Ask Dave: Which Broker to Choose and Couch Potato Technique

A reader recently asked me:

I hope it’s not too much trouble to ask, but what broker or bank would you suggest that I use for my self-directed RRSP? I have Scotia bank for my mortgage, but TD looks like they have an interesting setup for the investor. Low fees and no fees are important to me of course, other vise it defeats the purpose. I plan on doing the “Couch Potato” approach so I should only be buying and readjusting once a year (no monthly purchases necessary).

Do you have any comments on the “Couch Potato” technique?

My answer:

I use E*Trade and their commissions are super cheap. I think TD will allow you to do “wash trades” where you sell a USD ETF and buy another one without having to convert to CAD. They will only do this over the phone, but I have heard that they will do it.

Re: Couch potato technique. I don’t know exactly what it is. It sounds like it involves putting your money into 2-3 index funds in some simple allocation like 33-33-33 or 50-50 and rebalancing only once per year. The most cost effective way to do that would be to save up cash throughout the year and then buy some investments (and sell if necessary) once per year to rebalance. Eventually your portfolio will become much larger than the cash you will put in annually so the “cash drag” is not that significant relative to the size of your portfolio. I agree that investing in low-cost passive investments like indexes are a great way to invest and also believe that everyone should stick to some initial asset allocation and rebalance when necessary. The couch-potato technique is not really much different from mine. I wait until I have over $2000 in cash in my RRSP rather than waiting until some anniversary date, so I end up buying more than once per year. I also try to rebalance my investments and I invest in index ETFs which are passive low-cost investments.

Ask Dave: USD Holdings in an RRSP

A reader recently e-mailed me with a question. Here it is:

Hi Dave,

Just a quick question, please.

I saw that you included Vanguard funds in your RRSP holdings but I am confused about that. I thought Vanguard only sells their funds to Americans (not to Canadians) so how are you doing that within the RRSP?

My answer:

Nope, anyone can by Vanguard ETFs. Not sure what you mean by “funds”. If Vanguard also has mutual “funds” those might be different. But their ETFs are just like stocks so you can buy them in the same way that you can by stock in other US companies.

He continues:

I am ready to open a self-directed RRSP for the first time. My wife is an American and has Vanguard funds and we just can say enough about them. I would love to include Vanguard funds (read index/ETFs) in my RRSP as well but how do I do it? Can I acquire them within any self-directed RRSP account company?

My answer:

I see, you DO mean index/ETFs. Yes all companies should allow you to buy them. The only annoying part is that no broker allows you to keep US cash in your RRSP (even though by Canadian law that is allowed). The consequence of that is that if you own VTI in US dollars and want to change it to VWO in US dollars you have to sell it, at which point it gets converted to Canadian dollars and then buy VWO at which point it gets converted to US dollars. So you get dinged on the exchange. If you only did this every 10 years or something like that, it would not be a huge deal (compared to the gains/losses you made on the underlying investments). See an article of mine, “Foreign Exchange Costs Associated With USD Investments in an RRSP” for related calculations. There is currently a lawsuit going on against BMO to stop the practice of not allowing Canadians from holding US cash in their RRSPs (even though it is allowed).

Some Minor Rebalancing: Bought XRB

There was some cash piling up in one our RRSPs again so it was time to buy something with it. I entered in my current portfolio into a spreadsheet that I have been using for probably over five years now. Once I enter in the current values of every part of the portfolio it tells me how much of each investment I would need to buy (or sell) in order to make things balance out. This assumes I sell my investments and buy others (which I don’t, I just buy more of the investments I have with available cash). So the spreadsheets numbers don’t exactly mean much. Basically it gives me some idea of how far off my portfolio’s asset allocations are from my desired asset allocations. I was wrestling last night with the decision of which investment to buy. I had about $2400 in spare cash. My holding in iShares MCSI EAFE International Index ETF (XIN) where a bit lower than the desired. $1000 or more into it and it would be balanced (bare in my mind that I won’t be splitting up this $2400 at all; I just want one transaction here). So if I put $2400 into XIN it would be more than balanced. Which is fine. Some of the other investments that I had small holdings in, such as Vanguard’s Emerging Markets Index ETF (VWO) and iShares Real Return Bond Index ETF (XRB) had much larger deviations from their desired/original allocation relative to their original allocation. So maybe I should be buying some more of those? So I modified my spreadsheet by adding a column that showed the percent change between the desired/original and actual allocations. I decided that since XRB had declined the most recently, and it’s actual allocation was the most below the desired, in relative terms, that I should buy some of it. I only needed to put in about $500 more into XRB to rebalance it. Buying $2400 more of XRB would put the actual allocation well above the desired. Like driving a boat, I’ve overcompensated a bit but that’s ok.

The most important thing I am trying to do is to minimize cost by only incurring one buy transaction every time I have enough money to reduce my commission to 1% of the trade’s value. E*Trade trades are $20, so I make a purchase every time I have over $2000 in cash. I never plan on selling in the near term, and finally, I try to add to an existing holding whose actual allocation is less than the desired/original allocation.