A Life-Long Do-It-Yourself Investing Plan

I don’t claim that this plan is the best possible or that it will work for everyone.  I do claim that the vast majority of people who follow different plans will get worse outcomes.

Most of my readers will be more interested in the later stages of this plan.  Please indulge me for a while; the beginning lays the foundation for the rest.

Starting out

Our hypothetical investor – let’s call her Jill – is at least 18, currently earns less than $50,000 per year, and has a chequing account at some big bank.  She has a modest amount of savings in her account earning no interest.  It’s about time she opened a savings account to earn some interest on her savings, but big bank savings accounts barely pay any interest.

So, Jill opens an online non-registered savings/chequing account at a Canadian bank that is not one of the big banks.  She chooses it because it’s CDIC-protected, transactions are free, and it currently pays much higher interest than the big banks offer.  If this bank ever changes its policy on offering competitive interest rates or free transactions, Jill will just switch to somewhere else that offers better terms.  It’s not worth switching for a small interest rate increase or for a limited-time offer, but if she can ever get say 0.5% more elsewhere, she’ll go.

For now, Jill probably needs to keep a chequing account at a big bank.  Accounts at smaller banks sometimes need to be linked to some other bank account, and you can’t access a bank machine through most smaller banks.  It’s also good to be able to talk to a big-bank teller the rare time you need a certified cheque, to make a wire transfer, or to pay some bill you can’t figure out how to pay online.

Jill also opens a TFSA at the small bank.  It pays even higher interest, and she might as well earn the interest tax-free.  Sometime much later, Jill may want all of her TFSA room devoted to non-cash investments, at which time she can close this TFSA.  But for now her TFSA will hold some cash.

At this point Jill is learning about how TFSA contribution room works.  She’ll find that it’s best not to deposit and withdraw too often because you don’t get TFSA room back until the start of the next calendar year.  She should use her regular non-registered account for more frequent transactions.

This plan will work well for Jill as long as she has fairly short-term plans for her savings, such as going to school.  As long as she will likely need her savings within 5 years, there’s nothing wrong with keeping it in cash earning as much interest as she can get safely and conveniently.

Let’s look at some potential distractions Jill faces on her current plan.

The bank teller says Jill should open a savings account and get a credit card.

Jill needs a good savings account, such as what some small banks offer, not a big-bank savings account that pays next to no interest.  If Jill gets a credit card, she should look for one that suits her needs, not take the conflicted advice of a teller.

All the cool kids are buying Bitcoin.

Jill is level-headed enough to know that she knows next to nothing about investing, never mind wild speculation in Bitcoin, or whatever is currently holding people’s interest.

Savings Start to Grow

At some point, Jill’s savings will grow beyond what she thinks she will need within 5 years.  Perhaps she has graduated, is working full time, and has no immediate plans to use all her savings as a down payment on a house.  She doesn’t carry credit-card debt, has paid off her student loans, and has no other debts.  We’ll assume for now that Jill has no group RRSP at work and is making less than $50,000 per year, so that she’s not in a high tax bracket and has no reason to open a self-directed RRSP.

Jill will still hold some cash savings she might need in the next 5 years in her small bank savings accounts.  Now it’s time to start investing in stocks with her longer-term savings.  Jill knows that stocks offer the potential for great long-term returns, but she has no idea which ones to buy.  Fortunately, she’s heard that even the most talented stock-pickers often get it wrong, so she’s best off just owning all stocks.  This may sound impossible, but the exchange-traded fund (ETF) called VEQT holds just about every stock in the world.  She can own her slice of the world’s businesses just by buying VEQT.  There are a few other ETFs with similar holdings, and it doesn’t matter much which one Jill picks.  (I mention VEQT because it appears to be among the best available stock index ETFs right now; I get no money or other consideration for mentioning it.)

Jill opens a TFSA at a discount brokerage.  It’s okay for her to have both this TFSA and the one holding just cash at a small bank, as long as her combined contributions don’t exceed the government’s limits.  Any savings she adds to this new TFSA she uses to buy VEQT.  That’s it.  Nothing fancier.

The biggest lesson Jill needs to learn while her stock holdings are small is to ignore VEQT’s changing price.  Many people hope that their stocks won’t crash.  This is the wrong mindset.  Stocks are certain to crash, but we don’t know when.  We need to invest in such a way that we can live with a crash whenever it happens.

Jill should just add new money to her VEQT holdings on a regular basis through any kind of market, including a bear market.  Trying to predict when markets will crash is futile.  She needs to accept that she can’t avoid stock crashes and that prices will eventually rise again.  This lesson is so important that Jill needs a different plan if she will panic and sell the first time VEQT drops 20% or more.  Learning that stock crashes are inevitable and calmly doing nothing different through them is critical for Jill’s investment future.  Fortunately, in the coming years, Jill will focus on the safe cash cushion in her savings accounts when VEQT’s price drops.

What distractions could throw Jill off her plan now?

The bank says they can help Jill open a TFSA and invest her money.

The bank is just going to steer Jill into expensive mutual funds that will likely cost her at least 2% per year, which builds up to a whopping 39% over 25 years.  As incredible as it sounds, 39% of her savings and returns would slowly become bank revenue during those years.  It’s no wonder that bank profits are so high.  In contrast, VEQT’s fees are just 0.25% per year, which builds up to just 6% over 25 years.

The smart, sophisticated twenty-somethings are getting rich day-trading on Robinhood.

No, they’re not.  We only hear the stories about rare big temporary successes, not the widespread mundane losses.  Very few traders will outperform VEQT.  Over the long term, Jill will be ahead of more than 90% of investors and an even higher percentage of day traders.

Investing has to be harder than just buying one ETF.

In most endeavours, working harder gives better results.  With investing, you need to learn enough to understand the power of diversified, buy-and-hold, low-cost investing.  Beyond that, taking courses in stock picking will just tempt you to lose money picking your own stocks.

VEQT’s price is dropping! What should I do?

Inevitably, stock markets crash.  It’s hard to know how you’ll react until you experience a crash.  If Jill decides she really can’t handle a sudden VEQT price drop, her best course of action is to gut out this market cycle until VEQT prices come back up, and then choose a different asset allocation ETF that includes some bonds to smooth out the ride.  She can then stick with this new ETF into the future.

Rising income

Jill’s income is now enough above $50,000 per year that it makes sense to open an RRSP account at her discount broker.  She also has a group RRSP at work, and she contributes the minimum amount required to get the maximum match from her employer.  She would have participated in this group RRSP even if her income was lower because the employer match is valuable.

Jill figures out how much she’d like to contribute each year to her RRSP at the discount brokerage.  This has to take into account her RRSP contribution limit, her group RRSP contribution as well as the employer match, and the fact that there is little to gain from reducing her taxable income below about $50,000.  If she wants to add even more to her long-term savings than these RRSP contributions, she can save some money in her discount brokerage TFSA.

Next comes the decision about what to own in her self-directed RRSP.  Once again, she buys only VEQT.  Nothing fancier is needed, and most people won’t do as well as just owning VEQT.

When Jill looked into the details of her group RRSP, she was disappointed that the fees were so high; VEQT isn’t one of the investment options.  But she can’t get the employer match without choosing among the expensive funds.  So, her plan is to learn the vesting rules of her group RRSP, and once she’s allowed to transfer assets to her self-directed RRSP without penalties or losing the company match, she’ll make this transfer every year or two.  She’ll be careful to make these direct transfers from one RRSP to another rather than withdrawals.  However, when asking questions about the group RRSP rules, she’ll be careful not to reveal her plans to avoid the expensive fund choices.  The company operating the group RRSP may become less than cooperative if they know Jill has no intention of paying their excessive fees on a large amount of savings.

So, Jill now has VEQT holdings building in her RRSP and TFSA at the discount brokerage.  Her investment plan remains wonderfully simple.  But there are distractions ready to push her off this plan for easy success.

All the savvy thirty-somethings are talking about dividend stocks.

Most dividend investors are poorly diversified, but it’s possible to own enough dividend stocks to be properly diversified.  Does Jill really want to spend her time poring over company financial statements to choose a large number of dividend stocks?  Some people like that sort of thing.  Jill doesn’t.  She’s better off with VEQT.

Now that Jill’s savings are growing, surely she’s ready for a more sophisticated investment strategy.

Just about everyone who tries more complicated strategies won’t do as well as just owning VEQT.  Jill is best off just sticking with her simple plan.  She’s not keeping it simple because she’s not capable of handling something more complex.  It’s just that there’s no guarantee that a more complex strategy will perform better, and she’s not interested in doing the necessary work.  Jill used to be annoyed at people with more complex strategies because it made her feel dumb to have such a simple plan.  But now she just wishes these people well; she knows she has a smart strategy no matter what it sounds like to others.

Buying a home

Jill decides to buy a home in the next couple of years.  The cash she has in her savings account isn’t enough for a down payment; she plans to use all of her investments in her discount brokerage TFSA as well as $35,000 of her RRSP investments through the home buyer’s plan.

Suddenly, money that she didn’t plan to use for at least 5 years has become money she wants to use sooner.  So, she sells the VEQT in her TFSA, and sells $35,000 of the VEQT in her RRSP.  This protects her home-buying plans in case VEQT’s price suddenly falls between now and when she buys her new home.

Jill still wants to earn good interest on her cash, so she checks out the options for cash interest at her discount brokerage.  Unfortunately, the interest rates are not nearly as good as what some small banks offer in their savings accounts.  So, she opens an RRSP at her small bank, and arranges for TFSA-to-TFSA and RRSP-to-RRSP transfers from her discount brokerage to her accounts at the small bank.  She’s careful to make sure she isn’t making withdrawals, but direct transfers.

From now until she buys the home, she directs all new TFSA savings to cash in her small bank TFSA to build her down payment. But she won’t use all her cash on hand as a down payment, because there will inevitably be expenses with a new home.

After buying the home, she plans to direct new savings to paying down the mortgage.  She’ll still participate in her group RRSP, but she won’t contribute to her TFSA or self-directed RRSP for a while.  She wants to get the mortgage down to a less scary level in case mortgage interest rates rise.  Once the mortgage is somewhat tamed, she’ll resume adding to her TFSA and self-directed RRSP, and she’ll invest in VEQT.

New distractions as well as the old ones are ready to push Jill away from her simple plan.

Isn’t it better to invest than pay off the mortgage while rates are so low?

(Editor’s note: keep in mind this blog originally ran in 2021.)

This is good reasoning to a point.  It comes down to how stretched you are.  A quick test is to calculate what your mortgage payment would be if interest rates rise 5 percentage points.  If this payment would cause you serious problems, you’re probably best to pay extra on the mortgage for a while.  With her life ticking along so well, Jill sees no need to add risk.  Once the mortgage principal is down to a more comfortable level, she’ll resume adding to her investments.

Surely it’s finally time for a more sophisticated investment strategy.

Jill’s simple investment strategy is working well, and she’s busy with her new home, her job, and the rest of her life.  There’s no reason to believe a different strategy will work better for Jill.  As we’ll see later, there are ways for Jill to cut her investment costs, but her portfolio still isn’t large enough for the reduced costs to give significant savings, and she’s definitely not interested in doing the extra work necessary to get these savings.

Approaching retirement

Thoughts of retirement are entering Jill’s mind, but she’s not ready to stop working yet.  She’s amazed at how seemingly modest monthly savings have turned into large balances in her investment accounts.  She’s married now, and together with her husband they have 8 investment accounts including non-registered (taxable) accounts, TFSAs, RRSPs, a spousal RRSP, and a LIRA.  Across all these accounts, all they invest in is VEQT.  It couldn’t be simpler for DIY investors.

Jill still has a regular non-registered high-interest savings account (HISA); her only TFSA now (at the discount brokerage) holds only VEQT.  The HISA still holds cash she thinks she might need in less than 5 years.  This includes emergency savings and cash for anything expensive she anticipates buying.  Over the years she considered investing some of this cash in GICs, bonds, and other possibilities, but the interest rate on her account remained competitive with these other options, and having the cash ready at a moment’s notice is comforting.

Jill is starting to think about building her fixed-income investments anticipating retiring in less than 5 years.  This fixed-income allocation will include her HISA and some short-term bonds; she’s not interested in taking on the inflation risk and interest-rate risk of long-term bonds.  She chose the ETF called VSB for her bonds.  She plans to build her fixed income holdings slowly until it’s 5 times her annual spending by the time she retires.  All her stock holdings will remain in VEQT.

The family’s stock portfolio is now roughly a million dollars.  Even VEQT’s low 0.25% management expense ratio (MER) costs Jill $2500 per year.  She pays another cost as well: foreign withholding taxes (FWT) on the dividends of non-Canadian stocks.  This impact of this tax burden varies between registered and non-registered accounts and totals $2000 per year for Jill.

It’s possible to reduce Jill’s MER and FWT costs.  For example, there are U.S.-based ETFs that have lower MERs, and when they’re held in RRSPs/RRIFs, the U.S. doesn’t withhold dividend taxes.  Justin Bender has a portfolio he calls Plaid that cuts costs compared to VEQT.  My personal portfolio cuts MER and FWT costs by 0.29% per year compared to VEQT.  Benjamin Felix takes a different path to higher promised returns with his Five Factor Model Portfolio that seeks to give investors higher returns through exposure to known investment factors.  What all three portfolios have in common is their increased complexity compared to Jill’s plan.

So why shouldn’t Jill try to cut costs or get higher returns?  $4500 per year isn’t cheap.  Robb Engen made a compelling case for sticking with a simpler portfolio based on a single asset-allocation ETF, such as VEQT.  I’ll save further comment for the first distraction Jill faces below.

C’mon, don’t be a chump.  It can’t be that hard to run a portfolio that saves costs or boosts returns.

Running a portfolio with multiple ETFs and many accounts is a lot more work than it appears to be.  The complexity apparent in theory grows tenfold in practice.  Every decision we have to make is another opportunity for the recency bias baked into our brains to cause us to buy high or sell low.  Unless Jill would enjoy building a spreadsheet to automate a complex portfolio, it just isn’t worth her time and effort to try to save some of the $4500 she pays per year.  Many people who try to run a more complex portfolio will end up making costly mistakes that outstrip the savings they’re trying to achieve.  I run a somewhat complex portfolio with my big spreadsheet and scripts to send email alerts, but I tell my sons to just buy VEQT.

Why not pick your own stocks and do away with MER costs altogether?

For all but the best stock-picking professionals in the world, people are essentially picking stocks randomly.  Devoting countless hours to researching stocks ends up being no better than throwing darts.  To be adequately diversified, you must own many stocks.  The risks of owning too few stocks can be more costly than the small MER on VEQT.  Jill isn’t interested in devoting her life to researching stocks for what could turn out to be worse results than owning VEQT.

What about gold as an inflation hedge, or real estate for more diversification?

Unlike businesses, gold produces no earnings.  In fact, it costs money to guard gold.  Over the long term, gold returns have been dismal compared to stocks.  The array of businesses held by VEQT have vast real estate holdings.  Jill doesn’t need to buy more real estate.  There will always be investments that come with some sort of story, but Jill doesn’t need them.  She doesn’t need hedge funds, commodities, or IPOs either.

Retired

Jill’s thoughts have turned to how best to spend from her retirement savings.  She is maintaining her fixed-income allocation in a HISA and the ETF VSB for a total of 5 years’ worth of her family’s spending.  The rest of her portfolio in all discount brokerage accounts is still in VEQT.  She spends from her HISA, and each year she sells some VEQT to replenish her fixed income allocation.

She has decided what percentage of her portfolio she can safely spend each year.  This percentage rises with her age, similar to mandatory RRIF withdrawal percentages.  In the years before she starts collecting CPP and OAS, she actually spends more so that she can live as well now as she’ll live after getting these government pensions.

Jill considered buying an annuity for more income certainty, but the lack of inflation protection in available annuities put her off.  She might consider buying an annuity later in her retirement when inflation will have fewer years to erode fixed payments.

Jill has been following her plan successfully for some time now, but she still faces distractions.

Stocks are sure to crash soon.  Jill has to protect her portfolio now that she’s no longer earning an income.

People are always making scary predictions.  The truth is that nobody knows when stocks will crash or when they’ll shoot up.  Jill has her fixed income allocation to buffer stock volatility.  If a stock market crash would devastate her finances, she probably should have begun retirement with a fixed-income allocation of more than 5 years of spending.  Selling stocks when she’s nervous and buying stocks when she’s comfortable is unlikely to work out well.

An insurance guy has this great variable annuity with guaranteed minimum lifetime withdrawals.  Your money gets invested inside the annuity and if it performs well you get higher payments.  But you always have your guaranteed minimum payments.

Insurance companies invent lots of products that make it seem like you can have your cake and eat it too.  Somehow, rising markets will make you rich, and with falling markets you get your guaranteed income.  To complete the magic, the insurance guy gets a fat commission for selling the variable annuity, and the insurance company makes money too.  All the children in Lake Wobegon are above average.

Reality isn’t so wonderful.  Commonly, the fees applied to your investments within the variable annuity are very high, which significantly reduces the odds that they’ll perform well enough to give you higher payments.  Further, the guaranteed income typically isn’t indexed to inflation.  Decades of inflation crush the buying power of fixed payments.  It isn’t impossible for a variable annuity to be a good deal; I’ve just never seen one.

This pre-construction condo project pays 12% interest on a second mortgage.  That’s way better than the pitiful 1.5% interest on a HISA [as of 2021].

This is another example of an investment few people really understand.  If the borrower was likely to make the payments, someone who understands this business well would already have invested.  Whoever is selling this to Jill is hoping for a fat commission.  It’s dangerous to chase higher yield on money that’s supposed to be safe.

Conclusion

Jill’s plan was simple and she followed it successfully.  Her most difficult challenges were avoiding distractions and sticking with her plan.  There are many other plans that can work out well too, but constantly switching to shiny new plans won’t work out well.  More complex plans can seem sophisticated, but most people who follow such paths will get worse results than Jill got.

Michael J. Wiener runs the web site Michael James on Money, where he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007.  He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on March 31, 2021 and is republished on the Hub with his permission.