Here’s Part 2 of the highlights from my recent AMA on Reddit. This is a lightly edited transcript of the exchange, along with some additional comments and links I didn’t have time to provide during the live discussion.
CrushyMcCrush: Two questions: 1) if you have existing stocks that are fairly diversified, would you consider them part of your allocation for that region (e.g. Google, FedEx etc. in place of a US ETF) or would you recommend selling these stocks and buying an ETF?
2) For index investing, what is the minimum amount of time in the market you would recommend for someone with an above-average risk tolerance? For example, if I am saving for a down payment in five years, is that long enough, or would you recommend a high-interest savings account?
CCP: 1) As you can imagine, I don’t recommend holding any individual stocks. They are a huge distraction: believe me, you’ll find yourself focused much more on those individual companies than on the rest of your portfolio. Unless you have very large capital gains that you want to defer, I generally recommend that index investors purge their portfolios of individual stocks and simply use ETFs.
If you can’t sell the stocks for whatever reason, then yes, I would tend to consider them as part of your overall allocation to that country (e.g. Google is part of your US equities, Royal Bank is part of your Canadian equities, etc.).
2) If you’re saving for a down payment, I would recommend GICs: this is about savings, not investing. GICs have zero risk of loss and decent rates now (2.5% to 3.25%), at least compared with years past. Just make sure you understand that GICs are not liquid, so if you think you might need the cash in two or three years rather than five, adjust the maturities accordingly.
jjj7890: I’m investing with monthly purchases of ETFs with a mix of 50% XIC and 25% XAW, with 25% allocated to fixed income—except instead of buying a bond ETF, I’m pre-paying my mortgage. I figure that “earning” a guaranteed 3% return on the mortgage prepayment is preferable to a 2% to 5% (?) fluctuating return on a bond fund. What might I not be thinking of, and what do you think of this approach in general?
CCP: There’s nothing at all wrong with what you’re doing: investing and paying down your mortgage are both ways of increasing your net worth.
I would just frame it differently. You are not allocating 25% of your investments to fixed income. You have a portfolio of 100% equities, and you are also paying down debt. The mortgage prepayments are a sound decision, but they’re not just a different way of buying fixed income. So just make sure you are comfortable with the risk of a 100% equity portfolio.
juggabags: I’ve followed the Couch Potato plan for years, shifting only very occasionally between the recommended ETFs in my RRSP and TFSA. But, now I’m thinking of getting into one of Vanguard’s new Asset Allocation ETFs (probably VBAL) and was questioning whether I should move all my current investments over, or just add any new funds to VBAL.
CCP: I’m getting this question a lot since the launch of the Vanguard asset allocation ETFs. I like simplicity, and I think hybrid solutions (holding the existing ETFs and adding new money to VBAL) undermine that simplicity and can make rebalancing even more complicated. So if there are no tax consequences (i.e. all of your funds are in TFSAs and RRSPs), I tend to recommend selling the current holdings and using only the one-fund solution.
[Note: I recently answered a similar question in more detail at MoneySense.]
domlee87: As someone who has read Millionaire Teacher and The Value of Simple, I feel like I know all that I need to know about investing in index funds. Is there a need to know any more after this point and if there is, do you have any specific books that you would recommend? I am considering reading up on Canadian taxes but don’t know what else to really seek out after that.
CCP: A very insightful question. At some point there are diminishing returns on education about index investing. If you save regularly and have a well-diversified, low-cost portfolio, and you rebalance with discipline, you are already 90% of the way there. A basic understanding of tax-efficiency will get you even closer.
So it’s not unreasonable to decide that you don’t want to spend hours reading about the minutiae that might, at best, save you a couple of basis points a year. Indeed, it’s just as likely you could start to second-guess yourself and unwind the solid plan you’ve already built.
Ulkurz: I’m a 30-year-old who recently started looking to grow my savings mostly by investing in stocks, bonds and other options. However, the learning curve about investing rationally is pretty steep. It can take a while before I’m absolutely confident about putting my money in something I believe in. I’ve around $40K in savings that I do not need at all. Where do you suggest I should start?
CCP: If we start by assuming that you believe in investing in the stock and bond markets, then a simple balanced index fund could be a place to start. If you’re also considering totally unrelated ideas (such as buying a rental property), then you may have little option other than keeping your savings in cash until you are comfortable.
One word of advice: doing your research is important, and you need to be comfortable with your choice. But be aware of analysis paralysis or you may find yourself sitting on cash for years.
schpeucher: I became familiar with your work last year but have yet to ever invest: I have only used savings accounts. So, on top of “Am I an idiot?” my question is, what are your thoughts on opportunity cost in investing? I have almost $100K saved, but I also need some funds available to run a business venture I’m starting. Is it best to invest as much as possible and use a line of credit to fund daily spending? Or better to always be in the black and invest less?
CCP: I can’t comment on your specific situation, but no one is an “idiot” if they don’t invest. If someone plans to start a business, then it’s entirely reasonable to hold cash for that reason (and probably an emergency fund, too, in case the business fails). Investing that cash and using credit to fund the business is adding a double layer of risk.
msvolkl: What would your suggested asset allocation be for two people with defined benefit pensions, both age 30? Would you suggest being more conservative (don’t need to chase higher earnings due to pensions), or taking more risk due to the safety net of the pensions?
CCP: This is a great question, because you can make an argument for both. You have less need to take risk than those without a pension, but also more ability to take risk if you desire. So in the end it comes down to your comfort level.
TradersJoes: Been following your blog and using the CCP balanced portfolio for registered and cash accounts through my discount brokerage. I hold the same three ETFs in each account and rebalance every six months. With a portfolio over $500K, what are the advantages of switching to a full-service advisor vs. continuing to manage on my own?
CCP: Advisors can generally add value in the following situations: the investor has no interest in devoting time and energy to managing the portfolio (not the case here, I’d say); the investor needs financial planning as well as investment management; the portfolio is large and complicated (multiple accounts, some of which are taxable) and requires more expertise; the advisor can impose a discipline the investor lacks; and the advisor can do all of this for a reasonable fee.
pfcguy: I have an actively managed portfolio of >$250,000 managed by professionals. It consists of ~25 stocks, bond ETFs, and an international ETF, and a fee of 1.5% per year. They also provide financial planning, life insurance advice, etc.
I can think of a number of reasons to switch to a passive/index strategy like a CCP model portfolio of ETFs. Can you think of any advantages to stay with active? Are there things a portfolio manager does that I would not get from a passive/index portfolio?
CCP: I think your question is less about active vs. passive and more about advisor vs. DIY. You can reduce your costs by building your own Couch Potato portfolio, but if you get value from your advisor in terms of planning, discipline, etc., then switching to DIY may not really improve your situation overall.
CrasyMike: Here and there someone will post asking if a market-linked GIC is appropriate. This person will typically have a short-term goal that requires limited to zero risk, but wants to figure out how to get the “best possible return.”
I’m sure a high-interest savings account is an appropriate option for this person, but if they are willing to accept the possibility of zero return on investment then why not a market linked GIC? What is so inherently wrong with them?
In this post you point out that some of them are a total rip-off. But are there any market-linked GICs that are not a total rip-off—a limited upside, but still better expected return than a regular GIC?
CCP: I’m not aware of any product that promises a meaningful upside and also no risk of loss. Market-linked GICs are often built in a similar way to the homemade one I described in the post linked above, but they layer on hefty fees and may even cap the upside.
RE: “If they are willing to accept the possibility of zero return on investment then why not a market linked GIC”? I guess I don’t think one should ever accept the possibility of zero return with such a limited upside. I would rather just buy a plain vanilla GIC and accept the guaranteed return.
Jabb: My RRSP is all ETFs, but years ago I became enamoured with the SPDR ETFs where I could allocate my money into ETFs holding specific sectors. Is this majorly hampering my compounding returns?
CCP: I can’t know if it’s hampering your returns in the short-term, but tinkering with narrow, sector-specific ETFs is likely to be a major distraction over the long term. I recommend simply using total-market ETFs and avoiding trying to guess the next hot sector.
@Nick: Please see my model portfolios for my general suggestion, which is to hold roughly equal amounts in Canadian, US and international equities.
I have a quick question regarding TFSAs.
I have about $10,000 in my emergency fund which is in a TFSA savings account and about $15,000 in my TFSA index investment fund. I plan to grow my emergency fund to $20,000 and have around $35,000 of contribution room.
In order to maximize the tax benefits, would you recommend I move my emergency fund to a regular non tax sheltered saving account so I have more contribution room for my TFSA investments or does it not really matter? Thanks!
@KW: It’s fine to keep an emergency fund and investments in a TFSA if you have plenty of room. But if you have a maxed out TFSA, then you’re right that it would make more sense to fill the TFSA with investments and hold your emergency cash outside. The investments have a higher expected return, so you’d be making better use of the tax shelter. Moreover, if you need to dip into the emergency cash, you won’t have to keep track of the TFSA withdrawals and risk accidentally overcontributing.
@KW: If you are already a TD customer, then I suggest you open accounts with TD Direct Investing. This brokerage is the only one that allows you to buy e-Series mutual funds as well as ETFs. Once your accounts are open and you have transferred the money from Tangerine, you can decide whether you are comfortable trying one of the asset allocation ETFs. If you decide it’s not your thing, you won’t have to switch brokerages: you can just stay at TD and use the e-Series funds.
I actually think an asset allocation ETF might be easier than using TD e-Series funds, because you will never have to rebalance. You can make one trade, set up a DRIP, and you’re good to go. But one exception would be if you are making small monthly contributions: if that’s the case, the $10 trading commissions will eat you up, so the e-Series funds are definitely a better choice.
Thank you for answering my question!
I have one more quick question:
I am planning to transfer my Tangerine index funds to TD E series sometime within the next year in order to reduce my fees. My portfolio is fairly small at the moment, about $30,000 total for both RRSP and TFSA, however, I hope to have around $50,000 by the end of this year.
I would like to keep things simple while reducing my fees. I don’t have any experience balancing my portfolio or using a discount brokerage yet but I am planning to learn and doing more research.
If you were me, should I transfer my tangerine investments to TD E Series first (I’m a TD customer as well) or go with an even cheaper option, such Asset Allocation ETFs? I like that these ETFs are automatically balanced but again, I don’t have experience buying ETFs so would probably be more comfortable switching to TD E Series first.
Any thoughts or feedback would be greatly appreciated, thanks!
Thanks for the informative reply Dan, I’ll do just that!
Can you specify what you mean by “set up a DRIP”?
In regards to ETFs, I understand it’s better to make 1-2 big trades per year instead of monthly contributions to minimize fees. Is there a minimum amount I should be aiming to have before making a trade? I’m assuming I should be saving this amount in a regular savings account before using it to purchase trades for my ETF, correct?
To give you an idea, I am contributing a couple thousand per month to my Tangerine index funds at the moment.
Should I be worried if the Asset Allocation ETFs you recommend (Vanguard and iShares) are new and don’t have any history about their performance?
Lastly, do you have recommended resources to learn more about trading ETFs?
@KW: DRIP = Dividend Reinvestment Plan. Most brokerages can arrange to have ETF distributions (dividends and interest payments) reinvested in new shares. This is less important if you are investing new cash every month. but convenient if it’s an account where little new money is added.
If you are paying $10 per trade, I would tend to avoid trades smaller than about $5,000 (or 0.2% of the trade).
No, there is no concern about the short track record of the asset allocation ETFs. The underlying ETFs all have long track records and the providers (Vanguard and iShares) are the largest players in the industry.
I’m 27 years old. I just began saving one year ago and after becoming debt free, have built an $8,500 emergency fund (3 Month reserve) in a TFSA, and $3,500 in a TFSA Investment (Tangerine Balanced Growth). I’ll be adding $5,000 to the Investment account this year, and opening an RSP Investment account next month with a $5,000 purchase (likely Equity Growth if I stick with Tangerine). I’ve been educating myself on investing and ETFs for the past year now and feel ready to open a discount brokerage account (likely BMO IL). I’ve read your blogs regarding Model Portfolio’s and know that you suggest keeping with a Tangerine fund until one has exceeded $25k to avoid paying more in purchase fees with ETFs. However as I’m understanding it with a balance of $15k under BMO IL, there would be no account fees, and I would only have to worry about purchase fees. If I keep my purchases to annual lumps, and even if I build a portfolio with an MER as high as 0.38% on each registered account would I not still be paying more under Tangerine?
Sorry for the long question, I appreciate your time if you’re able to get back to me.
@Kevin: Strictly speaking you might pay somewhat less by using ETFs, but in my opinion a disciplined monthly savings strategy is more important than a slight reduction in fees.
If you do use ETFs, you almost certainly should use a one-fund solution to keep trading to an absolute minimum.
Hi Dan, and thanks for reading.
I’m 56, and recently retired. Hence, I’m pretty cautious. I see fear and greed in the equity market, so I am moving to fixed investments. I have enough money, as long as I don’t lose it. :-)
So for a fixed equity investor, I am wondering if I am missing some obvious vehicles. I look at Corp Bonds and GIC’s. The GIC’s pay around 2.5 – 3 percent, and the corp bonds about the same (usually looking at 3 or 5 year view) In my view I usually take Corp Bonds, for liquidity reasons, even though I don’t plan on touching them.
Is there some other vehicles I should be investigating. When I started this active management of my portfolio I really figured I could make 3% pretty easy, but it’s turning out harder than I thought.
@Jerry: Thanks for the comment. I think you’re right to recognize that there is no guaranteed 3% unless you lock in for four or five years in a GIC. It wasn’t so long ago that even 2% was hard to find. Depending on your risk tolerance you may want to consider adding some equity component to your portfolio, even if it’s only 20% or 25%. Only the most risk-averse investors should be 100% fixed income, and indeed, you can argue that adding a small equity component actually reduces your overall risk.
My husband and I are trying to minimize the costs (taxes, fees, etc) associated with our investments. We are in our early 30s, have an RPP through my employer, an emergency fund in our TFSAs, about $6000 in our RRSP which is currently in a Tangerine growth portfolio, and a mortgage to which we make occasional prepayments. We probably won’t max out our RRSP and TFSA contribution limits any time soon, but we are very diligent about making monthly contributions to them. We’d like to move the RRSP to an investment account with lower fees and SRI options, so we’ve been looking at Questwealth’s SRI growth portfolio and Wealthsimple’s SRI growth portfolio.
I’m concerned about the potential high cost of currency conversions and tax implications of holding USD in an RRSP (if we do choose either Questwealth or Wealthsimple), but I can’t figure out how much of a difference these will make. What are the tax implications of holding one of these portfolios in an RRSP? Would it be better or worse than going for an asset allocation ETF like Vanguard’s? (I’m not sure we’re ready for a full DIY model yet.)
Thank you so much!
@Lise: It’s hard to know the cost of currency conversion if Questrade or Wealthsimple are doing it for you. I would imagine they get institutional rates, but they might not pass those savings on to their clients. There is a small benefit to suing US-listed ETFs in an RRSP (a reduction in foreign withholding tax on dividends), but in my view at the $6,000 level it is not worth switching out of Tangerine to a robo-advisor that would be only marginally less expensive. (If the SRI component is the more important reason for the switch, then that would be different.)
The reduction in foreign withholding taxes in on US equities if you use a US-listed ETF is about 0.30%. If US equities is 20% of the portfolio, then the cost savings works out to about $3.60 per year ($6,000 x 20% x 0.30%). I think you will agree this is a non-issue. At this point in your lives I would suggest continuing to focus on paying down your mortgage and saving what you’re able to. Tax optimization can wait.
Thanks so much for your contribution on this site and your podcast, I enjoy following both.
I have a TFSA transfer question. I thinking of selling my TFSA mutual fund and moving the proceeds to my TFSA iTRADE account where I will purchase an ETF. Would this be considered a withdrawal of TFSA contribution room for the current taxation year?
Thanks in advance,
@Victor: As long as you fill out the appropriate transfer forms, moving assets from one TFSA to another (or from one RRSP to another) is not considered a withdrawal, so there will be no tax consequences and no effect on your contribution room.
Hi there, I am clueless on investment. At the moment, I am not sure what to do. I want to invest on international stocks. Do I need to setup a bank account for this investment?
Hi Dan, I’ve followed CCP for many years, using a combination of both index ETFs and TD e-series funds. I’m very happy with with the overall investment performance results. Thanks for all the great advice over the years
However, today I received a pile of proxy voting forms from TDAM regarding changes that TD is proposing for the e-series funds. It seems they want to change the investment objectives (the index I suppose?). Do you have any insight on what TD is trying to do, and would it be best to vote for or against the proposed fund changes?
@Larry: Stay tuned, I will be writing about the TD e-Series changes shortly.
I have been following the CCP approach for a number of years and really appreciate your insights on personal finance. Having listened to all of your podcasts, I understand that trying to time the market is usually a bad investment strategy. However in my personal circumstances, I wonder if some market timing could indeed be the right thing to do. I have recently sold a property following a separation and have invested the proceeds in my TFSA, buying the Vanguard VGRO (which is the ETF I am buying for my retirement savings). The idea would be to have those funds readily available should I want to buy property again in the coming years (say 2-4 years). I am in my mid-thirties. The recent hiccup in the market made me realize that should there be a downturn in the near future, my investment could be in the red when I want to buy and would therefore realize a loss. This seems to be a very plausible scenario as everybody seems to foresee a recession sooner rather than later. My initial reaction is to disinvest and keep those funds in a GIC or a similar product such that I have the funds available when I want to buy property (and “hopefully” enjoy the benefit of a slower real estate market). What do you think of this approach? Sounds like market timing but seems to be the right option. Thank you!
@Julien: This is not about market timing, it’s about choosing the appropriate investment for your goal. If you are planning to use your money within 2 to 4 years, investing in equities (and VEQT is all equities) is completely inappropriate. A savings account or short-term GICs are the only suitable choices for a goal with such a short time horizon. This is always the case, whether a recession seems to be looming or not. Stocks are only appropriate as long-term investments: minimum 5 years, preferably more.
@Dan: thank you for the help and clarification!
@Brody I’d also be curious to know what Dan thinks on the HSBC Wealth Compass mutual funds that are essentially a mutual fund wrapper of a low-cost couch potato portfolio from BlackRock Canada’s iShares unit. Yes, it does have a modest allocation to cash of around 5%. At the time you posted your comment, MER ranged from about 0.85-0.96%, which in and of itself was lower than either of Tangerine’s index mutual fund portfolios (1.07%) or the CIBC index mutual fund portfolios available to Simplii Financial customers with an approximate 0.05% MER rebate. Since then (May 2019), HSBC has lowered the management fees on these funds by 0.25%, bringing the expected MER down to around 0.60-0.70% (their website won’t show the updated MER until next year in compliance with provincial securities regulations).
They’re not as low cost as TD’s e-Series funds or the single-ticket asset allocation ETFs, but I would argue on both costs and portfolio construction, they’re even more attractive to most of the robo-advisors (ex. Questwealth Portfolios), especially when you consider most of the robo-advisors have either (a) been paring back the added services that they offer, elevating such services to higher tier accounts or (b) many people do not take advantage of these services and are attracted mainly to the automatic rebalancing, which this offers. As well, the tracking of the cost base should be more automated as it is often is with mutual fund accounts.
For those reasons, I think Dan’s alternative model portfolios page should be updated to at least include HSBC Wealth Compass.
Hope your doing well in these crazy times. Thank you for this website, your podcast and your advice over past several years. I’ve been a deciple of yours ever since I found your site back in 2016, Here’s not such a simple question, that I should not have to answer if I planned correctly but can be an eventuality in life. Let’s say you have a 100k investment portfolio using 25%:75% fixed to equity using ZAG, XAW and VCN. And, you are aware of the tax benefits so you have 25k of ZAG in your RRSP, 50k of XAW in your TFSA and 25k of VCN in your cash account. (please overlook the fact that the 25k in cash should be in a registered account). If you needed to withdraw 25k of funds form your investment what would be the best plan to use? Would you need to consider the current state of the market? For example, if the markets was down withdraw from ZAG and then re-balance or if the markets were up than withdraw from your TFSA and the re-balance
Is there a best way to approach this?
@Paul: Right off the top I think we can agree that taking the money from the RRSP is almost certainly a mistake, as that would be fully taxable and you would lose the contribution room forever. So that leaves the TFSA or the non-reg. If selling the holding in the non-registered account would result in a significant taxable capital gain, then it likely makes sense to take the money from the TFSA (you can replace it later). If selling the holding in the non-reg account would result in a loss, then it would likely make sense to take the money from there. You can use the loss to offset a future gain.
Once the funds are withdrawn you can switch to a one-ETF portfolio and use the same holding in all the accounts to simplify these decisions in the future.
Hi Dan. I plan to have no income in some tax years, except for ETF dividends paid in my non registered accounts. For these tax years, I would like to intentionally realize capital gains on the ETFs in my non registered accounts in order to raise their ACBs. Because of my low income, I expect to pay no income tax on these capital gains.
However, there are trade costs incurred from selling and repurchasing an ETF (such as the broker fee and spread). I would like to avoid these trade costs. Am I able to voluntarily pay capital gains on my income tax return for an ETF which didn’t otherwise have any activity that would trigger a capital gain according to CRA rules of actual or deemed dispositions?
If so, then you can ignore the second part this question below.
If I am not able to voluntarily pay a capital gain without an official trigger, then perhaps I can create an artificial trigger: I can gift a portion of my ETFs to my brother and then he can instantaneously gift these same ETFs back to me at the same price. My brother does not own any similar ETFs in his non registered accounts so he wouldn’t be concerned about affecting his own investment ACBs. Would this strategy be accepted by the CRA?
And as a further complexity, I own ETFs in a non registered joint account with my mother. I am 100% beneficial owner of the ETFs and my mom is joined to the account for right of survivorship. Note that I am not a legal dependent of her.
Instead of gifting ETFs to my brother, I could instead declare an ETF gift to my mother within this joint account so that now she is partly a beneficial owner of the ETF. Then she can instantaneously gift the ETF back to me at the same price so that I am 100% beneficial owner once again. In this case, there would be no actual documented transfer so the CRA and bank wouldn’t even know it happened. However, I would declare the capital gains on my income taxes appropriately.
I understand that this inquiry is much more related to income taxes than couch potato investment strategies.
@Phil: The answer to your first question is no, you cannot ask your brokerage to trigger a deemed disposition of an ETF for tax purposes: you would actually need to sell the units. (Although I have heard of this being done with mutual funds.) Regrading the other suggestions, I’m going to be honest and say that it sounds like you’re dramatically overcomplicating your situation for the sake of avoiding the relatively modest cost of making a transaction or two per year. You may also be inviting inquires from CRA. I would just accept the bid-ask spreads as a cost of investing.