# New member seeking advices



## JHSC (Mar 6, 2013)

Hello All!

I am a recent university graduate that worked for a few years, in my mid-20s and would like to start my investment adventure. I have some formal financial education but no practical experience. I would appreciate it if any body here would like to give me some guidance.  Currently I have a maxed out TFSA ($25k) at my bank, and not yet open a RRSP and any other non-registered accounts. My saving would be around $25k - $30k per year, and my spending pattern would not change in the near future (Unless there is a drastic decline in housing price, then I would consider buying a house). Below are some questions that I have in mind:

1) I originally lived in ON but now I relocated to QC for work, but I intended to move back to ON in a year or so. I immediately notice the extraordinary high tax rate in QC (~40% marginal). I imagine I would not hit the same marginal tax for many years in ON, and I would benefit from the relatively larger tax refund at the present. I would be able to put ~$25k in the remainder 2013. Is it worth contributing to RRSP while I am still in QC to take advantage of this? 

2) I intended to transfer my bank TFSA to my Questrade TFSA I opened a few weeks ago to buy ETFs. However, I hear good things about the TD e-series funds recently and have the application forms ready. Which is the better route in your opinion?

3) I read that RRSP is better to hold US/international instruments due to the foreign tax withholding, while TFSA should ideally hold Canadian Instruments. However, the MER for Canadian ETFs is also noticeably costlier than the US ETFs. Should I hold US ETFs in my TFSA now, or buy Canadian ETFs in my TFSA and wait until I have a RRSP to hold the US ETFs?

4) I intended to diversify my portfolio as follows: 25% US equities, 25% International (EU, JPN, AUS), 25% Emerging (BRICS, etc), 10% CDN equities as well as (if necessary) 5% commodites, 5% fixed-income and 5% alternatives for hedging. This portfolio is intended to be aggressive and I would invest long-term. Any feedback would be welcome, and if anybody has a similar portfolio or have recommended ETFs for each of the asset classes, please give me a shout too!

Thank you for your time and patience!

James


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## arrow1963 (Nov 22, 2011)

It's been a day and no one has responded to this, so I'll take a stab. Your post is well written, but I've noticed that some of the 'comprehensive first posts' have been skipped over a little bit by the community (I'm remembering seeing a slow reaction to purple platypus in particular). I think part of it is that because people ask many questions that they probably know the answer to, or which they could find out in just a couple of minutes. I'll give you my answers to your questions, and maybe that will prompt more responses.

Issue 1: How much do you have to save?

Does the $25K in a TFSA include your emergency fund? Is the TFSA currently invested, or is that just a savings account? If your savings are needed to fund an emergency account, or to pre-pay for future expenses, you might not have as much as you think.

Issue 2: What are you saving for?

Your savings timeframe will impact a couple of different things. Normally financial commentators will immediately go to your asset allocation. If you might maybe want to buy a house in 18 months, there would be a real justification for including some bonds in your portfolio (and minimizing transaction fees). Buying a house might also mean that investing gets totally put off to the side until you pay off your mortgage. So, on the one hand, the money you save here might be money that sits for 60 years. On the other hand, it could be 6 months. I'm guessing that you'll probably want your savings back within 6 years to buy that house.

The other issue with your timeframe is in how you structure your accounts (ETFs, Index funds, US Account?). From my perspective, if you're saving $30K/year, you're in position to set up a 'good' ETF portfolio from the start and avoid changing midstream. However, that's on the assumption that you will 'grow into' that portfolio structure. If you're going to take everything out in 5 years, it might be worth going with the e-series funds to start (though they aren't as detailed as your asset allocation).

If you're interested in ETFs and you care about management fees and choice (which you appear to be), I think that portfolio structures can be split into a 'good', 'better', 'best' structure, assuming that you have the assets and savings rate to justify increased complexity. With you saving over $2k/ month, I think you could easily implement an ETF portfolio. Just save up for 2 or 3 months and make purchases large enough to justify your commissions.

Good: E-Series Index Funds
Better: An ETF portfolio held using all CDN accounts using ETFs trading on the TSX
Best: An ETF portfolio with CDN funds in CDN accounts for domestic exposure, and a US$ RRSP accounts for holding US listed funds (VTI, VUS, VEU, VBR etc...) 



Your questions:

1) Yes. If your tax rates are higher now than they will be in the future, use your RRSP. If you might want the money to buy a house, use the RRSP (up to the home buyers plan cap). At marginal tax rates of 40%, I'd definitely be looking at the RRSP.

2) Depends (see above). If this is all short term money, index funds could be better.

3) Not sure what you mean, or if you're mixing ideas here. There are a number of US$ ETFs (bought and sold in the US) that are cheaper to hold than those in canada (including vanguard's VT or VTI). However, you need a US $ account in your RRSP to take advantage of them, and to move money over in order to buy them. Unless you think your timeframe is beyond the purchase of your first house, I don't think this makes sense for you.

4) I assume that you have seen the model portfolios at canadian couch potato (http://canadiancouchpotato.com/model-portfolios/) and have chosen not to implement them. Obviously your asset allocation is your decision, but what you have here raises a couple of 'yellow flags' for me:

a) At least for the next 2 or 3 years your portfolio will be <$100K. What would it mean to have these 5% allocations? Would you engage in small trades, or vary widely from your target as your portfolio grows? Easier would be to pick a target portfolio amount ($100K or $200K), build to that target in broad allocations (int. eq., cdn. eq., cdn. bonds) and then add in your smaller allocations when you hit that target.

b) If you haven't gone through a market downturn, you don't really know what your reaction will be to investment losses. William Bernstein (http://www.efficientfrontier.com/) actually advocates a relatively conservative allocation for new investors, in order to try and find their level of risk tolerance through practice.You're not going to make much more money, even under the best of conditions, with a 95% equity portfolio versus an 80%. If equities outperform bonds by 10% in a year, and you have $50K invested, the difference is ~$700. If equities fall greatly, you might have a bad enough emotional experience to avoid equity investing in the future. I'm not sure the trade off is worth it.

c) I don't know what your background is. Maybe you're in finance and thus these categories are near to home. However, if you're interested in indexed investing that communicates at least a weak belief in efficient markets. I'm not sure how you think you'll get good value from commodity and alternative hedging funds (or individual hedging trades).


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## blueeyetea (Feb 27, 2013)

As a new investor, I'd start by going over to http://canadiancouchpotato.com/ to get a primer on ETF's and mutual funds. The e-series is basically a mutual fund that acts like an ETF, so the mer will be slightly higher. Going with the e-series or buying ETFs would depend on how much you can spare at any time to buy them. 

For example, for some people the only way they can save money (and not dip into it) is if the bank takes $200 out of their bank account every month towards savings. In this case, you'd use the e-series mutual fund because you're not paying any transaction fee to build your portfolio. If you were buying $200 of ETF's every month, $29 a trade per fund get's expensive quickly. (I know that you can pay as low as $10/trade, but that's usually tied to having between $30K to $50K worth of assets in your account depending on the institution.)

Since you say that you plan on saving up to $5K a year, the ETF route probably makes more sense if you restrict the number of transactions a year. If you're buying 4 funds, well, it's 4 times the transaction fee. $50K is usually the dividing line where buying ETF's gets more cost effective. 

On the Canadian Couch Potato site, there's a spreadsheet somewhere that helps you calculate the costs of buying ETF's. I also suggest you get yourself the book "Count on Yourself" by Alison Griffiths. She makes a much better job of looking at the differences between buying mutual funds and ETFs and which is best depending on your situation. 

As someone who has lived both in ON and Quebec, yes, the income tax in Quebec are higher, but cost of living in Quebec tends to be lower. In the end, rent or taxes, it all comes out the same in the wash. You don't end up as ahead financially as you think you'd be. That changes once you start having kids.


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## JHSC (Mar 6, 2013)

Hello Arrow,



> It's been a day and no one has responded to this, so I'll take a stab. Your post is well written, but I've noticed that some of the 'comprehensive first posts' have been skipped over a little bit by the community (I'm remembering seeing a slow reaction to purple platypus in particular). I think part of it is that because people ask many questions that they probably know the answer to, or which they could find out in just a couple of minutes. I'll give you my answers to your questions, and maybe that will prompt more responses.


Thank you for your comprehensive answers! My intention wasn't to ask the obvious, but I did try to keep it as concise as possible so people would want to read them. But it seems you have given the green light to elaborate in details, I would be more than happy to. 



> Issue 1: How much do you have to save?
> 
> Does the $25K in a TFSA include your emergency fund? Is the TFSA currently invested, or is that just a savings account? If your savings are needed to fund an emergency account, or to pre-pay for future expenses, you might not have as much as you think.


My TFSA is just a saving account that is earning 1.x% annually, that's why I opened another one at questrade so I can perhaps do more. It is in addition to my emergency fund. 



> Issue 2: What are you saving for?
> 
> Your savings timeframe will impact a couple of different things. Normally financial commentators will immediately go to your asset allocation. If you might maybe want to buy a house in 18 months, there would be a real justification for including some bonds in your portfolio (and minimizing transaction fees). Buying a house might also mean that investing gets totally put off to the side until you pay off your mortgage. So, on the one hand, the money you save here might be money that sits for 60 years. On the other hand, it could be 6 months. I'm guessing that you'll probably want your savings back within 6 years to buy that house.
> 
> The other issue with your timeframe is in how you structure your accounts (ETFs, Index funds, US Account?). From my perspective, if you're saving $30K/year, you're in position to set up a 'good' ETF portfolio from the start and avoid changing midstream. However, that's on the assumption that you will 'grow into' that portfolio structure. If you're going to take everything out in 5 years, it might be worth going with the e-series funds to start (though they aren't as detailed as your asset allocation).


This is a very good point, and the truth is I don't any particular short-term goal to save up for yet. All I knew is it's not a good idea to leave cash hanging around. As a side note, I also have no debt. I only have 2 very vague goals currently, but I hope these would help with your thoughts:

1. Dream goal: Retire (More appropriately, financial independent) in my 40s
Term: 15 - 20 years from now
Required annual saving: $30k/year (I intend to fix this contribution, so I would not take anything out)
Required annual return: 10% (This could be tough in today's climate, but historically it was reasonable)

2. Optional goal: Buy a house
Term: 3 - 5 years from now, but really depends on the real estate market, I would only buy if the price becomes "fair"
Price: 300k - 400k
Funding options: Parents would back me up 100k in downpayment, and my sibling would possibly move in and provide relieve to some of the mortgage for a few years.



> If you're interested in ETFs and you care about management fees and choice (which you appear to be), I think that portfolio structures can be split into a 'good', 'better', 'best' structure, assuming that you have the assets and savings rate to justify increased complexity. With you saving over $2k/ month, I think you could easily implement an ETF portfolio. Just save up for 2 or 3 months and make purchases large enough to justify your commissions.
> 
> Good: E-Series Index Funds
> Better: An ETF portfolio held using all CDN accounts using ETFs trading on the TSX
> Best: An ETF portfolio with CDN funds in CDN accounts for domestic exposure, and a US$ RRSP accounts for holding US listed funds (VTI, VUS, VEU, VBR etc...)


Yes, I plan to contribute monthly and balance my portfolio annually, so ideally I shouldn't get killed over the commissions. Your "Best" option is actually what I had in mind for my question 3). Only that I have not yet open a RRSP, and I have 25k ready to go in the TFSA. That's why I ask if it's worth it to hold US funds in my TFSA, because ideally I want to stike a balance between the MER, the tax benefits and the forex rate effect when comparing US vs. CDN ETFs.

I do have $5k now to contribute if open a RRSP. I noticed Questrade's forex rate is (CAD/USD) = 1.016 today, is that consider good? If not, what other brokrages would you recommend for US$ RRSP accounts? 



> Your questions:
> 
> 1) Yes. If your tax rates are higher now than they will be in the future, use your RRSP. If you might want the money to buy a house, use the RRSP (up to the home buyers plan cap). At marginal tax rates of 40%, I'd definitely be looking at the RRSP.
> 
> ...


Regarding 4), yes I have read canadian couch potato but I don't believe the asset allocation is too optimal. I think it over-emphasized domestically, with a big majority biased towards Canadian funds. In theory, it was suggested that there is more advantage in diversifying away from your home because your income is already highly correlated to the home economy (so if your income takes a big hit, so would your portfolio), and the other countries' market tended to be less correlated. Can you tell me if this is the case in practice?

I am more inclined towards the model portfolios here: http://www.etftrends.com/etf-model-portfolio-details.php?id=51, which recommended 95% equities and 5% fixed income. In truth, the fixed income, commodity and alternatives don't need to be there at this stage. Should there be another economic downturn, I would allocate more % in fixed income and commodity like gold since both would possibly do quite well in that kind of market.

I am thinking of buying into small cap and value stock primarily, because they are known to be long-term winners. I have also learned that stock market outperformed the fixed income market by many folds historically. That's why I didn't focus too much on the fixed income market, so I would be happy to be educated about it.

In regards to my investor behaviour, you are right that I have no clue what my risk or loss appetite would be when I actually start putting in money. I could only hope that my financial background would convince me to stay rational in the bad times, knowing that it is only a short-term volatility, and zoomed out over the decades it would be a curve going up. I would definitely read in the site you provided me.

Thank you again, and I look forward to more feedbacks!

James


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## JHSC (Mar 6, 2013)

Hello blueeyetea,



> As a new investor, I'd start by going over to http://canadiancouchpotato.com/ to get a primer on ETF's and mutual funds. The e-series is basically a mutual fund that acts like an ETF, so the mer will be slightly higher. Going with the e-series or buying ETFs would depend on how much you can spare at any time to buy them.
> 
> For example, for some people the only way they can save money (and not dip into it) is if the bank takes $200 out of their bank account every month towards savings. In this case, you'd use the e-series mutual fund because you're not paying any transaction fee to build your portfolio. If you were buying $200 of ETF's every month, $29 a trade per fund get's expensive quickly. (I know that you can pay as low as $10/trade, but that's usually tied to having between $30K to $50K worth of assets in your account depending on the institution.)
> 
> ...


I would definitely get a hold of that book and evaluate what situation I am actually in, thanks for the recommendation! 

I only wanted to contribute a big lump sum to RRSP this year because it might be the last year I would be in QC, so I wanted to take advantage of the high marginal tax rate now to get a high tax refund which I might not get for many years later in ON. 

I have no clue when I would have clues, for now I have a solitude lifestyle and I would enjoy it the best I can. 

Thanks for your advices!

James


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## lonewolf (Jun 12, 2012)

JHSC

One of the biggest mistakes an investor makes is having to much skin in the game.

If your going to start playing the market put a small amount of your money on the table. Then after you lose all your money on the table your going to have something left to try again after you become a better investor. Of course you might lose everything a few times on your journey. Not many become an ace investor right out of the gate. Try to reduce your tuition cost of becoming a pro investor by reducing bet size till you have a better understanding.


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