# Critique My Proposed Portfolio Please



## StefanGucci (Dec 31, 2017)

Moving ~$620k CAD actively managed mutual fund portfolio to an ETF-based portfolio comprised of five accounts. We invest quite heavily in US equities, so I am planning to hold ITOT (and also IEFA and IEMG for international) in US funds for lower MERs and the FWT advantage. We are going through a big 5 bank, so I have tried to achieve asset allocation (and asset location across accounts) with a minimal number of ETF holdings...8 in total...to minimize the number of rebalancing transactions and costs. 

Background
-Wife and I are mid 30's
-Own our house ($550k, fully paid)
-No debt
-About $220k gross annual income
-Retire at 55? (who knows at this point)

Proposed Portfolio
-Target: 20% CDN equity, 60% US equity, 10% International, 5% Emerging, 5% FI.

*Me*
-RRSP: $69k ITOT
-TFSA: $63k VCN

*Wife*
-RRSP: $186k ITOT
-RRSP: (Spousal): $119k ITOT + $62k IEFA + $31k IEMG + $31k ZAG = $243k
-TFSA: $60k VCN

Other holdings 
-I am leaving my ~$100k (and ongoing contributions) in a company retirement fund (target date fund) and stocks as-is, due to employer contributions. This is why the proposed portfolio above may seem lower on fixed income.
-For taxable investments, I am using a robo-advisor for the time being (growth 80/20 mix). Will use this to dump extra money after TFSA and RRSP is maximized each year.


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## off.by.10 (Mar 16, 2014)

While the risk is not a large problem given your age and income, 5% fixed income is still ridicuslously low. It's ok if you really can stomach it but it wouldn't hurt your returns much to have 10-15% instead.

Also, you seem to have a lot of currency risk exposure. Personally, I'd keep some of that US equity in a currency hedged fund, even if it means giving up the withholding tax.


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## StefanGucci (Dec 31, 2017)

Hi off.by.10, 

So you think my FI is "off.by.10"?  

Just kidding...point taken. I may go from 5% up to 10% in this portfolio, but don't want to go much higher at this time. I don't see a scenario where the market crashes and I need to cash out stocks right at that point in time. If so, 10% or 15% won't help that much more than 5%. The risk of my wife and I losing jobs simultaneously is low and our expenses could be scaled back to a very low number (no mortgage) if the worst happened...and we carry an emergency fund to mitigate this. The portfolio will not need to be touched for ~20 years.

Also, I checked out my employer-sponsored RRSP and it is 18% fixed income, which will scale up towards a defined retirement year. I am actively using 2/3 of my RRSP contribution limit to this stream, so this should push the weighted average FI across both portfolios up over time. Also, my non-registered account is 80/20 and I will be throwing $2k per month into that.

Regarding currency risk, I was initially just going to take the easy route and go XUU/XEF/XEC, but introduced ITOT/IEFA/IEMG within RRSP for the foreign tax benefits. I wasn't keen on having to do Norbert's Gambit in three accounts to be honest. I could reduce currency risk exposure and simplify a bit if I hold ITOT/IEFA/IEMG in spousal RRSP only (Norberts Gambit in one account only). 

Good suggestions, I like this better. Please see changes below in red and let me know what you think... 


*Me*
-RRSP: $69k ITOT (Change to XUU)
-TFSA: $63k VCN

*Wife*
-RRSP: $186k ITOT (Change to XUU)
-RRSP: (Spousal): $119k ITOT (Decrease to $88k) + $62k IEFA + $31k IEMG + $31k ZAG (Increase to $61k) = $243k
-TFSA: $60k VCN


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## tygrus (Mar 13, 2012)

You have directed too much effort to capture total market, basically indexing. I would focus more sector wise with individual ETFs - REITs, Financials, Preferreds, Consumer Discretionary etc.

Your canadian content is too low. Frankly, I would never invest in china over canada.


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## StefanGucci (Dec 31, 2017)

Thanks tygrus. 

I should have mentioned in my original post that I am taking an broad market / indexing approach for this portfolio. If I anything sector-specific or even in individual stocks, it would be in my non-registered.


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## off.by.10 (Mar 16, 2014)

StefanGucci said:


> So you think my FI is "off.by.10"?


Haha no, that's a complicated topic ;-)


StefanGucci said:


> I don't see a scenario where the market crashes and I need to cash out stocks right at that point in time. If so, 10% or 15% won't help that much more than 5%.


Well like I said, it's probably not a big deal in your situation. Just pointing out the most obvious things I see. But keep in mind that a crisis can bring both loss of employment and market crash around the same time. And I disagree on the second part: even 10% instead of 5% would help. It's 5% more you can cash out without having to sell stocks which have crashed. In your situation, it sounds like a lot more time you could wait it out without stress. Then again, you seem to have other sources of emergency cash so your choice of 5% might be just fine for now.


StefanGucci said:


> Good suggestions, I like this better. Please see changes below in red and let me know what you think...


XUU still has the same currency risk. The hedged equivalent appears to be XUH. XSP is another option (S&P 500 only). I think it would be a good idea to keep ITOT where you do want exposure to USD. Norbert's gambit is annoying but the withholding tax advantage adds up over 20 years. Of course, it's ideal if you can do that in a single account.


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## StefanGucci (Dec 31, 2017)

Hi again, off.by.10

Sorry, when you mentioned currency risk, I was thinking (incorrectly) that you meant too much US-domiciled investment...my bad. I will read up on XUH and XSP, in lieu of XUU or ITOT, and see if it makes sense for us.

We are also probably a bit heavy on US (to tygrus' point)...we are currently about 60% US, but I was actually thinking of scaling US equity back to 50%, CDN up to 25%, and "other" to 25% (probably 10% FI, 10% int eq, 5% emerging eq). The 25/50/25 is actually how I have my automatic RRSP contributions set up to TD eSeries funds, I just wasn't sure if I wanted to 'correct' our current holdings back to 50% in one shot, or re-align over time.

Thanks again for the suggestions. I have really been spending a lot of time thinking about asset allocation, asset location, FWT...all while switching assets from mutual funds to self-directed. Lots of moving pieces.


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## tygrus (Mar 13, 2012)

As a US/Canada strategy you can hold stocks that are listed on both exchanges. There are about 10 or 12 big names that do that. 

I am so partial to canadian stocks because of the taxation of dividends.


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## humble_pie (Jun 7, 2009)

StefanGucci said:


> I wasn't keen on having to do Norbert's Gambit in three accounts to be honest. I could reduce currency risk exposure and simplify a bit if I hold ITOT/IEFA/IEMG in spousal RRSP only (Norberts Gambit in one account only).




i've already mentioned a new development from the TD. The big green is no longer allowing instant gambit sells in registered accounts.

in reg'd accounts, TD clients now have to wait T+2 days for settlement of the buy side. Once settled, they can journal the carrier stock to US account & sell it in the opposite currency.

this new restriction means that TD clients moving from CAD to USD should use the DLRs, since it's never advisable to wait while a volatile gambit carrier stock fluctuates for 3 days.

less common are clients wishing to gambit from USD to CAD in registered accounts. These clients are now out of luck, since only DLR.U is pegged. This in turn means that clients moving from USD to CAD will undergo currency fluctuation for at least 3 days if they attempt to gambit with DLR.U/DLR.

on the other hand, currency fluctuation across 3 days is likely to be less than fluctuation of an interlisted common stock.

all in all, management at the big green has never been a friend of gambit trading. BMO & RY have more relaxed attitudes. If i had a RRIF that was largely in US dollar investments, i doubt i would keep it at the TD.

fortunately stefanGucci is many decades away from RRIFdom, so he has plenty of time to solve the RRSP FX situation at the big green.


.


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## StefanGucci (Dec 31, 2017)

Hi humble_pie, good to hear from you again and I appreciate these comments (and in my other thread) about the more specific details of NG at TDDI.

So, I understand that I would be exposed to the currency risk over the T+2 days when I need/want to bring my USD equity holdings back to CAD. However, I would venture to say that that given the long duration and amount of US holdings (which should grow to 1M+), the benefit of ITOT versus XUU in terms of foreign withholding tax would still exceed the potential risk/exposure in FX losses?. Am I out to lunch on this?


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## humble_pie (Jun 7, 2009)

StefanGucci said:


> So, I understand that I would be exposed to the currency risk over the T+2 days when I need/want to bring my USD equity holdings back to CAD. However, I would venture to say that that given the long duration and amount of US holdings (which should grow to 1M+), the benefit of ITOT versus XUU in terms of foreign withholding tax would still exceed the potential risk/exposure in FX losses?. Am I out to lunch on this?




me the only thing i'd venture to say is that, lightyears from now when my RRIF shall have grown to one million dollars & also assuming that the big green shall still be functioning & moreover it will still be crochety about gambit trades in registered accounts ...

me i'd just remove that account to a gambit-friendly broker. If BMO & roybank are anything like the way they are today, they'd be on bended knee to get a $1M account. They'd even give you piles of cash or free trades or both.

i'd venture to say that i'd move my RRIF accounts & then i'd gambit my greenbacks home to canada like a lamb in clover .each:



.


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## StefanGucci (Dec 31, 2017)

haha...sounds like a plan...I will save the 'later' decisions for later. 

I think I will lose more in lost opportunity from the time my current mutual funds are liquidated to the time I buy the ETFs.


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## Pluto (Sep 12, 2013)

To OP: At your age and income level I'd skip the fixed income for now. Save that for when you are older. 
I'd go 100% equites. This is based on the premise that when the bear market arrives you won't cave in and sell, locking in a loss. During a bear market keep saving and buying stocks. 

Your etf strategy is OK if that's what you feel comfortable with. I did that for a few years a long time ago, but eventually and gradually started buying the best names of etf contents, and selling off the etfs. did you ever consider trying some individual stocks along with your etf's?


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## StefanGucci (Dec 31, 2017)

Hi Pluto. Yes, the fixed income is what I have really been struggling with...our advisor has never had us in any fixed income and given the current interest rate environment it feels tough to jump into fixed income in a big way. I may just introduce a nominal amount of up to 10% on the initial purchase, or start phasing it in more slowly to 10% by age 40. During the bear market, I don't see any reason why we would behave any differently than we did in 2007...status quo, keep buying in as if nothing happened.

Regarding individual stocks, I am not currently thinking of going in that direction for the main portfolio. I do not feel I have the skill to beat or time the market. In any case, staying with a passive/indexing approach will (or in the investing world...'should') get us where we need to be for retirement. I also have quite a bit of single stock exposure through buying into the company that I work for, so I would prefer to keep the rest of our portfolio more diversified. If I do want to get into any individual stocks or even more targeted ETFs, I would probably do so in our non-registered.

Thanks for the input!


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## off.by.10 (Mar 16, 2014)

StefanGucci said:


> Sorry, when you mentioned currency risk, I was thinking (incorrectly) that you meant too much US-domiciled investment...my bad. I will read up on XUH and XSP, in lieu of XUU or ITOT, and see if it makes sense for us.


Sorry about that, I meant only the fluctuations in value of the US dollar vs the canadian dollar. There's direct exposure (buying US stock) and indirect exposure (eg. buying a canadian company which does much of its business abroad). Having some of it is good but as with all things, some level of balance is often best. XUH and XSP follow the same indices but without the effect of the exchange rate added on top.

The withholding tax on these indices over 20 years is equivalent to about 4% if my math is right. Not trivial but worth it if, say, oil climbs back up and you have to retire with the dollar above 0.90 USD for a long while. OTOH, you could just as well end up retiring with the dollar in the 60 cent range and be quite happy to have all your money in USD. This is much like equity vs fixed income: something you should pay more attention to as you get closer to retirement, so you're not caught by a sudden swing of the rate. It's not that important right now except to get the habit so you don't forget about it later.


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## GoldStone (Mar 6, 2011)

Hi OP,

I agree and disagree with off.by.10 regarding currency hedging.

I agree with his/her suggestion that you should educate yourself on this subject. Start paying more attention to your currency exposure as you approach retirement. That's about two decades from now... you have plenty of time to form your own educated opinion.

On the other hand, I disagree with his/her recommendation to introduce currency hedging right away. Currency volatility can improve or harm your annual performance. Some years you win. Some years you lose. In the long run, currency fluctuations tend to even out. If you accept that point of view and the evidence behind it, currency hedging becomes an unnecessary cost. It is more likely to subtract value in the long run than to add. This is not just my personal opinion. I think it's pretty much a consensus. For example, see model portfolios on the Canadian Couch Potato site. None of them use currency hedging. CCP wrote a few articles explaining the rationale for no hedging. Look them up.


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## GoldStone (Mar 6, 2011)

tygrus said:


> You have directed too much effort to capture total market, basically indexing. I would focus more sector wise with individual ETFs - REITs, Financials, Preferreds, Consumer Discretionary etc.


Sector slicing and dicing is a terrible idea for most people. 

OP will get his sector exposure through total market indexes:

20% allocation to Canada is effectively a 10% allocation to Financials.
60% allocation to US is effectively an 8% allocation to Consumer Discretionary.
and so on so forth.

Preferreds is a separate story altogether.




tygrus said:


> Your canadian content is too low.


That's just, like, your opinion, man. 

You think it's too low, I think it's about right. I know serious investors who ignore Canada altogether.




tygrus said:


> Frankly, I would never invest in china over canada.


OP allocated 5% to EM. China is 28% of that. 0.05 * 0.28 = meaningless 1.4% allocation.


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## off.by.10 (Mar 16, 2014)

GoldStone said:


> It is more likely to subtract value in the long run than to add.


Good point that it all comes down to the cost of the hedging which is, to say the least, not very transparent. It seems rather significant so I agree it's not such a good idea for the long term. Forget about XSP and XUH for now.


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## GoldStone (Mar 6, 2011)

off.by.10 said:


> Good point that it all comes down to the cost of the hedging which is, to say the least, not very transparent. It seems rather significant so I agree it's not such a good idea for the long term.


The argument goes beyond costs.

Let's assume for a moment that hedging is free and precise. Would it be worth considering? Maybe, if you can prove that currency hedging dampens portfolio volatility. In Canada, that doesn't seem to be the case:

Why Currency Hedging Doesn’t Work in Canada
http://canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/


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## james4beach (Nov 15, 2012)

StefanGucci said:


> Yes, the fixed income is what I have really been struggling with...our advisor has never had us in any fixed income and given the current interest rate environment it feels tough to jump into fixed income in a big way.


In my view, that's an attempt to time the bond market. People have been saying this exact same thing since 2010. I'll suggest that it's useful to have some fixed income for the sake of asset class diversification and risk reduction. How much, though, is entirely personal taste.



> I do not feel I have the skill to beat or time the market. In any case, staying with a passive/indexing approach will (or in the investing world...'should') get us where we need to be for retirement.


That goes for bonds too  For most of us, it's impossible to time the stock or bond markets. The passive indexing approach is a good one for both. A fund like XBB is an excellent way to get bond exposure.

Regarding your low fixed income allocation: are you sure you will be OK with stock volatility, something like a 50% decline in your stocks? Assuming it comes along with a 20% housing correction, that could take your net worth from the current 1300K down to about 800K. Stock markets can take many years to recover after serious falls... possibly a decade or more. This last bear market was very brief, and the recovery was blazingly fast by historical standards.

It might be worth checking that your wife is on board with that kind of risk, seeing 1300K net worth cut down to 800K due to heavy stock exposure. While it's true you're young (I'm the same age), you don't necessarily have _that_ much time for this to recover from a big fall if you aim to retire at 55.

Here's a scenario: say you're 40 years old, and your net worth has grown a bit more to 1500K. Then we get a serious bear market, and you see your net worth drop to 950K. That might introduce a bit of stress with only 15 years to retirement, since stocks don't necessarily recover from bear markets quickly.

The alternative would be to invest with a less risky asset allocation, which will give you _more certainty_ that you can hit your retirement goal without being exposed to massive swings due to the stock market. Given how well off you are, far ahead of peers your age, I really don't understand why you'd want to take such large risks and add such uncertainty. Basically you are on track to have an easy, early retirement, even with the lower returns from say a 60/40 allocation.

So why take more risk?


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## CPA Candidate (Dec 15, 2013)

FWIW, my Dad recently passed away at age 73. Looking over his portfolio, his fixed income was < 10%; and most of that was pref shares. He had a couple GICs, but no bonds whatsoever.

BTW, his gains over many decades of investing were phenomenal. There is little doubt a "balanced portfolio" full of bonds would have left a much smaller estate.


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## like_to_retire (Oct 9, 2016)

CPA Candidate said:


> There is little doubt a "balanced portfolio" full of bonds would have left a much smaller estate.


Sure, but that's the result of taking risk. Big risk, big reward. I could have a 100% equity portfolio and the result might indeed be significantly better than someone who took less risk, but the next decade may not work out as well. Equities could suffer a 50% loss that lasts for years. To recover from a 50% loss, you have to make 100% to just break even. That's not likely to happen for a long time. 

In my opinion, having 5% in fixed income is a waste of time. Either commit to risk reduction or not. The 5% won't move the needle, may as well be 100% equities. Minimum 20% fixed income to make a dent.

ltr


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## james4beach (Nov 15, 2012)

Right... more risk, more reward. And I agree that there's no point to a 5% allocation. The characteristics of a portfolio don't really change until you step up to 20%. I think a big factor for choosing a fixed income allocation is the expectation of withdrawals out of the portfolio. Perhaps this is a way the original poster can think about whether they need fixed income or not.

Stock volatility doesn't really hurt (other than emotional distress) unless you are *withdrawing* money from the portfolio. By withdrawal I mean any cashflow out of the portfolio, including dividends. If you're dealing with any kind of withdrawal, portfolio volatility turns out to be much more dangerous than commonly believed. I run through a demonstration of this in my earlier post here.

So for anyone withdrawing $ from a portfolio, volatility absolutely is an important consideration. It can destroy a portfolio. This is where you need fixed income (and maybe gold) to dampen volatility, thus reducing sequence risk. But if you see 20 years ahead of you where you won't be withdrawing anything and plan to reinvest all dividends instead of withdrawing the cash, then you might not need any fixed income.


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## StefanGucci (Dec 31, 2017)

Just catching up on the thread, good conversations and opinions for sure.

I like james4beach's comment about volatility only having an impact during withdrawal. Just like I didn't lose any sleep during the crash in 2007-8 I doubt that I would in the next five to ten years. 

I think the old rule of thumb of 'bonds = age' starts too soon (one-size-fits-all rules of thumb are never very good). Even if you defer by doing 'bonds = 120 - age' or some variant, the ramp up is too slow. I sure as heck wouldn't have 20% bonds at 20, or 30% at 30. At 60, maybe I will have enough and will want to 'close the vault' tighter than 60%. 

I may defer on the bonds till 40 or so, then ramp up by adding ~3-4% per year (my employer RRSP will ramp up in fixed income over this time as well). Retirement at 55 isn't a hard stop for me either...more than likely I'll still be working. The portfolio at that time and how much I am enjoying work will influence the target date.


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## GoldStone (Mar 6, 2011)

StefanGucci said:


> Background
> -Wife and I are mid 30's
> -Own our house ($550k, fully paid)
> -No debt
> ...


Back of the napkin:

Assume equal income split, $110K per spouse
100% employment income, no capital gains, no dividends,
Ontario residency
RRSP maximized, $26K in 2017

Plug the numbers in TaxTips calculator
https://www.taxtips.ca/calculators/canadian-tax/canadian-tax-calculator.htm

I get $21,822 in total taxes and CPP/EI premiums. Round up to $22K.

$220K gross,
Minus deductions at source: $22K x 2 = $44K
Minus annual living expenses: $66K (why not)
Save and invest the difference: $110K (this amount includes maximized RRSP and TFSA contributions).

Current portfolio size: $620K

$110K / $620K = *18% in new cash coming in annually*.

Given how much cash is pouring in, I see little need for fixed income.

I can make a case for holding cash based on how high valuations are, both stock and bonds. See The Case for Cash, just as an example. That's a different argument though.


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## GoldStone (Mar 6, 2011)

J4B and LTR mentioned 50% drop.

Two thoughts:

1. OP & wife will be deploying a ton of cash in the next two decades (see my post above). Stocks on sale, 50% off, would be a dream scenario. If I were in OP's shoes, I would say a nightly prayer begging for the biggest crash possible, followed by 10-15 years of sideway markets.

2. I took OP's proposed allocation and threw away 5% fixed income, 5% emerging markets. Both are meaningless. I changed the allocation to: 20% Canada, 60% US, 20% International. Here are the five worst years since 1970, a span of 48 years:

2008: -26.16%
1974: -25.76%
2002: -19.46%
1973: -11.58%
2001: -9.62%

50% drop would be twice as bad as the Great Financial Crisis. What are we talking about here? An end of the world catastrophe? You think your bonds will save you?


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## james4beach (Nov 15, 2012)

It's true that global diversification offered a benefit during the 2008 crisis and a diversified portfolio wasn't down too badly (partly thanks to USDCAD spiking up). But if we're talking worst case scenarios, you have to look back to 1929 and how far the market fell. You'd be lucky if you only lost 50%.

Do bonds save you? Absolutely, yes. High grade bonds are simply not as volatile as stocks. They never fall as hard as stocks fall, and they also guarantee a positive return -- very different than stocks.


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## GoldStone (Mar 6, 2011)

Again, in OP's case, 50% crash would be a blessing. With so much cash to deploy in the next two decades, he should be begging for it.


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## james4beach (Nov 15, 2012)

GoldStone said:


> Again, in OP's case, 50% crash would be a blessing. With so much cash to deploy in the next two decades, he should be begging for it.


Wait, what do you mean "so much cash to deploy"? They're fully invested in stocks, I didn't see any cash. Are you referring to their high income? I might have missed it, but I'm not sure what their expenses are or what their net new savings are per year.


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## GoldStone (Mar 6, 2011)

james4beach said:


> Wait, what do you mean "so much cash to deploy"? They're fully invested in stocks, I didn't see any cash. Are you referring to their high income? I might have missed it, but I'm not sure what their expenses are or what their net new savings are per year.


See my estimates in post #25.


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## StefanGucci (Dec 31, 2017)

Goldstone...your estimate is pretty close...we can save $100k/year after expenses pretty reasonably. Income split is about 2/3 to 1/3 and gross amount is employment income only.


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## james4beach (Nov 15, 2012)

If you're willing to share, can I ask what your field of work is? I have similar income but with poor job stability, and am considering a career change so I can have more job security.


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## StefanGucci (Dec 31, 2017)

Architecture/engineering firm


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## lonewolf :) (Sep 13, 2016)

I like US the core will be the the last to fall


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## lonewolf :) (Sep 13, 2016)

What is the exit strategy of the portfolio. Every portfolio needs an exit strategy


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## StefanGucci (Dec 31, 2017)

Meet or exceed a critical portfolio value that provides a targeted retirement income, without eating into capital at more than 2% per year? 

The amounts and timing will most likely change between now and twenty years from now. Right now the focus is accumulation phase...increasing savings ratio and minimizing investment fees.


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## Fain87 (Jan 20, 2018)

StefanGucci said:


> Moving ~$620k CAD actively managed mutual fund portfolio to an ETF-based portfolio comprised of five accounts. We invest quite heavily in US equities, so I am planning to hold ITOT (and also IEFA and IEMG for international) in US funds for lower MERs and the FWT advantage. We are going through a big 5 bank, so I have tried to achieve asset allocation (and asset location across accounts) with a minimal number of ETF holdings...8 in total...to minimize the number of rebalancing transactions and costs.
> 
> Background
> -Wife and I are mid 30's
> ...


It's pretty vanilla. Your not going to outperform. I mean not ever. However It's better than high mutual funds which is what a lot of people get sold. What kind of returns are expecting?


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## GoldStone (Mar 6, 2011)

Fain87 said:


> It's pretty vanilla. Your not going to outperform. I mean not ever.


Outperform what? Passive benchmark? Of course not. He is not trying to. He doesn't need to. His income and saving rate are so good, he is going to secure a comfortable retirement by capturing market returns.

OTOH, he is going to outperform the majority of retail investors who pay expensive fees to financial advisers.


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## lonewolf :) (Sep 13, 2016)

SG your doing amazing job might want to consider owning some gold & silver for insurance for wealth preservation. A second passport in case living conditions get bad in Canada, Maybe set up to be able to grow food without soil in basement & you are some what bomb proof.

Your risk is not from enough growth from investments but since your so well established the risk sits in wealth preservation.


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## StefanGucci (Dec 31, 2017)

Well I can't say I thought of growing food in my basement...lol. You sound like a prepper.


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## Fain87 (Jan 20, 2018)

GoldStone said:


> Outperform what? Passive benchmark? Of course not. He is not trying to. He doesn't need to. His income and saving rate are so good, he is going to secure a comfortable retirement by capturing market returns.
> 
> OTOH, he is going to outperform the majority of retail investors who pay expensive fees to financial advisers.


Outperform the S&P 500. That's the most quoted benchmark.


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## Fain87 (Jan 20, 2018)

GoldStone said:


> Outperform what? Passive benchmark? Of course not. He is not trying to. He doesn't need to. His income and saving rate are so good, he is going to secure a comfortable retirement by capturing market returns.
> 
> OTOH, he is going to outperform the majority of retail investors who pay expensive fees to financial advisers.


We're not talking about his income and saving rate. With a good enough income & savings you can have a good retirement with 1% returns. It doesn't mean he should be happy with Average. 

Retail investors frequently underperform the Average returns of the market. So that's not saying much. 

If OP doesn't have experience with stock market or believe he can earn decent return then i'd think going with a Proven Asset Manager with a long track record of outperformance would be key. Examples would be Berkshire Hathaways stock, Donville Kent for Canada.

Like most proposed portfolios, I'd suggest backtesting it.


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## GoldStone (Mar 6, 2011)

Fain87 said:


> If OP doesn't have experience with stock market or believe he can earn decent return then i'd think going with a Proven Asset Manager with a long track record of outperformance would be key. Examples would be Berkshire Hathaways stock, Donville Kent for Canada.


Buffett is 87 and won't be at BRK for much too long. Will BRK continue to outperform once he is gone? For how long? Your guess is as good as mine.

To suggest Donville Kent as a long term retirement vehicle is a joke. Not to mention the minor detail that the fund is closed to new money.




Fain87 said:


> Like most proposed portfolios, I'd suggest backtesting it.


There is not much point in back-testing 100% passive indexed portfolios. They generated market returns in the past. They will continue to generate market returns in the future.

I think you misunderstand (or deliberately misrepresent) the point of making a passive bet on the markets rather than an individual asset manager. Donville Kent can lose his touch in 10 years. He can choose to retire in 15 years. Markets will continue to deliver market returns forever.

Let me guess: you are gainfully employed in the investment industry, aren't you? Passive vs active debate is pretty much settled. Very few people outside the industry continue to fight this losing fight.


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## GoldStone (Mar 6, 2011)

Fain87 said:


> Retail investors frequently underperform the Average returns of the market.


So do the so-called professionals.


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## james4beach (Nov 15, 2012)

Virtually nobody has outperformed the S&P 500 since the rebound in 2009. Not even the best hedge funds on earth, not even Buffett & Berkshire Hathaway.

What confuses me is that many people (including on this forum) seem to be outperforming the TSX index. I'm wondering why Canadian investors appear to be able to outperform the TSX, whereas outperforming the S&P 500 is impossible.


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## GoldStone (Mar 6, 2011)

james4beach said:


> Virtually nobody has outperformed the S&P 500 since the rebound in 2009. Not even the best hedge funds on earth, not even Buffett & Berkshire Hathaway.


Not sure why you brought up 2009. We are talking about long-term investment planning in this thread. 2009 until now is not even a full business cycle. 

Zooming out, very few people manage to outperform the S&P 500 over a long investment career. I wouldn't say it's "virtually nobody", but the exceptions like Buffett are rare. It's easy to identify them in hindsight. The trick is to identify them in advance and that's virtually impossible. The OP is in his mid-thirties. His investment horizon is about 60 years. Who is going to outperform S&P 500 in the next 60 years? Good luck with that.



james4beach said:


> What confuses me is that many people (including on this forum) *seem* to be outperforming the TSX index. I'm wondering why Canadian investors appear to be able to outperform the TSX, whereas outperforming the S&P 500 is impossible.


"seem" is an important word. This is an anonymous forum. People can claim whatever they want. We have no way to verify the claims.

Putting that aside, the formula to outperform the TSX seems fairly simple: don't own any resource companies. Most of them are crappy businesses: earnings are cyclical, margins are low, capital requirements are high, pricing power is non-existent. Buy and hold doesn't work well with these types of businesses. I can't think of any similar structural weaknesses in the S&P 500.


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## james4beach (Nov 15, 2012)

GoldStone said:


> Not sure why you brought up 2009. We are talking about long-term investment planning in this thread. 2009 until now is not even a full business cycle.


Good point. Over very long periods, few outperform the index. I'm just saying this has become even more intensely true since 2009.



> Putting that aside, the formula to outperform the TSX seems fairly simple: don't own any resource companies.


He says, just before the greatest and most powerful commodity bull market begins  It really wouldn't surprise me if something like that happens. There seem to be some signs of global inflation, and the broad CRB commodity index has recently started rallying.

Even I figured out the "formula" and underweight resources/commodities for that reason. Everyone at CMF does. It's totally plausible that after everyone has become convinced to avoid commodities, those sectors (energy, mining) start to soar. In such a case the TSX Composite would outperform all of us who have under weighted commodities.

ZLB is the same story, an incredibly well performing fund whose secret is basically to avoid commodity sectors.


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## GoldStone (Mar 6, 2011)

james4beach said:


> He says, just before the greatest and most powerful commodity bull market begins  It really wouldn't surprise me if something like that happens. There seem to be some signs of global inflation, and the broad CRB commodity index has recently started rallying.
> 
> Even I figured out the "formula" and underweight resources/commodities for that reason. Everyone at CMF does. It's totally plausible that after everyone has become convinced to avoid commodities, those sectors (energy, mining) start to soar. In such a case the TSX Composite would outperform all of us who have under weighted commodities.


True.

It doesn't really mater if you own Canadian equities in a broadly diversified portfolio that also includes S&P 500, EAFE and EM. Especially for young investors. Income and saving rate are very important. Beating the TSX is not. Might as well index it.


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## Fain87 (Jan 20, 2018)

GoldStone said:


> Buffett is 87 and won't be at BRK for much too long. Will BRK continue to outperform once he is gone? For how long? Your guess is as good as mine.
> 
> To suggest Donville Kent as a long term retirement vehicle is a joke. Not to mention the minor detail that the fund is closed to new money.
> 
> ...


Gainfully employed and thriving. if you average all active managers. Yes you will find they underperform average passive. I'm not suggesting he spread his money equally across all actively managed funds. 

I gave you two examples, I'm sure with some research you can find a few more.


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## Fain87 (Jan 20, 2018)

GoldStone said:


> So do the so-called professionals.


Sure many do. some are salesman pretty much. Some lose their touch. . . How were your returns over the last 5 years?


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## shood50 (Jan 30, 2018)

*What is a Good Cash amount?*



off.by.10 said:


> Haha no, that's a complicated topic ;-)
> ... And I disagree on the second part: even 10% instead of 5% would help.


Is the percentage important to you, the $ amount, a reflection of (years) of annual expenses or something else?

I ask because I've been struggling with how much cash to keep on hand (currently in an EQ Bank account). I currently have two years expenses that translates to 5% of my portfolio. My husband and my income is paid by our Corporation (in non-eligible dividends). The Corporation has money in it. We have no debt or physical assets (we rent, old cars).

At the end of the day, I have to sleep at night but wondering what your thoughts are.


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## GoldStone (Mar 6, 2011)

Fain87 said:


> Gainfully employed and thriving.


Do you trade or research your Personal Account during business hours? Those of us NOT in the investment industry don't have this option. One of the reasons why many of us choose couch potato strategy.




Fain87 said:


> if you average all active managers. Yes you will find they underperform average passive.


Thank you for acknowledging this basic fact.




Fain87 said:


> I'm not suggesting he spread his money equally across all actively managed funds.
> 
> I gave you two examples, I'm sure with some research you can find a few more.


Yes, it's trivial to find managers who outperformed in the recent past. How does that help? Past performance does not guarantee... yada yada yada.

The OP is in his mid-thirties. There is a good chance that he or/and his spouse will live into their 90s. His investment horizon is about 50-60 years. 

Please share your secret formula to identify the managers who will beat the benchmark in the next 20-30-40-50-60 years. Heck, forget beat the benchmark. How do you know they will stay in business?


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## GoldStone (Mar 6, 2011)

Fain87 said:


> How were your returns over the last 5 years?


In line with my passive benchmark, as designed.


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## off.by.10 (Mar 16, 2014)

shood50 said:


> Is the percentage important to you, the $ amount, a reflection of (years) of annual expenses or something else?
> 
> I ask because I've been struggling with how much cash to keep on hand (currently in an EQ Bank account). I currently have two years expenses that translates to 5% of my portfolio. My husband and my income is paid by our Corporation (in non-eligible dividends). The Corporation has money in it. We have no debt or physical assets (we rent, old cars).
> 
> At the end of the day, I have to sleep at night but wondering what your thoughts are.


In this case, it's the years of expense. 5% vs 10% won't make a large change in portfolio volatility or returns. But in a serious downturn, I could avoid selling equities and live off the safer stuff which hopefully kept its value. Ideally, I would want to be able to do this through the worst part of a crisis. 2-3 years sounds reasonable. I know none of that is perfect but it was the idea behind my suggestion.


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## shood50 (Jan 30, 2018)

*Thank you for sharing.*



off.by.10 said:


> In this case, it's the years of expense. 5% vs 10% won't make a large change in portfolio volatility or returns. But in a serious downturn, I could avoid selling equities and live off the safer stuff which hopefully kept its value. Ideally, I would want to be able to do this through the worst part of a crisis. 2-3 years sounds reasonable. I know none of that is perfect but it was the idea behind my suggestion.


Thank you for sharing your thoughts, I really appreciate it. Sarah.


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