Your Complete Guide to Index Investing with Dan Bortolotti

More DIY Investing Challenges

2017-12-02T21:36:24+00:00October 10th, 2013|Categories: Behavioral Finance, Financial Planning, Indexing Basics|Tags: |30 Comments

In my last post, I looked at some of the biggest challenges faced by DIY investors. I came up with the list after working with clients of PWL Capital’s DIY Investor Service. The theory behind indexing is relatively straightforward, and it’s quite easy to set up a simple portfolio. But do-it-yourselfers often face obstacles when trying to implement their plan. Here are a few more that need to be overcome if you want to be a successful DIYer.

Unrealistic expectations. Anyone who works with an advisor completes a risk tolerance questionnaire, and the process is revealing. Investors often say they want an expected return of 6% to 7% (occasionally we get people who expect 8% or more) while also indicating they’ll accept no more than a 10% loss in any given year. Those goals are incompatible.

With bond yields under 3% today, a balanced portfolio of 60% equities and 40% fixed income probably has an expected return of about 5% before fees, and in a scenario like 2008–09 it could suffer a drawdown close to 20%. Unless investors understand these trade-offs they can’t hope to carry out a long-term plan.

Ignoring asset location. Most people understand Canadian equities should be held in a non-registered account (if there’s no registered room available), while traditional bond ETFs are best held in an RRSP or TFSA. But there are subtle asset location issues most DIY investors are unaware of—indeed, even many advisors pay no attention to these details.

As I’ve written about before, US securities are exempt from foreign withholding taxes in an RRSP, but not in a TFSA. And if you need to hold fixed income in a non-registered account, GICs are far more tax-efficient than bond funds. Investors anchor on fees because these are easy to compare. The cost of paying unnecessary taxes is much less obvious, but it can have a much bigger impact than fund MERs or fees paid to an advisor, especially for wealthy investors.

Currency conversion. Currency spreads at discount brokerages are outrageously high: on transactions under $50,000, a spread of 2.5% is not unusual for a round trip. DIY investors who buy US stocks or ETFs without taking steps to reduce the cost of currency exchange can easily lose hundreds of dollars on a transaction. Norbert’s gambit is a great solution but it’s hard to pull off unless you have a lot of experience trading with an online brokerage.

Inability to tune out the noise. We all react emotionally to financial headlines: being fearful during a market crash or exuberant during a bull market is just part of being human. But successful investors need to restrain themselves from acting on those emotions. DIY investors face a tough challenge, because technology makes it so easy to trade: many brokerages now even let you buy and sell on your smartphone. A long-term portfolio doesn’t need to be adjusted after every episode of Market Call, and there can be huge value in putting an advisor between you and your impulses.

Finding professional help. DIYers often ask me to recommend an investment advisor who charges by the hour, or one who will make specific investment recommendations they can implement on their own. The problem is, most licensed advisors want nothing to do with that business model. Even if they were inclined to work with do-it-yourselfers (and most are not) they would face hurdles from their compliance departments.

Financial planners may work on an hourly model, and they are helpful when clients are looking to manage cash flow, reduce debt, get the right insurance coverage or plan for retirement. But many have limited knowledge about investing, and most are not licensed to advise on specific securities. If you’re looking for someone to give you step-by-step instructions on how to design and implement an investment portfolio on your own, you’re not likely to get it from a fee-only planner. (For more on this distinction, see Preet Banerjee’s Find the Perfect Financial Planner in the current issue of MoneySense.)



  1. October 10, 2013 at 11:30 am

    Great point on unrealistic expectations. I’d agree that tuning out the noise is the biggest challenge for clients. Especially with smart phones and cnn making a big hullabaloo about every minute event in the market. For new DIY’ers its more about seeing through the noise than tuning it out. Its important that clients remember that indexing is a long term strategy and who is the next chairman of fed or whether China hits its latest economic numbers is irrelevant for the long-term.

    Preet’s new article is great. Its quite lengthy though. Its a shame its not a subject that can be explained in 5 words! Would make my life easier! haha.

    As for licensed advisors, in your travels do you get the feeling that they want nothing to do with a fee-only business model, or that they just cant do it because thats the way the industry is currently set up?

    – Kathy

  2. Mike Holman October 10, 2013 at 11:31 am

    Another good article.

    In the last section you mention “financial planners may work on on hourly model” – are you talking about money coaches? Or are you just referring to anyone calling themselves a financial planner who isn’t a licenced advisor (which would include money coaches).

  3. Kenny October 10, 2013 at 11:35 am

    On the new edition: I’ve asked at Shoppers, Target, Coles, Indigo, and Superstore but still can’t find a copy here in NS. Any idea when the digital release will be?

  4. le October 10, 2013 at 12:17 pm

    I have noticed a change in tone of the articles since Dan has become a licensed advisor. Much more about what an advisor can do for you and less about how to develop the skills necessary to avoid seeking out an advisor in the first place.

  5. Edward October 10, 2013 at 2:27 pm

    I have a hard time tuning out the noise. ….So I tend to occasionally try and time the markets with my index fund purchases. I know it’s stupid and should just stick to the preauthorized dollar-cost-averaging method. (Which is setup.)

    For example, equity markets went way down this week (especially Tuesday), so I threw a few hundred extra into my US index funds. My lizard brain sees a 2% drop as a fire sale. The whole, “Buy when others are selling, sell when others are buying,” philosophy really appeals to me”. I try to tell myself throwing extra bucks into an index that’s dropped isn’t too bad a habit as long as I rebalance properly at the end of the year.

  6. David L October 10, 2013 at 5:20 pm

    Yup, trying to time the market doesn’t work. I was going to buy some VTI/VUN yesterday, and I thought “Hmm, it may just drop more tomorrow, so I should wait.” And guess what, it shot up today! So I said “F@%$ it, I’ll just buy it now, and remember timing market never works.”

  7. Nathan October 10, 2013 at 8:09 pm

    Dan, I’m sure you’ve mentioned this before, but does your new advice operation offer fee-only advice for semi-DIY-ers, as you describe? I understand the reason it’s rare is that it’s probably difficult to make decent money with clients who are only interested in paying for a couple hours each, but if anyone is well positioned to make it work it’s probably you!

  8. Rob October 10, 2013 at 8:57 pm

    I am a 59 yr. old committed DIY’er and CCP’er, managing two RRSPs, two LIRAs and 2 TFSAs as one, low seven figure, portfolio…..ETFs and e-funds. No RRPs. No non-reg. In six years time I need to start a retirement income drawdown. TNL@TB (TD) says she can’t (won’t?) help me unless it involves a 2% MER wrap. I’m of Scots heritage, not interested. Where do I turn for guidance in seeking the most tax efficient manner in which to begin the retirement income drawdown?

  9. John October 10, 2013 at 9:51 pm

    “equities should be held in a non-registered account, while bonds are best held in an RRSP or TFSA.”

    I thought it was the other way around; put high risk high return assets in registered accounts to get the most tax savings. Am I mistunderstanding something?

  10. Canadian Couch Potato October 11, 2013 at 12:53 am

    @Mike: I wasn’t just referring to money coaches. Many financial planners (who may have their CFP designation but are not licensed to sell securities) do work on an hourly model. I think many people don’t appreciate the distinction between a financial planner and an investment adviser. Some people do both, but many professional only do one or the other.

    @Kenny: Sorry you haven’t been able to find the book. I just saw a proof of the e-book version, so it should be available very soon. I will make an announcement on the blog when it’s available.

    @Nathan: We will do follow-up with our DIY clients on an hourly basis, but only after they have completed the initial process (which includes the $3K fee) so we can be confident we understand their situation. It’s not that it’s hard to make money working by the hour. The problem is it’s totally irresponsible for us to give investment advice after spending only a couple of hours with a client. It takes a minimum of 10-15 hours to gather and analyze all the relevant information.

    @Rob: You should be able to find a fee-only financial planner who specializes in retirement planning. They should be able to advise you on the most tax-efficient way to draw down your accounts, though they would not manage the portfolio for you and you would be responsible for making those transactions yourself.

    @John: There is an argument to be made for keeping high-risk, high-return investments in a TFSA, but in an RRSP those gains are ultimately taxable when you withdraw them. I can’t imagine a situation where it would be better to keep bonds in a taxable account and equities in a TFSA or RRSP.

  11. Be'en October 11, 2013 at 2:37 am

    Shux.. didn’t win the book :(

  12. Nathan October 11, 2013 at 4:33 am

    @CCP: Ah, that makes sense, thanks.

    If a person were already extremely organized and presented their situation to you in such a way as it took considerably less than 10-15 hours to review, would you consider reducing the initial fee? I’m thinking of a DIYer who is already well established and knowledgeable, already has a diversified portfolio similar to one of your models, and has a good idea of their financial situation, goals and risk tolerance, but for whatever reason wants someone knowledgeable to bounce questions off of. Maybe they’ve never done a Norbert’s Gambit and want someone to talk them through their first one, for example. Not asking for myself, just curious. Totally understand if you can’t really give a blanket answer to that question though.

    (Not that I think $3k for a complete assessment is unreasonable BTW; I think it’s probably a very good value for many. It just seems that some clients would require more assessing than others, so the flat right might not always be appropriate.)

  13. […] to help DIY investors (if you listen to Preet’s Podcast you’ll find out how), however  More DIY Investing Challenges he wants to point out maybe you shouldn’t be trusted with your […]

  14. Matt Becker October 11, 2013 at 8:19 am

    Tax location is something I want to learn more about. Taxes in general are an area where people have an opportunity to save a ton of money, but even the fact that taxes are being taken out of your returns is so hidden that it’s often a lost opportunity.

  15. ccpfan October 11, 2013 at 11:50 am

    bonds in taxable or not? I’ve found the following argument pretty sound:

  16. Canadian Couch Potato October 11, 2013 at 12:22 pm

    @Nathan: If we were not looking at someone’s investments, I suppose it would be possible to charge a coaching fee to sit down with someone and teach them something like Norbert’s gambit. But we’ve never done that. There might still be regulatory issues, since technically you would be advising them to buy and sell securities.

    @Matt: That’s an excellent point. I think of all the people we see with poor asset location who are blissfully losing thousands in unnecessary taxes with no idea they’re doing it. They might be able to pay $1,000 to save $2,000, but many won’t consider it.

    @ccpfan: As with so much in finance, everything depends on the assumption you use. Change a couple numbers and you get the opposite result. This article by Dan Hallett does a nice job of looking at both sides of the argument:

  17. Chris October 11, 2013 at 1:31 pm

    @CCP: At current interest rates, it’s actually fairly hard to imagine reasonable scenarios where you would keep bonds *inside* of an RRSP/TFSA (provided not all of one’s assets can be kept in registered accounts), unless one is close to retirement. The dominating variable is the expected rate of return of the asset class.

  18. Phil October 11, 2013 at 3:09 pm

    Congrats on the awards! You deserve them. Thanks for your efforts and your willingness to share your knowledge. You’ve been a big influence on my investing and I look forward to your future articles and posts.

  19. Canadian Couch Potato October 11, 2013 at 5:42 pm

    Thanks, Phil!

  20. My Own Advisor October 12, 2013 at 9:51 am

    Another great post and thanks to this site and MoneySense, I’ve improved my asset allocation over the years.

    I only keep US stocks and ETFs in RRSP, but wondering long-term Dan, if I could retire early?? – I should keep some US stocks non-registered in a USD $ account? I will need these U.S. stocks for income. Think PG, JNJ and KO stocks.


    As for the rest of the portfolio:
    I only keep CDN bonds in RRSP.
    I only keep CDN REITs in RRSP or TFSA.
    CDN dividend stocks are non-registered and TFSA only. Over time, I hope to have most CDN stocks and ETFs in TFSA.
    International ETFs in RRSP.


  21. Ryan October 12, 2013 at 9:55 am

    Excellent article Dan.
    I found Norbert’s gambit not too difficult once you read the articles about it. The challenge I found with N.G. comes at the end of the year when you have to figure out if there was a small capital gain or loss of DLR relative to CDN$.

  22. Canadian Couch Potato October 12, 2013 at 11:56 am

    @Ryan: If you’re able to do the “instant” NG at a brokerage like RBC Direct, where you don’t have to call to journal the shares or wait for settlement, it seems unlikely there would be a capital gain. By the time you factor in the trading commissions and the bid-ask spreads on two trades, the currency would have to move pretty sharply in a few minutes to leave you with a gain.

    @Mark: It’s true that an RRSP is not the place to keep stocks or ETFs if you plan to spend the income they generate each year. That’s one of the reasons I tend not to focus on income and take a total-return approach to retirement spending.

  23. Matt October 17, 2013 at 4:34 pm

    Regarding “tune out the noise”…Take the current example of wanting to enter the market with a sum of money right now while hearing (if not understanding) that US indexes are at an all time high. Is there no group think in the DIY community at large that would attempt to balance investing options at somehow classified peaks? Or how to enter the market since many DIY investors are in a position of migrating funds from traditional investments strategies. This is probably the ultimate crack cocaine for the uninitiated DIY investor but nonetheless am still curious as to whether there is no noise too loud that should be ignored.

  24. Chris October 18, 2013 at 7:12 pm

    I disagree with the recommendation that …”This article by Dan Hallett does a nice job of looking at both sides of the argument”.

    Mr Hallett has made the deciding Asset Location factor, the $$ taxes that would be paid in the first year. He multiplies the asset rate of return by the marginal tax rate for the tax-type of income.

    But the graph at show that the situation changes in year two. And over time a higher rate of return asset will more often benefit more in a tax-shelter account.

    The article also shows that the assets prioritized can be reversed when you expect RRSP withdrawals to be a higher rate than the contribution.

  25. Jacqui583 October 19, 2013 at 10:06 pm

    I just recently set up a mirror couch potato portfolio in a tfsa to supplement my rrsp one. I had no idea about issues between which investments are better in a registered fund and which aren’t. Fortunately my non-registered funds still have a fairly low balance. I just headed over to to pick up the Guide to the Perfect Portfolio. Looks like I still have LOTS to learn.

  26. Prasanna February 22, 2015 at 1:24 pm

    Hi Dan:
    Regarding your article in the Money Sense magazine on the “Total Return” concept and have a question on the Mindy example on the draw down through a RRIF with a draw down rate of 4% used but according to my understanding at age 71, the minimum withdrawal rate is 7.48%. I am sure I am missing something here….

  27. Canadian Couch Potato February 22, 2015 at 2:32 pm

    @Prasanna: The article included a simplified example to illustrate the overall concept. There was no suggestion that Mindy was over 71 or that all of her portfolio was in a RRIF. It is quite possible to manage a retirement portfolio this way even if the investor is drawing down a RRIF, but it’s more complicated to explain in a brief magazine article.

    You do raise a good point, though. Many investors believe they need to generate income (or at least annual returns) that keep pace with their minimum RRIF withdrawal rate. This is not possible, but it’s also unnecessary, since the prescribed minimum RRIF withdrawal is really just a schedule for paying taxes: there is no requirement that the money be spent. You can even transfer assets from a RRIF to a non-registered account in kind, so it may not even be necessary to sell investments to meet the requirement.

  28. Prasanna February 22, 2015 at 3:00 pm

    I see, so I can do a transfer to a non-registered account.When I heard about the 7% withdrawal rate, I thought this is unsustainable and would run out of money….so thanks a lot for this important clarification…..
    The GIC Ladder solution in the Mindy example seems a great way to have cash and also keep the pot growing as well.

    thanks again

  29. Canadian Couch Potato February 22, 2015 at 4:23 pm

    @Prasanna: This article may also help put some perspective on RRIF rules:

  30. Prasanna February 23, 2015 at 7:40 pm

    thanks Dan for that very detailed write up in which definitely clears up a lot of misinformation on the RRIF withdrawals. The article did answer another question I had which was on what balance the rate is calculated. So, very pleased to clarify a lot of uncertainty on this matter.

    Much appreciated

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