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!
Your comment “I’ll have eliminated Questrade from our lives “ sounds ominous. What did you not like about Questrade?
Thanks.
Hi Philip, Questrade is a perfectly fine platform for DIY investors but in my opinion they are falling behind in terms of user experience – the platform is clunky, nobody wants to pay even a tiny amount of ECN fees when there are true commission-free platforms.
Really, I just don’t want to manage three platforms and decided that Wealthsimple meets my needs more than the other two.
Great feedback. Thanks.
Is VEQT really the closest one came come to the optimal allocation described? Canada represents only about 3 % of the total capitalization of world stock markets. In the proposed model, Canada’s market weighting would be 3% of the 67% world market recommendation, or only about 2% of the total portfolio. VEQT would, therefore, overrepresent Canada by a factor of 15. Similarly, the US exposure in VEQT is 1.4 times the recommended allocation, and the “rest of the world” is under- represented.
The “rest of the world” allocation of would be the 67%, less the 2% contribution from Canada, or 65%, which would then be broken down into Developed and Emerging markets, ex N. America. Emerging markets represent about 10% of the world.
So, a portfolio comprised of;
VCN (Canada All Cap)- 2%
VUN (US Total Markets)- 33%
VIU (Developed All Cap ex N. America)- 55%
VEE (Emerging Markets) – 10%
or their CAD hedged versions, if desired, would more closely represent the proposed world market allocations.
That is 4 ETF’s instead of just one but it seems simple enough to set and forget (chill) those 4 ETF’s and rebalance annually.
I know it is hard for Canadians to gain comfort with going “out of market” with their investments. Most are shocked when they realize the size of the Canadian markets miniscule contribution to world market capitalization.
Hi Jim, the study described 33% domestic securities and 67% international. That’s more or less aligned with VEQT holding 30% Canadian (domestic) and 70% international.
Yes, Canada’s true market cap is only 3-4% of the world but we live in Canada and spend Canadian dollars. Currency fluctuation matters, and a Vanguard paper determined that having *some* home country bias is a good thing.
30% was optimal, but holding anywhere between 3% and 30% Canadian seems to be fine, depending on your preference.
The original study would have been referencing the US market when it recommended the 33% allocation, wouldn’t it? The author’s study would have had Canada’s exposure lumped in with the 67% “rest of the world” market.
With respect to currency issues, the hedged versions of VUS and VIU could be used and the 4 ETF’s noted would only have currency exposure to the 10% Emerging Market exposure of VEE.
Although I do agree that some home bias is comforting, if one wants to run a set it and forget it” or “chill” portfolio, knowledge of the economy and business in Canada as a factor in over-allocating to the home market is not necessary and fades away as a rational driver of the allocation issue. Add in the hedged versions of the 4 ETF’s mentioned and currency concerns are 90% removed as well. In fact, a little bit of unhedged exposure is probably good.
Hi Jim, the full study is worth a read – as is this interview with Cederburg on the Rational Reminder podcast: https://rationalreminder.ca/podcast/224
The data covers 38 developed countries and looks at the experience of a domestic investor in each country in the sample, investing in domestic stocks.
Wealthsimple’s Apple incentive…open until December 13. Make sure you are Registered for the incentive before initiating any transfer you want considered towards qualification. I thought opening new accounts would amount to the same thing
….
Hi Curt, thanks for sharing that. I would push back and let them know the only reason you opened the account and initiated the transfer was because of the incentive. They should do the right thing.
Great article Robb. I find that domestic / international equity holdings study you’ve revealed is fascinating information for a retiree like me.
My only question is about VEQT. Are you saying you are 100% invested in this single ETF? In my head I’m trying to think of what the risk is in putting all eggs in one basket…..yeah it’s an ETF, so it does have multiple holdings. Also, is there any risk to the investor who holds multiple ETF’s from a single ETF company – such as Vanguard for instance ? Maybe you have an opinion or comment.
By the way thanks for the tip on moving to Wealthsimple – got it here a couple of months ago. That 1% match that was “gifted” to me provided me with an additional $16,000 into my account. Better yet, the experience so far has been great. So nice not having to pay those buy / sell fees, and the perks are nice !
Hi James, thanks! I thought it was fascinating, too.
James, it’s important to know that these asset allocation ETFs (VEQT, VGRO, VBAL, etc.) are not just a single ETF but a “fund-of-funds” that hold between 4-7 underlying ETFs. So it’s not really all eggs in one basket, it’s just a helpful way for investors to get a globally diversified and risk appropriate portfolio with a single, self-rebalancing ETF.
As for Vanguard going out of business, I would put that risk as close to zero as it gets. Same with iShares/BlackRock. These are huge trillion dollar asset managers.
Finally, thanks for sharing about your experience with Wealthsimple. A $16k bonus is no joke, and I agree the perks of being a “generation” client are pretty great. Better than what other platforms are offering, that’s for sure.
Hey Robb, if during your gold glove experience with Wealthsimple you can inquire on the Self Directed RESP date, that would be helpful!
I can then too remove Questrade from my life!
Wealthsimple is such a better experience and service.
Hey Ravi, right now the date is “end of Q1 2025”. I’ll keep bugging them until we get a firm date.
Hi Robb,
I always look forward to reading your posts, they’re very informative. This topic is timely as I”m selling all my stocks to purchase all-in-one ETF’s and was wondering how best to keep a 3 year cash reserve. You inspired me when I saw your post a while back, detailing your decision to sell all your stocks. At the time, I wasn’t totally convinced, so I only made the switch to an all-in-one ETF in my LIRA After a year, I have found it to be very liberating not having to spend time monitoring and rebalancing. I’m now transitioning away from stocks in my TFSA and RRSP
I was wondering if you could point me in the right direction to some high interest savings ETF’s that would be worth consideing for the’ cash’ portion? Are there advantages to high interest savings ETF versus a high interest savings account? Wealthsimple’s cash account currently offers 3.75% interest
This fall I also made the move away from TD to Wealthsimple during their 1% bonus promo. I was impressed with how smooth and seamless it was, everything was efficiently handled. with quick access and timely responses to questions. Not sure if being a Generation client impacted the amazing service, but they rate 10/10 for customer experience!
Even though I miss having access to the stock data/resources on TD’s platform which is top notch, I’m glad I made the switch to Wealthsimple, as I no longer have to pay fees for ETF purchases, and my RRSP account is streamlined from 4 accounts to one, making it easier to manage. At TD, the RRSP consisted of 4 accounts, 1 each for CDN Stocks, U.S. stocks, CDN ETF’s’ and U.S. ETFS. Plus it involved trading on 2 platforms-one for stocks, one for ETF’s.
As for Questrade, no argument here on staying away from them. When I tried to open an RESP account, it was the most cumbersome, inefficient onboarding process and worst experience ever. The client reps were not well informed, their response times slow. After a long process of uploading the required documents, they said they couldn’t open the RESP because I wasn’t a blood relative to the child. Not sure why this information wasn’t posted anywhere on their site. To top it off, they refused to delete the data I submitted, even though the account was never opened. Strangely, for several months after, I received regular emails from the client rep asking if I needed any assistance with my account. (even though no account existed).
Hi Michael, thanks for the kind words and for sharing your story. Glad to hear you’re enjoying the Wealthsimple platform and have embraced the simplicity of a single asset allocation ETF. It is truly liberating.
For the cash wedge I typically recommend holding 90% of your portfolio in your chosen asset allocation ETF and then 10% of the portfolio in a high interest savings ETF (CASH.TO is the one I recommend simply because the ticker is easy to remember).
This is just an easy way to put the cash wedge to work inside of your RRSP or LIRA, for example, versus setting up a separate cash reserve in a non-registered savings account like Wealthsimple Cash.
Now, 10% might not be enough to cover three years worth of expected withdrawals from each account type, so you might need 15% or more depending on your spending needs.
Keep in mind I also recommend turning off the DRIP for your asset allocation ETF so that the distributions can help naturally replenish the cash wedge without selling anything. A psychological trick, more than anything.
Finally, you will need to rebalance occasionally to get back to your 90/10 split. In good times you can do that more frequently (quarterly or semi-annually), but in a period of poor market returns just let things ride and remember why you have the three years worth of cash in the first place.
Wealthsimple does not offer RRIF accounts, as far as I can tell. Is there a date of when we can expect them to allow RRIF accounts to be opened? What happens to current Wealthsimple clients who have RRSP accounts when they turn 71 and are required to move all RRSP money into a RRIF account?
Hi Darby, they added self-directed RRIFs and LIFs earlier this year. I think you have to open them on the app rather than the desktop – but they exist (I have current clients who have done the RRSP to RRIF conversion at Wealthsimple and also some clients who have moved existing RRIFs to Wealthsimple this year).
Thanks Robb. I found them on my phone but not my PC. If I understood it correctly, it said that self-directed RRIFs could only withdraw once per year whereas the managed one could set up recurring withdrawals? Also, I hold a USD ETF (VTI) in my RRIF, although I am slowly withdrawing from that ETF, and I don’t believe it is easy to hold USD in a Wealthsimple account?
Hi Darby, the managed account RRIF is actually pretty slick because you can set up and automate your withdrawals to land directly into your chequing account on whatever frequency you desire (monthly, quarterly, etc.). Wealthsimple then would sell whatever’s high in your portfolio to raise the cash to meet the scheduled withdrawal.
You can’t do that on the self-directed side because they don’t know what you want to sell – so unless you have cash just sitting there, you wouldn’t be able to automate withdrawals. That’s true with other self-directed platforms, too, btw.
It’s not a once per year withdrawal limit, it’s a manual one-time withdrawal (you can do as many of those as you like). Poor wording on their part, but it’s meant to show the difference between being able to set up recurring on the managed side, versus not being able to do that on the self-directed side.
As for USD, you can absolutely hold USD cash and US-listed ETFs in Wealthsimple. There are currency conversion fees (1.5%) for converting USD to CAD, but if you had an external USD account you can withdraw from Wealthsimple to that USD account.
Thanks again Robb. So my RRIF withdrawals wouldn’t be any different than what I have been doing at TD.
Thanks for the information on USDs held at Wealthsimple. Most places charge an Fx fee when converting currencies but I have used Norbert’s Gambit to avoid those fees. I’m assuming I can do the same at Wealthsimple?
Hi Robb,
Great article. Regarding Wealthsimple:
How is their customer service in your experience? I just called them and was not too impressed but maybe it was just a one-off.
On the apple promotion what if someone transfers in-kind assets of lets say $110,000 and by the time Wealthsimple receives the funds the assets are worth $98,000 due to a market decline. Will they get the bonus or not?
Hi Kevin, my experience has been good but I think it certainly depends on the agent. As a Generation client ($500k+ in assets) I get “priority support”, so that might help as an existing client.
Remember, they have grown rapidly in recent months thanks to these generous transfer bonuses and so like most places they’re probably struggling to get customer service staff up and running to meet demand. I think once you’re in the family, so to speak, the service is pretty good.
To answer your question, their terms say net deposits must be $100k or more. If you withdraw $12,000 and the value sits below $100k then you would lose eligibility, but a market fluctuation will not make you ineligible for the promo.
Thanks Robb for the reply.
That is re-assuring to hear that you have had a good experience.
As for the 2nd point, they send me the email below:
If you transfer assets in-kind or in cryptocurrencies, the value of the transferred assets will be calculated based on market value when the transfer is complete.
Does this mean the if it the market value drops below $100K by the time Wealthsimple receives the funds I would be ineligible for the promo? I am just concerned that with the upcoming holidays I am not sure how long it will take Questrade to send the funds and if the value of my investments drop to less than 100K then I would miss out on the promotion
Hi Kevin, the deposit for the purposes of the promotion will be whatever market value hits the Wealthsimple account upon completion of the transfer.
A transfer in-kind is generally pretty fast – my LIRA transferred in-kind in three business days from TD to WS.
I’m not sure what you’re holding that you’d be concerned about a 10% drop in a short period of time. If you’re really concerned, and this money is in a registered account (RRSP/TFSA) you could sell it now at Questrade and then initiate the transfer from Wealthsimple to ensure you move $100k over without any risk of market fluctuations.
That, or take your chance with the timing of the transfer, and you can always make up any difference by depositing some cash to a Wealthsimple Cash savings account (that would count). You’d have to leave that money there for 12 months so you don’t ever dip below $100k in deposits.
Basically, you have 30 days from registering to get $100k or more into your Wealthsimple accounts.
Spouse and I own almost 53,000 shares of VEQT and buying more all the time. As I try to simplify our portfolio I continue to move towards just a few funds. We own close to zero bonds, just what is held within the VGRO in our kids RESP and a Spousal RSP.
Love VEQT!!!
Nice! Well done, Chris!
@Darby – the comment thread ended so I’m replying to your question about Norbert’s Gambit.
You can’t do Norbert’s Gambit at WS Trade. Their currency conversion fees are one way they actually make money on your account after offering all of these benefits and freebies.
So I think you’d have to withdraw to an external USD account.
If anyone has experience with this feel free to chime in.