Podcast 2: Planning vs. Investing

The second episode of the Canadian Couch Potato podcast is now available:

Many thanks to the thousands of people who downloaded and listened to the debut episode, and for sending your feedback and suggestions for future topics. After an initial delay, the podcast is now available through iTunes as well as all major podcasting apps, so please subscribe if you haven’t done so already. If you enjoy what you hear, I invite you review the podcast on iTunes, which helps more listeners hear about it.

Our new episode features financial planner Sandi Martin, who will be well-known to readers of Canadian financial blogs: she has her own blog at Spring Personal Finance, and has been a contributor to Boomer & Echo. Sandi is also one of the creators of the Because Money video and podcast series.

In our interview, Sandi and I discuss the important (and frequently misunderstood) differences between financial planning and investment management. The media often lump these two services together, but they are fundamentally different: in all provinces except Quebec, financial planning is not even regulated. However, all investment advisors in Canada must be licensed by their provincial securities commission.

Sandi and I also chat about why it’s important for plans need to come before products. If you’re asking which ETFs you should use before you’ve got a savings plan and clear investment objectives, you’re getting the process backwards.

Finally, we briefly discuss the growing presence of robo-advisors in Canada. Sandi and her colleague John Robertson recently created a useful tool called Autoinvest to help Canadians compare the various online services. They explain how it works in a recent episode of Because Money.

In the Bad Investment Advice segment, I reflect on the idea that you can profit by rejigging your portfolio before major political events, such as the Brexit vote or the US election. The good people at MarketWatch provided a perfect case study with the article, The danger to your portfolio from a Trump win is huge and you need to move now, published on November 2. As you’ve probably noticed, the consensus view on what would happen if Trump was elected—stocks would plummet, gold would rise, interest rates and the US dollar would fall—turned out to be spectacularly wrong. Again.

In the Ask the Spud segment that closes each show, I answer the following reader question:

“Is there a reason why corporate bonds are not often suggested in your ETF model portfolios? I talked with some of my friends and I was wondering why you would use government bonds when corporate bonds offer a yield bonus of 1%. There doesn’t seem to be any additional risk: in the financial crisis of 2008, corporate bond ETFs lost only about 5% and recovered in a couple of months.”

In fact, the bond ETFs I recommend in my model portfolios are a mix of both government and corporate bonds. A traditional bond index fund includes about 20% to 40% in high quality bonds issued by corporations. You can certainly choose an ETF that holds only corporate bonds if you’re looking for a little more expected return, but as I explain in the podcast, this is no free lunch.

Episode 3 of the podcast will air in the New Year. Thanks again for listening!

 

12 Responses to Podcast 2: Planning vs. Investing

  1. Braj December 15, 2016 at 12:11 pm #

    Fantastic, looking forward to the whole series!

  2. jamie quinn December 15, 2016 at 12:53 pm #

    Dan, I’ve been a long time follower of your blog and this new podcast format is really great. Thanks! Now a question from left field that might be in the category of “Bad Advice” but came to mind after hearing your discussion of corporate vs government bonds in this podcast. A few years ago I read a pundit that suggested that, because bond yields would be low for a very long time, one might combine annuities with equities and forgo bonds altogether in a balanced portfolio. I know this is heresy, but how bad of an approach is this?? I suppose annuities might fail to fulfill the job of diversification that bonds perform so well–perhaps not a small matter. Do I need to add that I found the argument at the time somewhat compelling.

  3. Canadian Couch Potato December 15, 2016 at 1:42 pm #

    @Jamie: Thanks for the comment. I don’t think that’s terrible advice, but one would certainly need to understand all of the implications. I would not frame things by saying, “This is a good strategy because bond yields are low.” It could be appropriate when bond yields are average or high, too. After all, when bond yields are low annuity prices are higher, so there’s certainly no bargain.

    This is pretty similar to the discussion about whether you treat a defined benefit pension as the fixed income part of your portfolio. If you do that, you would need to be comfortable with the fact that the rest of your portfolio would be equities, with all of the volatility that would bring.
    http://canadiancouchpotato.com/2014/04/14/ask-the-spud-is-my-pension-like-a-bond/

    Another implication is that when you die, your heirs inherit your bond portfolio. But in most cases they won’t inherit your annuity.

  4. jamie quinn December 15, 2016 at 2:41 pm #

    Lots to get my teeth into.Thanks!

  5. Su-Chong Lim December 15, 2016 at 5:12 pm #

    @CPP: Considering my earlier comment about every Financial Section advice article stridently urging you to do anything that would violate Couch Potato principles being solidly in the category of Bad Advice, I thought it would be pointless to single out any one article over another for being Worse Advice than another. But I see that the Bad Advice that you just highlighted, although no worse than any other Bad Advice (still, essentially claiming to predict the future in a way that no one else can – a definite Couch Potato no-no), seems somehow, in the context of recent events, more plausibly astute to our reptilian brain, and therefore more likely to overturn our prior determination not to succumb to a combination of Clairvoyance and Active Management, so in that context, more dangerous than most other Bad Advice.

    I’m a bad one for flagging Bad Advice, because I make it a point to tune out articles and news of that nature, so I honestly don’t notice most of the garbage that gets published as Financial Advice. But a recent announcement that the (US) Fed is finally “certain to” raise the key interest rate got me thinking. You have in this Blog previously alluded to the repeated Bad Advice of the last 5+ years, that interest rates have been falling for so long, that they “must” rise very soon if not sooner (!!). Yet if one had actually got out of bonds whether individually or index-variety 5+ years ago (as the Bad Advice corollary repeatedly urged you to do), you would have missed out on a solid return on your bond investments as interest rates didn’t rise rapidly as promised.

    Well, I don’t know if it’s fair to ride on your coat-tails and point out all the prognostication that is poised to spew forth. OK, admittedly I’m prognosticating myself, that this particular brand of Bad Advice will swell in volume, but the Bad Advice will be that “This time it’s actually true, the Fed’s rise of interest rates will trigger a parallel rise in the Canadian interest rates, a rise that’s mathematically inevitable and has been a long time coming and that it will be absolute folly to invest in bonds or to have any bond component left in your portfolio. Don’t listen to that Bortolotti guy — he obviously knows nothing about the dangers ahead.”

  6. Joe B. December 19, 2016 at 11:41 am #

    Dan, great website. I’ve been a long time follower and switched to the couch potato initially in 2006 (etf’s) and again in 2009 for my kids RESP and my TFSA (td e funds).

    The RESP & TFSA (TD efunds) portfolio is about to get to six figures and I’m wondering if it is time to switch to an ETF portfolio?

    In my experience the efunds portfolio is much simpler to manage (monthly pre authorized contributions, simple re balancing, simple to track IRR, etc). At this stage I think that the simplicity of contributions and annual re balancing makes the TD efunds simpler to manage and therefore a better match with my style.
    The TD efunds portfolio is so simple that I’m thinking of creating an non registered account and directing all my future investment contributions to the TD efunds.

    Based on my calculations my weighted MER for the efunds portfolio is 0.43 basis points vs less than 0.20 basis points if I went with a etf portfolio (XIC, XSP, XIN, VAB).

    This means i’m paying 0.23 basis poins for this convenience (over $200/yr). If I switch to ETFs, I won’t have the simplicity, free monthly contributions and free rebalancing. If I contribute twice a year and assume the 2nd contribution accts as a reblance time I will make 8 trade a year and pay approx $80 in commission. Switching to EFT’s at this point will save me approx $120/yr but I give up the simplicity and convenience. There will be a point when my portfolio grows large enough that the TD Efunds may not make sense due to higher fees.

    The other idea I had was use TD efunds for contributions and then transfer to a ETF portfolio every few years. This get’s me the simplicity of the monthly contributions but will complicate rebalancing and portfolio performance tracking.

    I would be interested in your opinion on switching from TD efunds to ETF’s and the pros & con’s.

    thanks

    I

    Joe

  7. Canadian Couch Potato December 19, 2016 at 6:21 pm #

    @Joe: Thanks for the comment. The following blog should help. I would point out, however, that I do not recommend currency-hedged funds such as XSP and XIN.

    http://canadiancouchpotato.com/2016/05/02/ask-the-spud-switching-from-e-series-funds-to-etfs/

  8. Vincent Wong December 20, 2016 at 3:22 pm #

    Hi John,

    I’ve recently moved my CAD TFSA amount to Questrade, and was deciding whether to follow 3 Vanguard Funds as your model stated, or fund using the moneygeek portfolio as stated here:
    http://www.moneygeek.ca

    All Canadian Slightly Aggressive

    XSB.TO: iShares DEX Short Term Bond Index Fund 6.3%
    ZPR.TO: BMO Laddered Preferred Share ETF10.1%
    VFV.TO: Vanguard S&P 500 ETF 46%
    XEG.TO: iShares S&P TSX Capped Energy Index Fund 10.3%
    VEF.TO: FTSE Developed ex North America Index ETF (CAD-hedged) 27.3%

    He also has a Regular Aggressive Portfolio (in USD/CAD):
    XSB.TO: iShares DEX Short Term Bond Index Fund 17.3%
    ZPR.TO: BMO Laddered Preferred Share ETF 8.5%
    IVAL: ValueShares International Quantitative Value ETF 21.4%
    QVAL: ValueShares U.S. Quantitative Value ETF 22.5%
    BRK-B: Berkshire Hathaway 22.3%
    XEG.TO: iShares S&P TSX Capped Energy Index Fund 8%

    What are your thoughts on the passive porfolio you’ve chose (3 funds) versus these value-investing funds PhD Jin Won Choi has selected? I only have a small amount (~40K CAD) to invest.

  9. Oldie December 21, 2016 at 4:36 pm #

    @ Vincent Wong: The Money Geek’s approach is an analysis of markets and trends which is essentially a prediction of the future. His recommended portfolio that you quote is a reflection of this.

    The Couch Potato (i.e. the rational, evidence-based, future-agnostic, passive index investor) demands of himself that he does not attempt to predict the future. Any investment strategy that involves a prediction is a violation of this principle.

    The Couch Potato approach is very hard to stick to when at every turn there are so many apparently very clever people showing you how to do better. But it is the only rational way to go.

  10. Dan D December 21, 2016 at 9:10 pm #

    @Oldie: I don’t know if we need to be so dogmatic about it. I wouldn’t lump the Moneygeek portfolios with “apparently very clever people showing you how to do better.” While I personally prefer the CCP models to the Moneygeek portfolios for more or less the same reasons you cite, the Moneygeek portfolios are still fairly broad based and diversified.

    I’ll use the 1st model posted by Vincent as a basis for comparison:

    XSB – If you’re investing long term, using short term vs mid-duration bonds is quite conservative and by using XSB over XBB you are basically trading a bit of returns for a bit lower volatility. However, bond yields are so low that it won’t make much difference. If you have a very low risk tolerance I can see the argument for wanting to keep fixed income as safe as possible. One could reasonably argue for a GIC ladder here instead.

    My bigger issue is with the 6.3% allocation – equities:fixed income ratios are a major decision and one number can’t possibly be appropriate for all investors. Using a decimal for any allocation is needlessly specific and gives a false illusion of precision that doesn’t really exist and can’t be maintained without basically rebalancing daily. Also, with an allocation below 10% for anything I personally wouldn’t bother unless I had a very large (7-figure) portfolio. Hard for me to see how different the long-term returns for this portfolio would be using a 6.3% allocation to XBB vs XSB vs GICs vs cash. This portfolio is extremely aggressive and volatile but this could easily be adjusted by increasing fixed income exposure.

    ZPR – I don’t think these are necessary, especially in a beginner’s portfolio. However, at least this is a broad pref share ETF vs buying individual pref shares. At a 10% allocation this is defensible – if you want to use 10% of your portfolio for gambling I say go for it, and there are much worse ways to do so than ZPR.

    VFV – It’s kind of a weird decision to use VFV over the more broad based VUN. Both of these will likely perform very similarly. VFV is marginally (and unnecessarily imo) less diversified than VUN by not including small cap stocks but having the biggest 500 US companies making up almost half of your portfolio is still decent diversification.

    XEG – I’m not sure why the only Canadian equities are energy stocks – I guess this is the “prediction” that they will outperform the broad Canadian market (VCN). It seems like a fairly arbitrary prediction that is likely to cost some returns long term. But you could argue that the Canadian market as a whole is quite concentrated in a few sectors, so while XEG is undoubtedly less diversified than VCN it’s maybe not by as much as one might think? And since Moneygeek includes only a 10% allocation to XEG (CCP allocated more to VCN) it’s possible that in terms of overall portfolio diversification the two are even less far apart than it first appears.

    VEF – I personally wouldn’t use a currency hedged international fund (and it’s kind of weird that he doesn’t also hedge currency on VFV) but some people with a low risk tolerance might appreciate that kind of insurance. Other than the hedging, this seems like a completely reasonable choice for an international fund and the allocation is also reasonable – you could maybe argue for making this closer to even with VFV?

    Anyway, overall I see this is a pretty haphazard very aggressive portfolio that makes some conservative choices I don’t understand, and will likely underperform a CCP portfolio with a similar fixed income allocation in the long term. However, it is low cost and well-diversified and I think one would be better served following Moneygeek’s portfolio rather than individual stock picking. I definitely don’t put it on par with individual stock picking.

  11. Tristan December 24, 2016 at 3:38 am #

    Vincent Wong, I agree with Oldie. The Moneygeek portfolio is less diversified than the CCP 3 fund portfolio, and therefore will have a wider dispersion of expected outcomes, without a higher expected return. Preferred shares are known to increase volatility and decrease returns of a portfolio and hedging of equities increases portfolio volatility and adds cost. Having a PhD doesn’t necessarily make you a better investor. As Warren Buffett says, once you have average intelligence, temperament (your behaviour) is the most important thing. I’d go with CCP’s portfolio.

  12. Miguel January 13, 2017 at 3:26 pm #

    The content was great, and the production and hosting was top notch. Really great job on the podcast!

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