Weekend Reading: Money Bag Edition

Weekend Reading: Money Bag Edition

Welcome to another edition of Weekend Reading. I continue to receive a ton of emails from readers and clients about investing, retirement, real estate, and more. I’ll answer some of those questions here in this special Money Bag column.

We’ll look at investing in a rental property, rebalancing RESPs for older children, the limitations of Wealthsimple Trade, dabbling in cryptocurrency, and how much should you invest in your own company stock.

Buying an investment property

From Dennis:

“Hi Robb. We live in a small city outside of Toronto, where house prices continue to increase significantly. We are thinking of investing in a 2 bedroom condominium in the city, using $100,000 of our own savings plus a mortgage of $400,000, but have some reservations: (1) The rental income may not be quite enough to cover mortgage payments, condo fees etc. (2) We will have the hassle of dealing with tenants and tenancy issues (3) The housing bubble may burst and prices may stagnate. I wonder if we would be better off investing in REIT’s or something similar.”

Hi Dennis, do you already own your own house in that area? If so, you already have plenty of real estate exposure.

I think you’ve highlighted three really good reasons not to buy a rental property (regardless of the current market conditions).

And by investing in a low cost and globally diversified portfolio of index funds you’ll automatically have some exposure to REITs in an appropriately weighted allocation.

My experience working with clients who do own investment properties is that they don’t spin off as much income as you’d think, they can be a pain to manage, and you’d be better off selling them at some point anyway to top-up your investments before you retire.

Rebalancing RESPs for older children

From Shonna:

“Hi Robb, I really enjoy your blog and have been motivated to start my own journey into DIY investing. I plan to follow your lead and invest in VEQT for the foreseeable future. My question is about RESPs for my daughters, who are in grade 6 and grade 4. At what point should I reduce the equity exposure in this account? I have zero confidence in the bond market right now.”

Hi Shonna, I’m in the same boat when it comes to RESPs. My family RESP (two kids, 11 and 8) is still in 100% equities using TD’s e-Series funds. My original plan around this age was to simply start introducing the TD Canadian Bond Index fund with my regular monthly contributions. I still might do this, but I’ll likely wait another year and see what happens with bond prices.

I realize this is market timing and I should simply follow a rules-based approach, but the time horizon is still pretty long at 7-10 years so I feel confident holding 100% equities for another year or two.

Here’s a great explainer from the Million Dollar Journey blog on how he manages his own kids’ RESP portfolio: 

You could also consider Justwealth’s target education date (robo-advised) RESP portfolio. They’ll automatically adjust the portfolio allocation in much the same way that the MDJ post describes, except they use a rules-based approach to take away our decision making from the process (that’s a good thing).

If you want to avoid bonds but still want to stick with an 80/20 portfolio you could use VEQT for 80% of the balance and then perhaps open another RESP on the banking / mutual fund side of your financial institution and simply buy GICs. The interest rates will be terrible but you won’t be at risk of losing principal.

Or, go with a short-term bond fund which is less sensitive to interest rate movements (Vanguard’s VSB, for example).

Limitations of Wealthsimple Trade

From Parvinder:

“My spouse and I have an RRSP, a spousal RRSP, and a personal, joint investment account at CIBC. I’d like to transfer them over but don’t think that spousal RRSP is an account available in Wealthsimple Trade right now. Is this correct? If so what’s the best choice to handle this?”

Hi Parvinder, as you’ve discovered, Wealthsimple Trade has its limitations – mostly due to the account types it offers (only personal RRSPs, TFSAs, and non-registered investment accounts). Wealthsimple Invest, the robo advisor, does offer more account types but you wouldn’t be able to select your investments.

If you prefer to self-manage your investments and want everything in one place then consider Questrade, which offers all the account types you need. Questrade also offers free ETF purchases, so if you’re in the accumulation phase of life and just buying a single asset allocation ETF then this would work out very nicely for you.

Here’s a quick explanation on how to open a Questrade account and transfer your existing investments.

Dabbling in cryptocurrency

From Danielle:

Hi Robb, I have a question about Ripple (XRP) as an investment. I’m thinking of throwing $500 into it through the bitbuy app. My friend invested in it and has made quite a bit of money. I’ve been researching the price predictions for the next 10 years and it looks solid. What do you think?

Hi Danielle, if it’s $500 you can afford to lose then there’s nothing wrong with making a speculative bet on it. But, treat it more like casino money and not as an investment.

Price predictions are usually made by those who are heavily invested in seeing the price move up or down, so take any of that research with a huge grain of salt. Cryptocurrency is a hugely speculative asset class. It doesn’t have an expected return because it doesn’t produce anything or have any value beyond trying to sell it to someone else at a higher price.

These speculative plays tend to crash and burn hard, so getting in after an enormous run-up in prices probably doesn’t leave you with much upside. Meanwhile, there’s a LOT of downside.

Finally, beware that most cryptocurrency exchanges are largely unregulated and prone to hacks and fraud. If you want to invest a small amount just to cure your FOMO then consider using Wealthsimple Crypto, which is actually a regulated exchange in Canada. You can only buy Bitcoin or Ethereum, but it’s insured and you don’t have to mess around with digital wallets.

Telus stock versus indexing

From Jeff:

“Hi Robb, I know you are a proponent of index investing, but we buy shares of Telus every paycheque, due to the employee matching program. Telus matches us 12% (and no fees for purchasing or participating in the DRIP).

I know it may risky to have a large holding in just one company, but do you think it’s better for us to continue to invest in the Telus shares, due to the fact that Telus just spun-out Telus International and is planning to do the same with Telus Health, Telus Agriculture, Telus Security?

Also, Telus is heavily investing in 5G technology and in the internet of things, making it effectively a company that owns other companies, in the future.”

Hi Jeff, are you asking if investing in a single company in Canada, a country that makes up 3% of global financial markets, is the same or better than investing in a globally diversified portfolio made up of thousands of companies?

It’s generally not wise to have any significant amount of your retirement savings invested in the company that also employs you. Ask any former Nortel or Enron employees about that.

By all means, take advantage of employer-matching programs and discounted stock purchase plans. But once your shares exceed 5% or so of your overall portfolio, it’s probably best to move them to a more diversified basket of investments.

Weekend Reading:

Our friends at Credit Card Genius share the best credit card offers, sign-up bonuses, and deals for April.

Check out my interview with My Own Advisor Mark Seed about my journey to financial independence through entrepreneurship.

Barry Choi at Money We Have explains how to invest in index funds.

Jason Zweig at the Wall Street Journal says investors shouldn’t be fooled by the stock market’s newest magic trick:

“What happened? Did hundreds of fund managers start popping genius pills? No, although marketing departments are probably gearing up to tout their brilliance. Instead, the ghastly losses of early 2020, when stocks fell by 34%, have just disappeared from trailing one-year returns.”

A Wealth of Common Sense blogger Ben Carlson looks at what happens after the stock market is up big.

Global’s Erica Alini takes a look at average incomes relative to average home prices across markets over the last 40 years.

On The Evidence Based Investor blog, Larry Swedroe explains why older investors handled last year’s volatility worst.

PWL Capital’s Justin Bender explains how to calculate your money-weighted rate of return:

Jason Heath says Canadian inheritances could hit $1 trillion over the next decade, and both bequeathers and beneficiaries need to be ready.

Here’s why retirees should avoid being frugal with their savings:

“Having a comprehensive financial plan that considers assets, cash flow, taxes and lifestyle needs and wants is recommended for people to worry less about money in retirement, and maybe spend more.”

The always insightful Morgan Housel shares the big lessons of the last year.

Finally, a great reminder to stop thinking about what you’re retiring from and start thinking about what you’re retiring to.

Enjoy the rest of your weekend, everyone!

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  1. Peter Crisp on April 18, 2021 at 2:17 pm

    Regarding income properties, we have both income properties and other investments. I may get flamed but I tend to agree with Robb. I don’t know how many people I know who have been seriously burned by renters – evictions that take months, damage etc. and even the pros make mistakes screening (during my last call this past week to very good Property Manager, she was waiting for the police to arrive to evict a bad tenant). A condo these days will barely make a profit if you are lucky, and your cashflow will more likely be break even or negative, and prices are frothy right now. If anything, this is a time to hold or sell for most people.

    My suggestion is to look at how you can add value – sweat equity/construction background, connections with pre-sales, real estate background etc. That helps. And figure out a goal. Is it long-term equity or cash flow or both? Consistent cash flow is very hard to achieve because there will be unexpected expenses from tenant evictions to insurance costs to condo fee surcharges to legal fees. If it’s to help a family member out (e.g. kids) that can be a thought as long as it doesn’t impact your own retirement goals. A friend of mine did that and it was a smart move by buying and holding the mortgage at attractive interest rates.

    If you don’t have a clear goal and you can’t add value anywhere, I’d stick to stocks, including REITs. You can make money but it’s a lot of work and you can’t follow the herd and you will make mistakes – it comes with the territory.

    • Pam on April 19, 2021 at 12:05 pm

      I have turned my condo into a rental as I didn’t want to sell given the market conditions. I was never sold that I wanted to be a landlord and we’ll see if I make it more than the 5 year term on the mortgage before I decide to sell and suck up the “loss” from when I purchased the property. I don’t know that I am making much money but I am not losing any really either at this point and it staves off my having to come to a head on selling. I hope the market improves and I can just sell and be done with it.

      • Robb Engen on April 19, 2021 at 2:19 pm

        Hi Pam, thanks for your comment. Hopefully this real estate boom lifts prices in your area as well so you can make out okay on your property.

    • Robb Engen on April 19, 2021 at 2:18 pm

      Hi Peter, thanks for sharing your experience and and advice regarding income properties.

  2. James on April 19, 2021 at 8:53 am

    Jeff, Definitely continue taking advantage of the 12% matching from your company however you should diversify some of your existing holdings of shares into other assets annually once you can sell them without any penalties on the company contribution.

    • Brian on April 19, 2021 at 6:57 pm

      Hi Rob
      I often read a good rule of thumb is don’t let an individual investment become more than 5% of your portfolio. This begs the question: 5% of what.

      Should the denominator be:
      Overall value of portfolio including bonds and equities?
      Total value of all equities held?
      Total value of equities less monies held in broad market equity ETFs such as XSP and XAW?
      It makes quite a difference depending on which number you plug into the denominator?

      Thanks for any insight?

  3. Potato on April 19, 2021 at 9:49 am

    “It’s insured…” Is it? The insurance is from a captive insurer, for a set amount (which was set a few doublings ago). I spent a few hours trying to follow the threads a few months ago and still couldn’t tell you how much a consumer might recover after a hack.

    • Robb Engen on April 19, 2021 at 2:25 pm

      Hi John, I guess “insured” compared to what? Coinbase says it stores 98% of digital currency in cold storage, and only the 2% stored on hot servers is insured.

      Another reason to treat crypto speculation as casino money rather than as an investment.

      • Potato on April 20, 2021 at 12:06 pm

        Yep, still very much the wild west with crypto. No CDIC or CIPF here!

  4. Diane on April 19, 2021 at 10:28 am

    With respect to investing in a property and renting, here are my thoughts. We have owned properties over the years. Rule #1 – Cash flow is king, no positive cash flow, walk away. When calculating future cash flow, ensure that you include more than you think necessary for repairs, you will need it. We have had a bad tenant and even though they did not pay, we were not able to remove them. Not only did we lose money on rent, we also had significant repair costs. We just sold one of our properties and have decided to invest the money elsewhere and get rid of the high PITA factor. We still have 2 properties, with good tenants. Our plans are to sell these properties when the current tenants leave and be done with this. Money invested well can achieve the same returns with much less risk and much less irritation.

    • Robb Engen on April 19, 2021 at 2:27 pm

      Hi Diane, thanks for sharing your experience. Many of my clients would agree with your assessment.

  5. Kim Kearney on April 19, 2021 at 11:42 am

    Hi Robb,

    Thoroughly enjoy this weekend reading and your timely responses to my questions, thanks again.

    You mention that you are comfortably with 100% equities for another year or two. What factors will make you decide on the timing to sell VEQT and have you given any thought to which ETFs would you re-direct your investments?

    • Robb Engen on April 19, 2021 at 2:33 pm

      Hi Kim, thanks for the kind words. When I said I am comfortable holding 100% equities for another year or two I was referring to, “inside my kids’ RESP”, which I invest in TD e-Series funds. My kids will turn 12 and 9 this year and so I need to start dialing down the risk in this portfolio.

      My personal investments (RRSP, TFSA, LIRA, Corporate Account) are all in VEQT and I don’t have any plans to change that for the foreseeable future. I’ll be 42 this year and suspect I can stay in 100% equities for another 15 years or so. By that time, who knows what the investment landscape will look like.

  6. David @ Filled With Money on April 20, 2021 at 6:47 pm

    That $500 investment into Ripple is interesting. Especially since a lot of exchanges banned ripple from being traded on their platform so they’ll have to take their chances with VERY unregulated and unproven exchanges which are so prone to hacking. Otherwise, they’ll have to mess with physical wallets.

    I definitely agree that if the $500 isn’t that much money, then by all means, there’s nothing wrong with dabbling in it. If it makes a difference, it’s best to stay away!

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