General

ETF investors sitting comfortably in the Balanced Growth sweet spot

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By Dale Roberts
Special to the Financial Independence Hub

In October I penned this blog post, The Balanced Growth Portfolio. The Investor’s Sweet Spot. A Balanced Growth model with typically be in the area of 70-80% in stocks and the remainder in bonds. It’s a growth portfolio, but with a modest allocation to bonds to reduce the price risks. As I often write, those bonds work like shock absorbers through market volatility or market corrections. They help smooth out the ride.

I’d call this model the sweet spot as it might offer the best balance of very good total return potential with less risk compared to an all-stock portfolio. It many periods it will deliver the best risk-adjusted returns.

In fact, in many periods the Balanced Growth portfolio model can deliver the same returns as an all-stock model, while taking on less risk. Stock market corrections become the great equalizer. The pure equity model will certainly outperform in a long bull market run, but then the stock market corrections come along and bring the stocks down to earth while the Balanced Growth model then moves into the lead. They might play a game of tortoise and the hare for many years or decades.

See my above post link for charts on that comparison.

Let’s look at the ETF holdings of Canadians

Industry statistics are published by the Canadian ETF Association. You can access the December 2018 report and commentary here.

The chart at the top of this blog shows the monthly breakdown of assets held in ETFs. Current Month is month’s end December 2018, Previous Month is November, of course. Keep in mind that the assets will be affected by the total inflows and outflows (purchases and sells) and also the market variance. The stock markets fell in December and that will bring down the total stock assets number.

 

We see that Canadian ETF investors are in that sweet spot of near 70% equities and 30% bonds. And the good news is that while the stock markets were pulling their little December hissy fit, investors were adding new monies to their ETFs: both Fixed Income and Equities. And you’ll see that Canadian ETF investors are acquiring within the Balanced Growth band.

We see that investors did respond to the stock market price risks and moved more monies into the fixed income side of the ledger in December. No problem there. Sometimes Mr. Market gives us a little love tap and reminds us that markets can go down in a hurry. We get a very considerate warning shot across the bow. On that here’s my Seeking Alpha article from one year ago Mr. Volatility is Asking You, Taunting You – So You Wanna Go?

Many of us might be getting a little flabby with respect to our risk taking ability. We have not been tested much in the last decade coming out of the Great Recession. We should always remember that markets can be volatile and they can fall by some 30%, 40% or 50% or more in a major market correction. I reminded readers of those risks in my first post to the Tangerine Forward Thinking blog with Why You Might Still Want Bonds In Your Investment Portfolio.

Ensure that you know your risk tolerance level and that your portfolio is best matched to you risk tolerance level. Have a more than solid investment plan but consider that emotional risk. From that Seeking Alpha article and offered by the most ferocious heavyweight boxer of all time, Mike Tyson …

Everyone has a plan until I punch them in the face.

Yes, Mr. Market may punch you in the face one day. Are you ready? I can take a punch in the market and in the boxing ring. I grew up with a boxing ring in the backyard so that my older brother could practice punching someone in the face as he prepared for and kept in fighting shape for playing Junior ‘hockey’. He only ever lost one hockey fight. Me and my face take full credit. Mr. Market has thrown a few punches too.

All said, be prepared.

How are Robo-Advised Canadians putting monies to work? 

Keep in mind that many investors will create their own ETF Model Portfolios through their discount brokerage. But of course there’s a massive move to the Canadian Robo Advisors, where investors can access digital and human advice that will then lead to the recommendation of risk-appropriate ETF portfolios. That risk assessment is key. Continue Reading…

FP: RRSPs still have at least 3 advantages over TFSAs

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My latest Financial Post column has just been published. It being the height of RRSP season, it looks at some well-known and some less well-known advantages RRSPs still have over the new kid on the block: TFSAs. Click on the highlighted text for the full story online: Three reasons why RRSPs still matter — and one of them you probably didn’t know. The article is also in Wednesday’s print edition on page FP6 under the headline RRSPs still matter despite rise of TFSAs.

The Tax-free Savings Account (TFSA), which was introduced just over ten years ago, is often described as the “mirror imaqe” of the RRSP. That is, the RRSP provides an upfront tax deduction by lowering your taxable income for the year you make the contribution. The TFSA does not, which can be a strike against it in some eyes; on the other hand, once you reach retirement, the TFSA comes into its own by NOT being taxable, and therefore not resulting in clawbacks of Old Age Security (OAS) benefits or (for very low-income seniors) the Guaranteed Income Supplement (GIS) to the OAS.

On the other hand, as many seniors are discovering to their chagrin, all those RRSP tax savings you enjoyed during your (hopefully) high-income earning years come back to haunt you: once the RRSP becomes a Registered Retirement Income Fund (RRIF) at the end of the year you turn 71 (the alternative is the unpalatable act of cashing it all out and being taxed then and there, or annuitizing), then you’ll be on the hook for forced annual — and taxable — RRIF withdrawals. Ottawa giveth and Ottawa taketh away.

But, as the FP piece argues, some decades can elapse between an RRSP contribution and the ultimate RRIF withdrawals, and when you add in the ongoing tax sheltering of an RRSP — on top of the upfront tax contribution — then the experts quoted in the piece believe the RRSP comes out, certainly if you’re at or near the top tax brackets.

Below is the arithmetic provided by Mathew Ardrey, wealth adviser at TriDelta Financial, which was too long to include in the FP version. He cites the example of someone who has $10,000 of income and can invest in either a TFSA or a RRSP:

 

Same tax rate
RRSP TFSA
Income before taxes to save $10,000 $10,000
Tax at 50% $0 ($5,000)
After-tax available to contribute $10,000 $5,000
FV with 5% return for 25 years $33,864 $16,932
Tax at 50% ($16,932) $0
After-tax withdrawal in retirement $16,932 $16,932
Lower tax rate in retirement
RRSP TFSA
Income before taxes to save $10,000 $10,000
Tax at 50% $0 ($5,000)
After-tax available to contribute $10,000 $5,000
FV with 5% return for 25 years $33,864 $16,932
Tax at 25% ($8,466) $0
After-tax withdrawal in retirement $25,398 $16,932
Higher tax rate in retirement
RRSP TFSA
Income before taxes to save $10,000 $10,000
Tax at 25% $0 ($2,500)
After-tax available to contribute $10,000 $7,500
FV with 5% return for 25 years $33,864 $25,398
Tax at 50% ($16,932) $0
After-tax withdrawal in retirement $16,932 $25,398

 

Tridelta Financial’s Matthew Ardrey

“The part of the example I would focus on, is what is a reality for many Canadians, their income is higher while they are working than in retirement. Because of this, there is a clear advantage of receiving the deduction at a higher marginal tax rate and paying tax in retirement at a lower marginal tax rate,” Ardrey concludes.

Foreign income taxed less harshly in RRSPs than TFSAs

But that’s not all! As the FP column mentions, there are at least two other advantages RRSPs have over TFSAs. One is that foreign income is taxed more in TFSAs than in RRSPs: Continue Reading…

Vanguard unveils 2 more Asset Allocation ETFs

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A year after Vanguard Canada shook up the ETF industry with its ground-breaking suite of three Asset Allocation ETFs (VGRO, VBAL, VCNS) it today followed up with two new iterations, bringing the total to five.

As you can see from the adjacent illustration, the two new ETFs include an all-equity ETF, VEQT; and a very conservative fund, VCIP, dubbed the Vanguard Conservative Income ETF Portfolio, which is 80% in fixed income. (The previous conservative entry, VCNS, was 60% fixed income). Both new ETFs begin trading on the TSX today.

Note that the color key above applies to BOTH funds: that is, Orange refers to four equity ETFs contained in both funds; blue refers to the three fixed-income ETFs that are present only in VCIP, since VEQT is 100% equity/orange. At least one sharp-eyed reader has noted the potential for confusion here.

In any case, the original suite of three ETFs were hailed by the financial press, including Yours Truly here and for the MoneySense ETF All-stars. The newcomers are further along the risk spectrum (100% equities) or further along the conservative income spectrum. And consumers have responded, injecting more than $1 billion into them, according to Kathy Bock, Managing Director of Vanguard Investments Canada Inc. Vanguard Canada now offers 39 ETFs, containing a total of C$17 billion in assets under management.

Here is the description of the two new ETFs contained in a press release:

Vanguard Conservative Income ETF Portfolio (TSX: VCIP) – The Vanguard Conservative Income ETF Portfolio seeks to provide a combination of income and some long-term capital growth by investing in equity and fixed income securities with a strategic allocation of 20% equities and 80% fixed income, made up of seven underlying Vanguard index ETFs.

Vanguard All-Equity ETF Portfolio (TSX: VEQT) – The Vanguard All-Equity ETF Portfolio seeks to provide long-term capital growth by investing primarily in equity securities with a strategic allocation of 100% equities, made up of four underlying Vanguard index ETFs.

Vanguard Canada head of product Tim Huver said “Canadian investors have embraced our ‘all-in-one’ asset allocation ETFs based on their sound portfolio construction, low-cost and simplicity. These ETFs have been among our most popular over the past year and we are committed to giving Canadians greater flexibility by offering two new investing options on both sides of the risk profile spectrum.”

Value for Money: Do you always get what you pay for?

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“This $6 bottle of wine tastes awful.” “What did you expect – you get what you pay for.”

It’s true, in most circumstances, that the quality of products and services increases as the price increases. You get what you pay for. When you cheap out on something, be it a bottle of wine, pair of jeans, or a manicure, more often than not you’ll end up disappointed. You might even end up paying more in the long run, having to replace the item or fix the mess you made when you cheaped out the first time.

One of the most common examples is with clothing. In this age of fast-fashion it’s not unheard of to find a t-shirt, pants, and a pair of sneakers – all of it – for less than $20. Anyone who’s ever shopped at Old Navy or Walmart can attest to this. But then what happens? The thin material starts to unravel, it’s improperly stitched, and it quickly wears out. Or, just as likely, it just doesn’t fit properly in the first place and so you never wear it.

I hate the term ‘investment’ when it comes to something that doesn’t have the potential to earn you money, but ‘investing’ in more expensive clothes can pay off. A well-cut suit, a timeless pair of shoes, work-out gear that doesn’t fray or pill after a few washes. Most of us can agree that spending more on a high quality item that will last a long time is worth the money.

Do you always get what you pay for?

But higher price = better product/service doesn’t always hold true. Take investing, for example. It’s widely accepted now that cost is the only reliable predictor of future returns. The higher the cost, the lower the expected return. The reverse is also true.

Canadian investors pay some of the highest mutual fund fees in the world and so it stands to reason that our expected returns will also diminish. We’re not getting what we pay for:  our advisors get paid and investors get short-changed.

Yet I’ve heard advisors use this argument – you get what you pay for – when trying to persuade their clients that low-cost indexing, or a robo-advisor, is an inferior solution to their actively managed model. Ridiculous!

Here are some other, hopefully, less controversial examples from my own personal experience where a higher price doesn’t always mean better quality. Continue Reading…

Pros and Cons of Vacation Timeshares  

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By Becky Williams

(Sponsored Content)

If you are like nearly everyone, the time that you spend on vacation represents some of the most pleasant and days of the year. You may spend a good deal of time trying to decide what will be the most amazing type of vacation you can take. One option you may want to focus on is obtaining a vacation timeshare. There are a number of significant benefits associated with a vacation timeshare.

A timeshare may not be for everyone and there are some factors that may make this type of vacation property not the perfect choice for you. However, by weighing and balancing the pros and cons of timeshare ownership, you will be able to make an informed, educated decision as to whether this type of vacation property makes the most sense for you. You will be able to find a vacation timeshare that is perfect for you today and into the future as well.

Guaranteed, reliable vacation

A primary benefit associated with a timeshare is that you have a guaranteed, reliable location to spend your precious vacation days. You do not have to spend an inordinate amount of time trying to find an ideal place to spend a vacation. You need only undertake that task one time when you select a vacation timeshare property the first time.

With a vacation timeshare, you know precisely what to expect. You will never again face a situation in which you are uncertain about what your vacation destination and lodgings really will be like. The reality is that this type of uncertainty, which is completely eliminated with a timeshare, has been a major reason why so many people have experienced vacation disasters.

An ideal location for you

Another key benefit of going the timeshare route when it comes to a vacation property is that you will have a destination and location that is ideally suited to you. There is a significant array of different vacation timeshare options in many, many locations across the United States and around the world.

On a related note, you can enjoy another benefit of getting a vacation timeshare. Many timeshare companies offer you the ability to swap your timeshare location for a particular year. In other words, you can trade your timeshare location with someone else at a different location. This provides you with both reliability and consistency as well as a degree of flexibility should you elect to try something different one year.

Entertaining family, friends, and colleagues

Although your main purpose in purchasing a timeshare is to be able to have a set vacation location for yourself and your immediate family, other people in your life can benefit from the timeshare experience as well.

For example, you may not have the need to use your timeshare for a particular period of time set aside to you. As a result, you can offer your timeshare to extended family members, to friends, and to work or other types of colleagues. Often, the owner of a timeshare will donate a stay to a charitable organization. The stay is auctioned off to raise money for the organization. In short, there really is a tremendous amount you can do with a timeshare, not only for yourself and your immediate family but for a broad spectrum of other people who may be important in your life as well. Continue Reading…

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