Archive | April, 2015

How Budget 2015 Will Affect Investors

Yesterday’s federal budget included several changes that will affect investors—in the future if not immediately. Let’s look at the three most important announcements, with a focus on how they may apply to those who use an index strategy with ETFs:

The biggest headline was the increase in annual TFSA contribution room from $5,500 to $10,000, beginning immediately.

Minimum withdrawals from RRIFs were reduced significantly.

Investors who hold foreign property (including US-listed ETFs in non-registered accounts) will be able to report this to the Canada Revenue Agency in a more efficient way.

Asset location just got more interesting

If you’re juggling TFSAs, RRSPs and non-registered accounts, asset location is a challenge. To manage your portfolio in the most tax-efficient way, you should consider which asset classes (equities, bonds, REITs and so on) are best held in which type of account. This isn’t straightforward. You can make a strong argument for holding bond ETFs in a registered account because they are so tax-inefficient. But if a TFSA can shelter you from taxes over an entire lifetime, shouldn’t it be reserved for assets with the highest growth potential—in other words, stocks?

There is no single right answer: an awful lot depends on individual circumstances such as your current tax rate,

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Ask the Spud: Do Aggressive Portfolios Pay Off?

Q: I noticed that over the long term (10 to 20 years) the average returns of your model portfolios are quite similar regardless of the asset allocation, but the maximum losses vary dramatically. Would you say that people saving for retirement may as well be less aggressive, since their goal can still be reached with less risk? – L.V.

One of the first principles of investing is that more risk should lead to higher returns, while playing it safe comes at the cost of slower growth. That’s why I was surprised when we compiled the historical returns of my model ETF portfolios. Over the 10- and 20-year periods ending in 2014, you were barely rewarded for taking more risk:

As you can see, a portfolio of 30% equities and 70% bonds enjoyed an annualized return of 7.48% over 20 years, while portfolios with 60% and 90% equities returned only slightly more. Yet equity-heavy portfolios would have endured a much rockier ride: the investor with 30% stocks never suffered a loss of even 8%, while the poor sap with 90% equities lost almost a third of his portfolio during the worst 12 months (which was February 2008 through March 2009).

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Announcing the Couch Potato Robo-Advisor Service

[Note: This was an April Fool’s joke!]

One of the most exciting developments in investing is the rise of online wealth managers, also known as robo-advisors. These services offer online portfolio management at a fraction of the cost of a full-service advisor. We’ve seen a number of these services pop up in Canada in the last year so, and I am happy to announce that my colleagues at PWL Capital are set to launch our own online service for Couch Potato investors. Best of all, it will be absolutely free.

We’ve nicknamed our service Bender, in honor of the lovable robot character from TV’s Futurama. (Any resemblance to the name of a human portfolio manager is purely coincidental.) Bender will be unlike any other robo-advisor, because it won’t actually make any trades in your account: it will simply give you voice instructions. Then you’re responsible for carrying them out.

This is something of a revolution in the robo-advisor space. Provincial securities regulators have put up high barriers for online wealth managers: they simply don’t like the idea of robots making bad investment decisions when human advisors are perfectly capable of doing that on their own.

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