and investments in one place, but the fact is there’s no one bank or institution that offers every account type we need, doesn’t charge any fees, and pays the highest interest rate on savings deposits. Until then, we spread out our banking to get a bigger bang for our buck.
Weekend Reading:
Sticking with the mortgage theme, Michael James on Money says to think twice before taking a five year closed mortgage due to severe penalties for breaking the mortgage early.
You’re likely shopping online now more than ever. Our friends at Credit Card Genius share the best credit cards for earning cash back and saving on foreign transaction costs.
The Better Dwelling blog reports that Canadian real estate prices grew 29x faster than U.S. prices since 2005.
The Lowest Rates blog presents six personal finance pros on what it takes to become a ‘money expert’.
Here’s a good piece from MoneySense where four single moms get personal about their money matters and ask a pro for help.
Rob Carrick is spot on with this advice to young, app-focused investors treating the stock market like a game:
“Free-trading apps are a fad that will fade, probably not without damage done to those who have treated investing like a game. The stock-market surge since March is not a test of anyone’s investing ability – everyone looks like a star trader.
But free-trading apps can also be a force for good investing. Here’s how: Use them to build a super-cheap balanced-ETF portfolio.“
Chrissy at Eat Sleep Breathe FI shared a guest post on the Money We Have blog and listed four simple steps to financial independence.
Ted Rechtshaffen says holding cash is a sign of fear, and fear is the worst investment of all.
Downtown Josh Brown and Irrelevant Investor Michael Batnick discuss Gold versus the S&P500, Warren Buffett versus Elon Musk, and more in this entertaining edition of, What are your Thoughts?
An incredibly detailed case study from the Frugalwoods blog on a Canadian family’s plan for the future.
Here’s a great piece from the Wall Street Journal’s Jason Zweig: The South Sea bubble is the classic story of an investing mania. Are investors today any wiser?
Erica Alini reports how this Ontario man was promised a refund – then Sunwing changed its policy.
I loved this article by Des Odjick on how her blog landed her a dream job as a content marketer.
Finally, what many of us have been dealing with for months – the implications of working without an office.
Have a great weekend, everyone!