One of the most gratifying things about writing this blog is getting emails from young people who are just getting started in Couch Potato investing. “Without you,” a 23-year-old wrote this week, “who knows what I would have continued to do with my money.” I wish I could say I got started that young.
“New Potatoes” are often full of questions about the ideal asset allocation (“Should I include 10% in emerging markets?”) and how they might save a few basis points by choosing Vanguard ETFs instead of the TD e-Series funds. But when it comes to new investors who are starting small, I think these decisions are almost immaterial.
If I could send one message to young people who are just beginning their investing journey, it would be this: stop worrying about squeezing out incrementally higher returns and concentrate on saving more money. Because when your portfolio is small, the size of your monthly contributions has a much a greater effect than your rate of return.
When savings are more important than costs
To illustrate this idea, let’s look at two investors at different stages of life. Christopher is in his early 20s and has just started his first full-time job. He’s saved $5,000 in his RRSP and plans to sock away another $100 a month. Christopher is trying to determine the perfect asset mix and keep his fees as low as possible. But what if instead of trying to optimize his portfolio he instead made an effort to increase his monthly contribution to $150, or even $200?
Starting value $5,000, contributions for 10 years
| Rate of return | $100/month | $150/month | $200/month |
|---|---|---|---|
| 1.5% | $18,151 | $24,464 | $31,717 |
| 2% | $19,400 | $26,047 | $32,694 |
| 3% | $20,756 | $27,760 | $34,765 |
| 4% | $22,228 | $29,615 | $37,002 |
| 5% | $23,828 | $31,624 | $39,421 |
| 6% | $25,567 | $33,802 | $42,037 |
| 7% | $27,458 | $36,162 | $44,867 |
| 8% | $29,515 | $38,723 | $47,931 |
| 9% | $31,753 | $41,502 | $51,250 |
As you can see in the table, at $100 a month and a rip-roaring annual return of 9%, Christopher would have $31,753 after 10 years. But if he increased his contribution by 50% to $150 a month, he would only have to earn 5% to wind up with the same amount. If he were able to dig deep and double his monthly contribution to $200, he wouldn’t even have to take any market risk: a savings account earning just 1.5% would leave him with an almost identical $31,717.
It seems clear that at this stage of his investing career, Christopher is far better off finding an extra $50 to $100 in his budget rather than trying to get an extra percentage point out of his portfolio’s performance—let alone 10 or 20 basis points by choosing ETFs instead of index mutual funds.
When low costs are paramount
Now let’s consider Nicole, who is in her 50s and has accumulated $200,000. Nicole is well along in her career and is now contributing $500 a month to her account. She wants to get an extra 1% out of her portfolio to ensure that she retires with a comfortable nest egg, and she is considering making some changes that will lower her costs by that amount. She wants to compare this cost savings to the alternative of raising her monthly contribution to $750, or even $1,000:
Starting value $200,000, contributions for 10 years
| Rate of return | $500/month | $750/month | $1,000/month |
|---|---|---|---|
| 4% | $372,036 | $408,972 | $455,907 |
| 5% | $407,367 | $446,349 | $485,331 |
| 6% | $446,229 | $487,403 | $528,578 |
| 7% | $488,980 | $532,503 | $576,027 |
| 8% | $536,011 | $582,052 | $628,093 |
Because Nicole’s portfolio is so much larger than Christopher’s, lower costs (or higher investment returns) now mean thousands of dollars every year. Increasing her returns by one percentage point over 10 years would have a greater effect than increasing her monthly contribution by 50%. And two percentage points—the approximate MER difference between a typical portfolio of actively managed mutual funds and ETFs—accomplishes more than doubling her contribution. It adds up to about $100,000 over 10 years.
Keeping costs low and choosing an appropriate target rate of return are important at every age. But the truth is, if you’re a young investor these factors matter a lot less than you think. In your 20s, it’s better to focus on spending less than you make and saving the difference. Once you have built significant wealth—and you will—then those basis points become much more important. Lay a foundation of good habits and by the time you enter your peak earning years you’ll be primed for success.
Deciding your asset allocation, and deciding your savings rate is not really a dilemma. But I see a lot of people are hit with decision paralysis, and somehow getting it “wrong”.
Note that deciding how much to save should be a conscience decision, not simply blindly “as much as possible”. Save too little, and you may not achieve your financial goal. Save too much? That’s not simply a good problem to have, it’s not utilizing your hard earned money. You can’t take it all with you in the end.
I’ve started to put monthly TFSA contributions into the TD e-series but think the weighting is all mixed up. I started only putting money into the TD Canadian Index e-series fund. I now have $1400 in that fund and $300 in the TD Canadian Bond Index e-series. I am looking at putting in $300 per month. Each month, should I put more in the Bond Index fund, put $150 into each of the two funds, or divide the $300 into the 4 Index funds in the recommended couch potato ratio? (20, 20, 20, 40%). I am 50 and have an defined benefit pension plan.
I am in my late 20’s and got around 23 000$ in rrsp and 2000$ tfsa. I just move all my rrsp in TD e-serie. Global patato with 25% in each asset. This years me and my spouse should be able to save around 40 000$.
Do you think we should move to etf as soon as possible or just stick with td for now and when should to move to ETF if I am better with TD?
I would wish in a near future switch to the complete patato with qtrade because one the five etf suggested is trade for free and i could do norbert gambit with DLR for free.
Also I reed in your book that missing only the 5 best trading day in 10 years could reduced a lot your return but your always tell to do one lump sump a years. If my saving are really high should I invest more frequently like every 4 month with ETF.
One last thing, for asset allocation I wish maybe to try 80% stock, 20% bond or 90% stock, 10% bond, how should I allocate the complete couach patato ETF for these 2 option.
By the way excellent job for your book and great blog, I always reed a bit a work ;)
Thanks for this excellent post. I’m 28 and just about to start investing so this is coming at the right time for me. I’ll try to save more instead of trying to grab a few base points here and there :)
For all those younger people who are starting to save here is what worked for me:
Make sure savings go to paying down debt first.
Save a set amount automatically to a savings account until you have an emergency reserve of whatever suits you (say several months pay). Do this by having it automatically taken from your checking account and going to the savings account – a set amount $25 a week or whatever it is.
Set up TD eSeries ETFs with automatic investments every month in a Systematic Investment Plan that takes money from your savings account. Calculate how much should go to each fund as a % of the amount you want to invest each month. Just call the broker and ask them to set it up.
Then slowly ratchet up the automatic amount that goes from your checking account to your savings account until you start to notice that it may be too much. For example you could increase the amount saved each week by $10 and change it every 6 months.
Revisit the amounts that are invested in the eSeries funds when you make this change.
Its surprising how fast this can add up and how you get used to saving without noticing it. I don’t think that saving lump sums and budgeting works. Try to make it automatic because there is a discipline to it that is simple.
@Slacker: Yes, the fear of “getting it wrong” really weighs on people unnecessarily. It’s not necessary to get everything perfect, especially in the beginning. First worry about “good enough” and then move slowly toward “excellent.”
@Starter: It’s hard to say anything useful without knowing your situation, but if you have a DB pension that will cover all of your basic expenses in retirement, then you may be able to take more risk in your other investments. I would think that a 40% allocation to bonds is probably on the conservative side, for example. Once you decide on an appropriate allocation, I suggest setting up a monthly contribution to each fund in the portfolio and then rebalancing once a year as necessary.
@Francis: If you are able to save $40,000 a year, then the lower costs of ETFs are worth it. The example about missing the biggest single days was just a reminder about why it is important to stay invested at all times rather than trying to time the market. It doesn’t have much bearing on dollar-cost averaging.
You can easily adapt the Complete Couch Potato with just 10% or 20% bonds. Just divide the additional equity allocation more or less equally among the remaining asset classes. The exact proportions are not that important.
@Jason S: Glad this caught you at a good time. Keep things simple for now and worry about the subtleties later. Good luck!
@Andrew: That is fantastic advice. Thanks for sharing. I agree that the automatic savings component is absolutely critical for most people.
Then if a should lump sumps once years with ETF intead of investing 4 time a years should I keep my contribuying in my td e-serie and then investing in ETF or should I put my further contribution in money market ETF commission free like DLR with QTrade or put my money in my 2% saving account with ING until next year?
@Francis: There is no simple answer. In general, I suggest investing money as soon as you have it if you are using mutual funds or commission-free ETFs. However, if you are paying $10 per trade for ETFs, then there is trade-off that you need to consider. Making four ETF purchases per year is probably fine, but monthly purchases of $300 is too frequent.
@Andew: Great advice
@Francis: I’ve had similar questions myself about when to invest and either into ETF’s or mutual funds. I would agree with CPP that you should invest the money when you have it. I’m a new Couch Potato as of this year and this is my plan:
I switched my investments to the CP in January so I did lump sums into ETF’s. I’m using the Global CP (70 equity/30 bond). I’ve also set up an automatic (2x monthly) funds transfer (cash transfer) from my RBC account to my RBC Direct Investing. I am planning to then buying index mutual funds in weighted portions like above (I get to decide when/what I buy so if my allocation is off I can balance this way as well). Once I have $1500+ in each mutual fund I will be moving them to ETF’s. I say $1500 b/c then the $10 trade is only .67% of the total trade. I want the trade commission to be similar to an index fund MER.
Hope that helps.
@Sterling F: Thanks for the suggestion. Your plan is excellent in theory, but make sure you’re aware that most mutual funds charge a redemption fee if you hold them for less than 90 days. So when you cash out your mutual funds to buy ETFs, you may get hit with this fee, which is usually about 2% with a $30 or $40 minimum. I suggest you verify with RBC before you do this.
@CPP: Thanks for the heads up. I hadn’t thought of that. Would the fee only apply to my last 3 months of contributions? In that case I could move $1500 to and ETF when there is $1875 in the account. $1500 + $375 (3 x $125/month).
@SterlingF: In general, yes. The 90-day rule is usually applied on each dollar, so as long as you keep three months’ worth of contributions in the fund you may be OK. But I would definitely verify with RBC as the policies differ among brokerages.
I don’t agree how you compared the return of “Christopher” based on different monthly contribution. First saving more will of course make you richer later. I believe the point is not about saving as much as possible but saving as little as possible. What I mean by this is, how can I have enough money later while still enjoying life right now. That’s why you should discount the extra $50 or $100 monthly contribution from the return. By doing so you get a $25624 return for the 5% $150 monthly contribution and $27421 for the 5% $200 monthly contribution. This comparison is much more fair. You then see that by having a return rate of %6 over %5 you get the same 10 years return plus the luxury of enjoying life with your monthly $50. Same thing append with a return rate of %7 over %5, you get the same 10 years return while going the a nice restaurant with your girlfriend every month with the $100. I think you get my point, I’m 25 my and objective is to maximise the return of my investments to enjoy life equally now and later.
@Seb: I understand your point, and I agree that we all wish we could earn higher returns so we wouldn’t have to save so much. But I feel that young, inexperienced investors should focus on developing good savings habits and discipline first so they will be in a position to earn those higher returns later in life when they will have more impact.
Remember, too, that we have full control over how much we save, but we cannot control our rate of return. Better to focus on the things we can control.
Now what about someone in their early 30’s? Is it somewhere in between, since we are 10 years later than Christopher?
@James: These ideas really depend more on portfolio size than age. The point is that if your portfolio is currently small, the best way to grow it is to save more. If it’s large, the best way to grow it is to lower your costs.
This is a great post. I’m almost 30 and have read everything i can find relating to long term passive investing and found myself scrutinizing my portfolio and investing patterns to make sure I’m maximizing my long term success. There comes a point, when as this post and similarly Benjamin Graham articulates, that someone (young) having a long term investing horizon will benefit most by directing their energy towards increasing their income and investment contributions rather than micro managing their portfolios to squeeze out a few basis points advantage, or worse, by incurring unnecessary risk.
I’m 32 years old and just starting out as a DIY investor. Saving is key, although I wish I had learned all this 10 years ago…now there is mortgage and student loans and so on, competing for my dollars! I’ve been doing my research and keep coming back to this website, it’s so helpful, thanks for being such a great resource.
My questions are more logistical, as I feel I have a good grasp on Index funds and ETF options, asset allocation, and rebalancing, but feel somewhat stuck regarding how to implement everything I’m learning. I’ve opened my TD e series account (easy web), and already have an online brokerage account ($9.95/ trade). I plan to start making monthly ($300-$400) deposits into my TD e-series account, which is an RRSP account. My online brokerage RRSP account has $1000 cash in it, which needs to be used somehow. Any remaining money I have, I plan to put into my TFSA via my online brokerage account (buy ETF’s once a year, likely pick four and slowly add to them).
Questions:
1. TD e series- unhedged or hedged? (ie.TDB 902 or TDB 904; TDB 911 or TDB 905??) I realize your model portfolio is unhedged and this is what most of the research I’ve done suggests, if it’s for long term investing. However, I noticed that the global portfolio hedged version of the TD e series did better in the CCP 10 year report card. Furthermore, Andrew Hallal suggests TDB 905 (currency neutral) and TDB 902 (unhedged) in his model portfolio in ‘Millionaire Teacher’. Thus, there seems to be mixed results/ opinions and so I remain a bit unsure of which way to go.
2. Does it make sense to purchase something like two ETFs (tracking a different index than TD e series funds) using the $1000 in my online brokerage RRSP account to diversify my portfolio even more, OR should this $1000 be allocated to what I’m trying to achieve- 40% bonds; 60% equities. Basically, can you have a diversified portfolio spread over two accounts or is this complicated as it’s more difficult to rebalance??
My apologies for the long post, just a lot on my mind with regards to personal finance these days….and hard to find someone to chat about this stuff with.
Thanks so much. Stephany
@Stephanie: Thanks for posting your comments.
1. There’s no hard and fast rule about hedging. Over the very long term, assuming that currency moves more or less even out, being unhedged will likely reduce volatility and costs. But as you point over some fairly long periods, if the Canadian dollar is very strong, hedging will help. Why not split the difference and use hedging in the US fund and no hedging in the international fund? Don’t let this smal decision stand in your way.
2. Honestly, I’m not sure why you have $1,000 in a separate RRSP at all. Why not just transfer this cash to your e-Series account and invest it there? As you point out, it’s impractical to rebalance across two accounts. And $1,000 isn’t going to offer you significant diversification anyway. I’d suggest simplifying things with one RRSP.
Email or post your questions any time!
@SterlingF: I’m in a similar situation (just moved over to RBC DI) and was thinking along the same lines – i.e. using index mutual funds for monthly contributions then doing a lump-sum ETF purchase once a year by redeeming the mutual funds. I’m curious if you have found out any information from RBC DI about how early redemption fees are applied to index mutual funds – i.e. if you leave enough units equal to the amount contributed in the last 30 days in the fund, does the system “know” not to charge you early redemption fees for the rest?
Is just wonder why in the complete CP portfolio there is a more important asset allocation to canadian stock than other stock. I read in your book that our economy is poorly diversify and the MER of the canadian fund are higher.
@Francis: One reason is to limit currency risk. But generally I recommend dividing the equity allocation about equally between Canada, the US and international. In the case of the Complete Couch Potato, that would have been 18.33% each, so I just rounded things off to 20%, 15%, 15%. The fact is, most Canadians have a much higher allocation to domestic stocks than that.
@Marc: I called RBC DI yesterday actually and was going to post what I found but the guy on the phone wasn’t that helpful. Basically all I got was that I should look at http://www.sedar.com (my suggestion not his) to find out the specifics for each fund and how they handle the fees. I tried but couldn’t find the funds I was looking for (Can: RBF556, US: TDB661, Int’l :RBF559, Bond: TDB966). He also said that since the minimum initial investment for RBF556 was $1000 that I shouldn’t have less than that in there, so I would have to save up to $2875 ($1000 initial, $1500, $375 – 3 months contrib) before I could/should transfer. He said that RBC DI wouldn’t stop the transaction but that I may be penalized after the fact.
TL:DR – No, I’m not sure how RBC DI handles the early redemption fees exactly….yet.
@SterlingF: thanks – feel free to add new comments as you find more info! A good source of detailed mutual fund information I’ve found is http://www.investorpos.com – I think it’s meant for advisors but if you don’t mind the watermark, you can view info on any fund you like including all fees.
@SterlingF: That’s disappointing: there’s no reason why they shouldn’t have given you a straight answer. SEDAR won’t help, because the brokerages set their own policies independent from the funds themselves. Leave it with me: I will ask my contact at RBC Direct Investing. Stay tuned!
Great informative article as usual! I’ve been thinking of asking about this for awhile, and since Francis brings it up, it seems like a good time. It’s about how much of one’s portfolio to have in the Canadian stock market. Index investing theory would seem to suggest that since the Canadian equity market is about 3% of the world equity market, then that would be the percent to hold in the equity part of your own asset allocation. My US and global equity index holdings are all currency-hedged (TD e-series), so it seems to make sense based on your response to Francis about currency risk. All my investments are in registered accounts as well, not sure if that’s relevant. I’ve seen a lot of asset allocation models from various Canadian sources that recommend much higher allocations to the Canadian market than 3% or so (such as the Complete Couch Potato amount of 20%) without discussing whether ones US and global investments are hedged. It seems like home country bias. Americans and others certainly don’t feel the need to invest disproportionately in the Canadian market (or even at all), so why would we? There’s also the problem of the Canadian market not being well-diversified. Are there other issues to consider that I’m missing? I’m aware that 3% Canada is a small percent and might not be practical to implement, and you might be able to get it through an all-world-ETF or something like that but it’s not the implementation details that I’m asking about, it’s the concept of why have such a high % Canadian equities in one’s asset allocation.
Also, I remember reading about the asset allocation of pension professionals. It may have been one of your articles, can’t remember for sure. I think the allocation to Canadian equities was relatively low.
Thanks
@Potato Salad: You’ve given me a good idea for a future post. In the meantime, these posts may be worth reading.
https://canadiancouchpotato.com/2010/06/15/build-your-own-pension-fund-portfolio/
https://canadiancouchpotato.com/2011/01/07/theres-no-place-like-home/
Thanks Dan. I had a look at the posts and am hoping you can address the following in future posts:
(i) If ones investments are all in registered accounts and the foreign equity holdings are currency-hedged, does it then make more sense to have only 4% of your assets in Canadian equities? Because under this scenario, having 15% or more in Canadian equities seems unnecessarily risky.
(ii) I think I pay an extra 0.05% for currency hedging in TD e-series US and EAFE indexes. Is this too costly? It seems like a reasonable, low price to remove a risk that seems high. But I gather from your writings that this isn’t the case. I’d appreciate if you could point me to the analyses that show why. I don’t want to be paying unnecessary fees to remove imaginary risk.
Thanks again!
@Potato Salad: All good questions. I will try to post next week.
@Potato Salad
The question about how much should be in Canada is a good one and worth a post, I agree. I really like Vanguard’s VT as a very simple all-in-one equity ETF. If someone with a small account wanted to buy the world with one purchase, that would be it, and I know Dan has a post about that exact topic:
https://canadiancouchpotato.com/2010/04/14/an-easy-way-to-buy-the-world/
It’s current weightings are roughly Canada 5%, US 45%, EuroPacific 35% and Emerging Markets 15%.
If someone wanted to move a small account from TD e-series into broad-based ETFs, you could conceivably buy two ETFs: A fixed income Aggregate Bond Fund like VAB or XBB and VT for all your equity exposure. Two transactions to purchase and very inexpensive to rebalance when necessary. Granted, the CDN equity exposure is quite low relative to typical allocations, but I’m not sure that’s a bad thing.
One nice thing about VT is that Vanguard has lowered the MER on this ETF from .30% in 2010 to .25% in 2011, to .22% in 2012. A few more years and it might be free :)
Thanks for the reply CCP. The only problem is that it will cost me $100.oo to transfer my funds ($1000 in my RRSP account) to the TD e series. I really regret that I deposited this money into this account, but was trying to beat the RRSP deadline as my TD e series account was not up and running until a few days ago. SO, is it worth the fee? I almost think I may be better off to buy two ETF’s (such as those mentioned by Steve in Oakville) with this $1000, and yearly rebalance these two funds in this RRSP account, to avoid the fee….
Regarding Vanguard’s VTI, this ETF is not listed on the canadian Vanguard website ETF list, does this mean Canadians cannot purchase this ETF??
Thanks again, Stephany
@Stephany: No, I would not pay $100 to transfer $1,000. But you should be aware that Waterhouse charges $100/year for RRSP accounts if the balance is less than $25,000, so you may end up paying it anyway. In any case, $1,000 is not enough to start buying ETFs. You will probably be paying $29 per trade, since you don’t have the required $50,000 to qualify for the cheaper commissions. Remember that you can buy e-Series funds through TD Waterhouse, so that may be your best bet.
Vanguard has ETFs that are listed on both Canadian and US exchanges. Canadians can buy any of these, but the US-listed ones trade in US dollars (another cost you want to avoid). VTI is one of these. The Canadian version of the same fund is VUS, though it uses currency hedging.
@Steve: Personally, I think VXUS is an even better choice than VT because of its broader exposure to mid and small cap stocks. It was not available when I first wrote that post. And its MER has just been dropped to 0.18%!
Thanks again Dan. I don’t think the TD Easy Web (for e -series) charges for the RRSP account. I trade at $9.95 in my online brokerage account, and this RRSP account is also at no fee. So it seems that using this $1000 (as it’s currently cash in this RRSP account) makes the most sense, as opposed to transferring it to my TD e series account (due to the fee). However, now I’m confused about purchasing ETF’s- $1000 is not enough to purchase two ETFs??
Thanks for the clarification re: Vanguard, VUS was on my list of ETF’s to consider. It sounds like it makes the most sense to stick to trading in Canadian dollars, to avoid more fees. Although, how come people talk about buying these US ETF’s then- VTI is recommended in Rob Carrick’s most recent book.
@CCP – yes, I agree with your comments on VXUS – but, it would mean you’d need a US equity ETF as well for US exposure. I was just thinking more for someone with a smallish account who doesn’t want to overweight Canada that you could purchase one equity and one fixed income ETF to get remarkably broad exposure.
Any difference in holding TD e-series via TD Easy Web or TD Waterhouse. And I take it if I did want to dive into ETFs I could only do so with the latter and not the former.
Wow; “required $50,000 to qualify for the cheaper commissions!” Is that per account (i.e. for both TFSA and RRSP, or, TFSA + RRSP)
P.S. Sorry, I’m just getting started and a friend directed me to your awesome blog
@Steve: You’re right, of course. I was thinking of VEU as the fund that should probably be replaced by VXUS. I would also note that iShares XWD covers the whole developed world, including Canada, and trades on the TSX for those want don’t want to buy and sell in US dollars.
@Anon: Welome to the blog. EasyWeb allows you access to TD’s mutual funds only. It’s great for people who only need access to the e-Series funds. TD Waterhouse is a full discount brokerage, which means you have access to mutual funds from every provider (not just TD), as well as individual stocks and ETFs. It’s definitely preferable to use the brokerage option if you have $50,000 or more, but for smaller portfolios I would just stick with EasyWeb.
The $50K limit is total household assets, i.e. all your accounts and all those of a spouse combined.
http://www.tdwaterhouse.ca/products-services/investing/discount-brokerage/commissions-fees/asff.jsp
@Stephany: Is your brokerage account with TD Waterhouse? That’s what I understood from your previous comment. EasyWeb does not charge annual fees, but Waterhouse does. They also allow $10 commissions only with household assets over $50K.
You can buy ETFs in any dollar amount, but it’s a matter of cost-effectiveness. If you buy two ETFs at $500 each and $10 per trade, the commission eats up 2% right off the top. When you sell to rebalance, you lose again. There are also bid-ask spreads on ETFs, but not on mutual funds. These costs will instantly erase any savings you would get from the lower MERs compared with index funds unless you are dealing with larger amounts of money:
https://canadiancouchpotato.com/2010/06/25/should-you-use-index-funds-or-etfs/
Regarding VTI and other US-listed funds, again, it’s a matter of figuring out when it is cost-effective to use these rather than those listed on the TSX. With large amounts of money, it makes a lot of sense. For $1,000 the transaction costs quickly outweight the benefits:
https://canadiancouchpotato.com/2010/10/18/are-us-listed-etfs-really-cheaper/
https://canadiancouchpotato.com/2010/01/24/should-you-buy-us-listed-etfs/
Piggybacking on Anon’s question : what if my TD Waterhouse account is a TFSA? Their do not charge annual administrative fees for that, whatever the balance. I have about $10k at the moment that I want to move there to buy e-Series funds. Is it still worth it or will they surprise me with some fees I didn’t think about?
@Jason S: They won’t surprise you with fees: they are all transparent. Some financial institutions charge a fee for TFSA withdrawals, so you may want to ask about that.
http://www.tdwaterhouse.ca/document/PDF/apply/forms/tdw-apply-forms-521778-pdf.pdf
I always had difficulty to understand what happen when you buy an US ETF in RRSP that do not allow US dollars in it. Does it mean you have to buy the ETF in US dollar and then they charge you exchange rate+ a %fee for the brooker to put in Canadian dollar your RRSP? What happen to fluctuation in your account, does it follow the actual exchange rate or an higher rate set by the brooker?
First: I have TD Waterhouse account RRSP account with less than $25k, and I only pay $25 per year, not $100.
Second: I don’t quite grasp why these two options (getting the best return and saving the most money) are mutually exclusive. I’m trying to do both. I’m 27, married, one kid, with a mortgage, significant student loans (just finished law school), and no credit card or line of credit debt. My wife and I are balancing out repaying our HBP withdrawals, saving in a TFSA for renos, emergencies, etc., contributing to our daughter’s RESP, and paying off our mortgage and student loans as soon as possible. Oh, and my wife’s still a grad student. We have no choice but to spend as little as possible, save everything we can, and maximize the return on our investments.
I’ve got different versions of a couch potato portfolio in each of the three accounts (RRSP, RESP, TFSA) based on the different timelines involved. Thanks for all the help you’ve provided through this blog! One minor quibble: sometimes it gets too focused on ETFs for me, since with our low figures, the trading fees are prohibitively expensive. If I’m not mistaken, it’s been a while since you’ve done any kind of thorough analysis of the various index funds, particularly bond funds, that are out there.
@Ian: Thanks for the comment, and for pointing out that you pay only $25 for your RRSP. The TD Waterhouse fee schedule lists two different fees: $100 for Self-Directed RSPs and $25 for Basic RSPs. I’m not clear on the difference.
http://www.tdwaterhouse.ca/document/PDF/apply/forms/tdw-apply-forms-521778-pdf.pdf (see page 7)
I didn’t mean to imply that you cannot focus on both saving more and reducing fees. It’s just a matter of priorities: you should only try to optimize your portfolio after you’ve made sure that you’re saving as much as you can. It certainly sounds like you have done that.
Fair point about focusing too much on ETFs. But the fact is, the bottom line on index funds in Canada is very simple: the TD e-Series funds are far and away the best available. The ING Streetwise Funds are also good option for small portfolios and novice investors, but after that there’s little to say. Were you curious about any specific index fund?
@Francis: You can buy US-listed ETFs with Canadian dollars and the brokerage will automatically convert the currency before executing the trade. And they will charge you a pretty large spread, typically 1.5% or so. When the holding is displayed in your account, the value will be shown in Canadian dollars according to the prevailing exchange rate.
@CCP: (regarding your reply to Ian) TD e-series funds are not available at discount brokers other than TD Waterhouse, and they include no fund tracking emerging markets. As for ETFs, they’re definitely not practical for regular bi-monthly contributions (due to transaction costs).
Also, given the complication of US tax laws (and estate taxes), what if one wants to avoid US-listed ETFs altogether? Wouldn’t this make it impossible to buy unhedged ETFs for US and Europe indices?
So, maybe there’s still some place for another blog entry on mutual fund choices in Canada, just to help us through the maze. That is, if it ever interested you to write a little more about them.
@CCP Fan: Thanks for the comment. Option 3 of the Global Couch Potato offers a suggestion for clients of other brokerages: RBC index funds for the equities and the TD i-Series for the bonds. The reason I do not list the RBC Bond Index Fund is that it holds only government bonds, whereas the TD fund tracks the DEX Universe index, which is about 30% corporate bonds. Maybe it is time for a post on this subject!
Great post. Great site.
47 replys so far, (and no contest entry this week hehe).
Looks like this topic resonated with people.
@CCP: Sorry for the confusion- my online brokerage account is with MD Management (no fee for the RRSP account and $9.95 per trade), not with TD Waterhouse. Thanks for the clarification re: purchasing ETF’s with small amount of money, as well as purchasing US ETF’s. From all this information, I think my best option is to purchase index funds with this $1000 (such as RBC index funds, as they seem to have a lower MER than most), including both bonds and equities funds and rebalance this account annually. I gather there is no fee to rebalance mutual funds. This might not be the worst situation, as once my TD e series portfolio is large enough to justify ETF’s instead of index funds (100,000 + according to my research) , it may make sense to transfer this to my MD Management RRSP account to begin purchasing ETFs.
In summary, keeping it simple with index funds and trading in CAD dollars, when you are just building your portfolio, seems to make the most sense for us ‘new potatoes’. This was my original thinking, although as I read more about ETF options, etc, I think I complicated things for myself!
@CCP: TDW Self-Directed RSP account allows you to hold stock/ETF while the TDW Basic RSP account doesn’t. I guess that’s the main difference between those two accounts.
I have questions regarding the withholding tax in TFSA. If I buy ETF track US market (hedged to CAD, e.g. Vanguard’s VUS) or index fund that track US index, e.g. TDB902. will I got hit by the withholding tax in TFSA, e.g. the dividents paid from VUS or TDB902, and how about the capital gain , e.g. If I sell them in TFSA, will I get hit by the withholding tax as well?
Thanks