# Looking to start Couch Potato - Feedback



## bradatkins (Mar 1, 2014)

Hey -

I've been sitting on some money for a while, more due to fear of not knowing what to do. A conversation at work has pushed me to get moving.

I have have the following financial characteristics, numbers approximate:

-Age 33 / Wife 32 / Kids 8 & 10
-Yearly family income $140K
-Yearly RESP contribution $2100 x 2 kids
-Yearly RRSP contribution through employer $15,000
-Yearly RRSP contribution outside of employer $12,000
-RRSP contribution room remaining $23,000

I'm chipping away at my RRSP room and expect to be caught up by 2016. I plan to make a $15K payment to RRSP mid March.

My RRSP situation looks like this:

Outside of employer

- 15K Fixed Income
- 95K Equities ( I don't have the breakdown handy)

Through Employer

- 17K Intl Equity
- 13K US Equity
- 12K Cdn Equity

Retirement Age 60 or so (who doesn't want earlier? )

I have 18K currently sitting in cash available to invest. I expect to have another 16K in a few months from side jobs etc.

I've been reading a bit, and this is what I was thinking of doing through Quest Trade ETF:




PercentTypeTotal CostMER30CAD Equity (XIU)5,378.400.1830USDEquity (VUN)5,378.400.1530INTL Equity (XEF)5,378.400.310Bonds (VAB)1,792.80.2


Any feedback (ie asset allocation, tax issues, or anything really) would be greatly appreciated.

Thanks!
Brad


----------



## avrex (Nov 14, 2010)

Looks good. Go for it.


----------



## GoldStone (Mar 6, 2011)

ZEA is expected to be cheaper than XEF in an RRSP.
http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/

Treat your multiple accounts as a single portfolio. It doesn't matter how you split the new 18K. What matters is your overall asset allocation across all accounts.

10% in fixed income? Be prepared for a bumpy ride.


----------



## richard (Jun 20, 2013)

To help in seeing everything as one portfolio (which is the only meaningful way to talk about asset allocation), you might want to try reducing the number of holdings in each account. Your employer account could all be put into one of your 3 equity divisions leaving you with the other two and the bonds in your own RRSP. If they're both RRSP accounts then it doesn't matter which one holds any particular asset.


----------



## MoreMiles (Apr 20, 2011)

90% stocks will lead to about a loss of 30-40% of your net worth if there is a crash. I know every young man will say they have high risk tolerance but watching your kids college funds disappear with no clue if they will rebound is not something most average joes can handle.


----------



## Soils4Peace (Mar 14, 2010)

Take the percent drop you can handle (i.e. Stay the course with) and multiply by two. The result should be your equity allocation. 

VCN is cheaper than XIU and gives more diversification, more holdings and small cap exposure. 

For RRSP VTI is preferred over VUN because the US domiciled version is exempt from the 15% dividend tax. On VUN it is like a hidden additional MER of 0.30%. The problem is getting cheap currency conversion, but the conversion is worth it for long term holds.


----------



## My Own Advisor (Sep 24, 2012)

Big fan and users of XIU but VCN is also a great one.

I also prefer U.S. $$ ETFs in my RRSP, so I would favour VTI over VUN.

I like and use VXUS for my international holdings.

I don't hold any bond ETFs anymore but VAB, XSB, XBB are all great I think.

Sounds like you're definitely on the right track!


----------



## Freedom45 (Jan 29, 2011)

As with My Own Advisor's comments above, personally, I prefer VTI for my US exposure, and VXUS for my International. Personal preference really though...

Also, personally, I hold my fixed income allocation within my employer's RRSP, and leave my self-directed account solely for equities and ETF's. Makes it easier to quickly isolate allocation values for me. Again personal preference. With that said, when I was holding fixed income in my self-directed account, I was holding XBB.

The only other comment is that 10% fixed income may be low, unless you've got a high tolerance for losses during bad times. I'm about your age, with what I would consider a medium-high tolerance to risk/losses, and I fluctuate between 15-20% fixed income.


----------



## Electric (Jul 19, 2013)

VAB has quite a long duration. Consider CBO, a GIC ladder or a money market fund. I am noticing that several active funds I follow are holding a lot of cash right now.


----------



## sisco (Oct 18, 2011)

In my opinion, your fixed income allotment is too low, and have a significant home bias. As others have mentioned, if there is another crash, you would take a huge hit. The statistics say that you'll come out ahead in the long term with equities vs. fixed income, but you never know when the hammer is going to drop, when you'll need the money, or whether future returns will mimic those of the past.

1. Increase fixed income weighting. For a smallish portfolio like this I would put 40% into a good bond fund. In the future you could add other safe options like preferred shares, real return bonds, etc, of you so choose.

2. Reduce Canadian equity exposure. The Canadian equity market only accounts for 4-5% of the global market so there is little reason so weight it so heavily in your portfolio.

3. Most of the literature I have read seems to suggest that short-term is the way to go with ETF bond funds and I tend to agree.

If I were you, with a portfolio of this size, I'd go with;

15% Canadian Equity (VCN, ~0.12% MER)
20% US equity (VTI, 0.05% MER)
25% International/Emerging Markets (VXUS, 0.14% MER)
40% fixed income (VSB, 0.17% MER)


VTI and VXUS are US-traded ETFs, but their incredibly low MERs make them worthwhile, IMO. Questrade allows you to hold USD in any account. Can be a little bit of a pain at rebalancing time, but you can usually get around most of this headache (taking a hit on currency exchange) by simply streaming new money into under performing asset classes to minimize the need for major rebalancing.


----------



## MoreMiles (Apr 20, 2011)

That is a very good advice. But in this forum we see again and again how young people feel they have extraordinary risk tolerance so no fixed income is needed. The bull markets from the last 2 years have further enhanced their recklessness. I think it's super naive to say one can lose half of everything and not worry about it. It may mean pulling your kids out of a private school or forced sale of your house to pay for your car, etc.


----------



## leeder (Jan 28, 2012)

@ bradatkins: Overall, you have a solid plan. Couple of items for you to consider:

1) While XIU is a perfectly good product, it does only hold about 60 equities. For more diversified and lower cost ETF, consider VCN. It holds close to 250 stocks and provides exposure to more mid and small caps.

2) If you plan to invest long-term, VAB is a perfectly suitable fixed income product. Just like individual bonds or GICs, if you hold VAB to its duration, you will not have a negative return even if the general interest rates rise.

3) GICs are an excellent option as fixed income and a laddered strategy with GICs is ideal.

4) US listed ETFs, such as VTI and VXUS, are ideal especially in a RRSP. However, if you plan on contributing new money into US and international ETFs regularly, it may not be a bad idea to purchase the Canadian listed US ETFs (VUN, XEF, etc.). I'm not sure how the trading commission works for Questrade; however, for TD Waterhouse, to execute Norbert's Gambit, you would have to pay three trading commissions just to buy one of VTI or VXUS. Convenience may be worth the extra cost.

5) I have no issues with your current portfolio weighting. Some may say its too much invested in equities; some may say you have 30-year time horizon and you can go for all equities. The most important is what do you think? As long as you can stomach the risk in your portfolio and sleep well at night (i.e., tolerate a 40%+ drop in your portfolio), you don't have to adjust anything. Otherwise, you can increase your fixed income allocation. If you are satisfied with your current allocations, just stick with the plan thick-and-thin. Don't let emotions get the best of you. Only adjust your plan if your circumstances change (i.e., risk tolerance change, lifestyle changes, etc.)


----------



## brad (May 22, 2009)

MoreMiles said:


> I think it's super naive to say one can lose half of everything and not worry about it. It may mean pulling your kids out of a private school or forced sale of your house to pay for your car, etc.


To me, this scenario implies that you're living off your investment income. The original poster is young and investing for retirement. If you're 35 or even 40 years old and your investments lose half their value, but you still have 25-30 years remaining before you retire and need that money, is it really an issue?


----------



## bradatkins (Mar 1, 2014)

Just an update, I've got the details of the portfolio with allocations. Not sure if that changes / firms up anyones advice:

CompanyTypeMERAmountIG Fixed Icome  $14,669IG Intl Equity 2.72 $33,813IG US Equity 2.63 $26,219 IG CDN Equity 2.62 $46,376Sunlife Intl Equity 2.82 $17,000Sunlife US Equity $13,000Sunlife CDN Equity 1.57 $12,000

Overall allocation:

31% Intl
24% US
35% CDN
9% Fixed Income


----------



## bradatkins (Mar 1, 2014)

brad said:


> To me, this scenario implies that you're living off your investment income. The original poster is young and investing for retirement. If you're 35 or even 40 years old and your investments lose half their value, but you still have 25-30 years remaining before you retire and need that money, is it really an issue?


So this correct.

I'm investing in RESP's for the schooling, may or may not be enough but we'll cross that bridge later (ie they can have some debt).

This money is for retirement, not for general savings for "stuff"


----------



## richard (Jun 20, 2013)

Great example of concentrating your holdings - if you converted your employer plan to be all Cdn you'll avoid that 3% MER, while you can diversify with other funds in your own accounts. Some sun life plans have options that are under 1% (I think I saw one Canadian index).

What do you think when people talk about how the market should see a drop or a correction this year? Your reaction to that possibility could tell you a lot about whether you need a higher bond allocation.


----------



## GoldStone (Mar 6, 2011)

Sun Life MERs look too high for a group RRSP. Do you work for a small company?

I participated in a few different group plans at Sun Life, Manulife and Standard Life. Typical fees are less than 1%.


----------



## bradatkins (Mar 1, 2014)

richard said:


> Great example of concentrating your holdings - if you converted your employer plan to be all Cdn you'll avoid that 3% MER, while you can diversify with other funds in your own accounts. Some sun life plans have options that are under 1% (I think I saw one Canadian index).
> 
> What do you think when people talk about how the market should see a drop or a correction this year? Your reaction to that possibility could tell you a lot about whether you need a higher bond allocation.


This is a good point about the balancing and avoiding the 3%.

I'm not sure if this is a good answer or not, but I don't really pay attention to any of that "stuff" about the market. It doesn't bother me. I see my slip for the quarter/year then just fold it up and go have a beer.


----------



## bradatkins (Mar 1, 2014)

GoldStone said:


> Sun Life MERs look too high for a group RRSP. Do you work for a small company?
> 
> I participated in a few different group plans at Sun Life, Manulife and Standard Life. Typical fees are less than 1%.


I work for Vale SA, about 85000 employees.

Here's the funds that I have with Sun Life:

http://www.leithwheeler.com/docs/leith-wheeler-canadian-equity-fund-series-b.pdf
http://www.renaissanceinvestments.ca/en/products/869.asp
https://grssl.morningstar.ca/global...slfinp=y&protpcol=https&fundid=125702&popup=y

I think I may be mistaken on those MER's, as they may be the 'public' ones? In my sunlife account it's showing the following under the Annualized Percentage for Fund Management Fees

Leith Wheeler Cdn Equity 0.55 %
LMBrandywine Cl Val US Eq 1.07 %
Renaissance Intl Equity 0.94 %

If it's not obvious, I'm just starting to get more active in managing my funds


----------



## GoldStone (Mar 6, 2011)

Ok, that looks better. The funds that you own through Sunlife are not retail funds. The links that you posted do not apply.

ADDED: check the lineup of the funds available in your plan. Many group plans these days offer passive index funds at a lower cost.


----------



## bradatkins (Mar 1, 2014)

OK so after some more reading (this thread and other sources), I think I'm finally ready to go.

I've opened an account at Questrade, and I'm about to fund the account.

Just some further background, I expect to only put money / rebalance yearly. I don't expect to put money in on a monthly basis.

What I'm thinking is the following:

$17,928 CAD to VTI TFSA account.

This would change my overall allocation to be:

28%	Intl
32%	US
32%	CDN
8%	Fixed Income

Does that make good sense?

Is there anything I need to be weary of because VTI is a US Listed ETF (ie tax, currency exchange, etc)

Let me know, just looking for a last thumbs up to see if I'm on the right track (or not the wrong track  )


----------



## leeder (Jan 28, 2012)

If you do invest in VTI with your TFSA or any other international ETFs/funds, the withholding taxes are not recoverable. You may also incur currency exchange purchasing US ETFs in TFSA. Figure out how to do the Norbert's Gambit. There's a bunch of posts on that in this forum. That said, those are minor points. As long as you're fine with your portfolio allocation and allocate everything efficiently tax-wise, I think you're set to go.


----------



## bradatkins (Mar 1, 2014)

leeder said:


> If you do invest in VTI with your TFSA or any other international ETFs/funds, the withholding taxes are not recoverable. You may also incur currency exchange purchasing US ETFs in TFSA. Figure out how to do the Norbert's Gambit. There's a bunch of posts on that in this forum. That said, those are minor points. As long as you're fine with your portfolio allocation and allocate everything efficiently tax-wise, I think you're set to go.


I'm fine if I get taxed on it and it's not recoverable, but do I need to do anything, or is it taxed at the source?

I found a good video for the Norbert's Gambit and Questrade here: http://www.moneygeek.ca/weblog/2013/10/18/how-exchange-usd-cad-cheaply-using-questrade/

Although I did note this article http://canadiancouchpotato.com/2013/08/16/inside-the-new-vanguard-etfs/ which seems to lean more heavily to the VUN, which may be a better choice for someone "new" like me?


----------



## leeder (Jan 28, 2012)

It's generally taxed at source; however, if you invested the money in your non-registered account, you would be able to recover the withholding tax. I personally think it's a minor detail, though a lot of people in this forum place quite a bit of importance on the tax efficiency.

Investing in the US ETF that trades in Canada is more convenient. You don't have to go through the Norbert's Gambit or any type of currency exchange. It is a bit more expensive, but it depends on how much you value convenience when you rebalance annually.


----------



## bradatkins (Mar 1, 2014)

OK just another update, I finally received documentation from my previous employer's pension plan, and I have $28,637 that I can transfer out.

If I transfer that, to I'm thinking Fixed Income LIRA, my portfolio would shape up as so:

24%	Intl
27%	US
28%	CDN
21%	Fixed Income


----------



## prasannathani (Feb 20, 2014)

I too have been looking to transferring my mutual funds out and start a CCP portfolio. Been doing a lot of reading over the course of the last two months regarding this topic and so would love to hear what everyone thinks of the following. Ran into a blog post on Moneygeek.ca that discusses the difference betweent CCP and their portfolio. In summary, he mentions that although both based on indices and passive investing, his portfolio is optimized. This optimization reduces the risk involved in the portfolio and that is something overlook/neglated by Dan. Would love to hear what people think, provided the blog post below:

http://www.moneygeek.ca/weblog/2014...ian-couch-potato-portfolios-whats-difference/


----------



## richard (Jun 20, 2013)

He seems to be doing 3 things:

1) Refining the allocation to use things like value stocks and small caps. Overall this is not a bad idea, but remember that even if they do have higher performance it may take a decade to show up. If you don't think you can stick with a strategy for that long when it looks bad it's better not to start.

2) Changing the allocations based on market conditions. He might be right, but one mistake or surprise can undo all the gains. If you are diversified between several asset classes you are already most of the way there since you will get the benefits from the ones that do well and the ones that do badly won't seriously hurt your portfolio. Whether you should change one asset class from 29 to 31% is anyone's guess and it's as likely to do harm as it is to help unless you really know more than the majority of investors. He's not the only PhD in the market.

3) Using MPT to optimize the portfolio allocation. Like Dan (CCP) says, if a 1% difference in the numbers is enough to give you a completely different allocation and in real life they regularly change by 5 - 10%, do you really think it's giving you an edge? This goes back to the second point. It might give you a slight advantage in some conditions but you would need to really stay on top of it just to have a chance. And if someone else is a little better than you then your chances go down pretty fast. 

The result is that you need to pay an ongoing fee to get access to the latest portfolios. It is certainly more work and more fees. It may deliver better results but that is not guaranteed.


----------



## GoldStone (Mar 6, 2011)

prasannathani said:


> I too have been looking to transferring my mutual funds out and start a CCP portfolio. Been doing a lot of reading over the course of the last two months regarding this topic and so would love to hear what everyone thinks of the following. Ran into a blog post on Moneygeek.ca that discusses the difference betweent CCP and their portfolio. In summary, he mentions that although both based on indices and passive investing, his portfolio is optimized. This optimization reduces the risk involved in the portfolio and that is something overlook/neglated by Dan. Would love to hear what people think, provided the blog post below:
> 
> http://www.moneygeek.ca/weblog/2014...ian-couch-potato-portfolios-whats-difference/


He uses MPT to optimize the portfolios.

Harry Markowitz got The Nobel Prize in Economics for inventing the MPT. I challenge you to find one article or one interview with Harry Markowitz where he recommends MPT optimization to regular investors like you and me. I bet you won't find one. You can optimize all you want based on past correlations, but the future is still unknown. An "optimal" portfolio on paper can easily turn suboptimal in real life.

Harry Markowitz famously quipped that he splits his personal portfolio in half to minimize future regret. 50% stocks, 50% bonds. He was probably half-joking, but the point still stands: you don't need a high level of sophistication in a personal portfolio. Basic diversification is fine.

Back to money geek blog: I think he adds complexity where no complexity is needed to justify his fees.


----------



## bradatkins (Mar 1, 2014)

prasannathani said:


> I too have been looking to transferring my mutual funds out and start a CCP portfolio. Been doing a lot of reading over the course of the last two months regarding this topic and so would love to hear what everyone thinks of the following. Ran into a blog post on Moneygeek.ca that discusses the difference betweent CCP and their portfolio. In summary, he mentions that although both based on indices and passive investing, his portfolio is optimized. This optimization reduces the risk involved in the portfolio and that is something overlook/neglated by Dan. Would love to hear what people think, provided the blog post below:
> 
> http://www.moneygeek.ca/weblog/2014...ian-couch-potato-portfolios-whats-difference/


Thanks for highjacking my thread 

Posting separate threads is free you know...no commission fees


----------



## prasannathani (Feb 20, 2014)

bradatkins said:


> Thanks for highjacking my thread
> 
> Posting separate threads is free you know...no commission fees


hahaha sorry! Since I'm in the same boat as you (looking to invest based on a new portfolio), figured I'd share the link to see what others here thought.


----------



## prasannathani (Feb 20, 2014)

richard said:


> He seems to be doing 3 things:
> 
> 1) Refining the allocation to use things like value stocks and small caps. Overall this is not a bad idea, but remember that even if they do have higher performance it may take a decade to show up. If you don't think you can stick with a strategy for that long when it looks bad it's better not to start.
> 
> ...


You make a lot of good points, and seems as one would need to invest in his philosophy in the longrun...I'm still on the fence, but leaning towards his practice as he's been rather helpful in explaining his strategy anytime I've had questions. We'll see how it goes!


----------

