Dear Dave,
Firstly, I wish to compliment you on your excellent blog. Your posts are simple and they have certainly helped me navigate towards a passive portfolio. Please keep up the excellent work.
Why thank you! Keep reading, tell your friends. And sorry for taking so long to respond to this, I’ve been quite busy.
I know that you are not in the business of giving financial advise, but I was wondering whether you could provide some guidance, or post on subjects related to my current situation. I am a relatively young investor, like you, (25) who now has a steady job and am looking to invest for the long term. I have been investing for a while now and have built up savings of, let us say a fictional $100,000, primarily of mutual funds, including some index funds. I currently use TD Waterhouse’s self-directed brokerage.
My portfolio is as follows:
TD Canadian Index-e
TD Monthly Income
TD Balanced Growth
TD Dividend Growth
Canadian - 12%
TD International Index currency neutral
Cundill International Value
Trimark Fund SC
International - 26%
Vanguard Total Market E.T.F. - VTI
RBC O’Shaughnessy US Value
US - 13%
TD Latin American Growth
Emerging Markets - 2%
GIC (one year, 3.75% matures in Dec. definitely can cash this earlier)
Corporate Bond ($160 a month)
Fixed Income, Bonds - 43%
Cash - 4%
Reminds me of my old portfolio at TD Mutual Funds (not Waterhouse, I had a mutual fund-only account at TD, used to be called TD Greenline Mutual Funds). Lots of funds with a lot of the same holdings; I had TD Canadian Index-e, TD Balanced Growth, TD Dividend Growth on the Canadian side. 3 International funds, 2 US Funds, etc… As my former advisor said to me “with so many mutual funds, what you’ve got is basically an index but with a high MER.”
Most of my portfolio is outside of an RRSP (20% is in RRSPs - I cannot really contribute much more to my RRSP). So if I wanted to switch my actively managed funds into ETFs, how should I do it? I am aware of the early redemption fees, but aside from that, do I just sell them and take that big chunk of cash and buy my proper allocations of ETFs? Are there tax consequences that need to be thought about? I know your thoughts on timing the market, so should I just buy everything I need on one day (the VTI I bought at $150 a couple weeks ago, and I know I shouldn’t even think about it)?
First of all you can do the switch to ETFs outside or inside, and you won’t incur any more costs either way. If you do it outside, you can transfer them into your RRSP later “in-kind” without having to sell them. As far as the tax consequences go, outside an RRSP you will have capital gains (losses) to pay taxes on if you sell anything, or when you transfer them into an RRSP. I think when I did it a long time ago, I sold them outside the RRSP and incurred a capital gain, and when they were sold they went into my linked bank account. I then moved that money into an RRSP cash account and then bought investments from there. I was selling and buying no-fee mutual funds outside and inside respectively so I didn’t incur any costs. I think the only tax consequence you should really worry about is to maximize your RRSP contributions every year and that’s about all you can control. Of course, since you are probably planning to keep VTI inside your RRSP, just transfer the VTI in-kind and you will incur a capital gain (loss) on any gains (losses) since you bought it.
Next, don’t switch all those things into ETFs if your commissions are going to be huge relative to the size of your portfolio. If you are going into 4-5 ETFs and the total commission is going to be about $100, I would say that if your portfolio is $10,000 or more, go ahead.
As for your timing try not to even worry about what the market is doing. Pick an asset allocation that you are comfortable with and then go with it. Switch all at once to a new allocation if you want.
With RRSP space that I do gain each year, which investments should be prioritized to be bought within an RRSP?
I guess if you don’t have the RRSP space for everything yet, it would make sense to put non-Canadian stuff into the RRSP first. The Canadian stuff doesn’t suffer from as much double-taxation as the non-Canadian stuff. I cannot remember what the difference in taxation is between dividends and capital gains (I don’t have any non-RRSP investments at the moment, just some debt :-)) but it’s probably not enough to worry about.
(Aside: when I say double-taxation, I mean that money outside an RRSP is taxed once (as income on your paycheque) and then again when it earns interest or realized capital gains, whereas inside an RRSP it is only ever taxed once (as income).)
It seems that my allocation for bonds/fixed income is too great, but that is only because I did not know exactly how to allocate it, in the end, I only want about 20% bonds.
How did you feel about the recent market downturn? Were you glad to have so much in bonds/cash? If so, keep your current allocation. If you didn’t care too much and think that you could have suffered more and not cared, go with less. Just don’t worry about timing. If you switched to more stocks now, the equities market could continue its fall over the coming year. If you keep your current allocation, the equities market could just as easily bounce back over the coming year as well and you might miss it. You cannot even hope to predict the future.
I recently thought about my emotions during the recent slide, and in retrospect I kind of wished I had a little bit more bonds/cash than the 20% I have (maybe 30%?). I am going to add 5% REITs to my portfolio eventually, so I will eventually have 25%.
I was doing a systematic investment plan where money was taken out and a number of the mutual funds were purchased on a biweekly basis. Now I have stopped the plan and will accumulate money until there is enough to purchase the right ETF (VTI, VEA, VWO, XIC).
I used to do what you did with mutual funds as well. Biweekly, and I would purchase several different funds. Now I also save up cash in my RRSP until I have enough to buy an ETF. I usually wait until. I have $2000. Since I pay commissions of about $20 that means the commission will be 1% of the purchase amount.
I know this is a long rambling post, but any guidance you might be able to share, even if not directly but through future postings, would be much appreciated.
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