The Money Mustache Community
Around the World => Canada Discussion => Topic started by: Reggie on October 23, 2017, 07:40:40 AM
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This isn't really a tax question but more of a Canadian ETF question.
I'm trying to re evaluate my ETF investment strategy and wondering what others think is a good split between your own country (Canada) and international ETFs.
Currently I have a pretty aggressive ETF strategy with 10% bonds, 40% Canadian ALL CAP, and 50% International (excl. Canada) ALL CAP.
What do others do? What are your thoughts on an appropriate % invested in your own countries market vs. international? The Canadian market is not all that diversified.
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I skip bonds in my investments, I have some in my RESP but those belong to my children. My house acts as a counterweight to the volatility of stocks, it keeps my expenses low and I can defer maintenance when the stock cycle demands it (ex. solar panels in the rising stock years, keep the old flooring during crashes). It mimics bonds, you sell them during tough times to buy stocks and buy them in good times.
I'm a little heavier on the USA then you, I want about 40% american, before the international is added on. I let it drift quite a bit because I'm accumulating fast and just use purchases to get closer to what I want.
I like the Canadian Couch Potato, it works well for me.
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I skip bonds in my investments, I have some in my RESP but those belong to my children. My house acts as a counterweight to the volatility of stocks, it keeps my expenses low and I can defer maintenance when the stock cycle demands it (ex. solar panels in the rising stock years, keep the old flooring during crashes). It mimics bonds, you sell them during tough times to buy stocks and buy them in good times.
I'm a little heavier on the USA then you, I want about 40% american, before the international is added on. I let it drift quite a bit because I'm accumulating fast and just use purchases to get closer to what I want.
I like the Canadian Couch Potato, it works well for me.
Thanks for this insight! I never thought of the idea as my house acting as a counterweight. That's a great idea!
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I have no bonds and 15%vcn and 85%vxc. Too lazy to do full breakdown but vxc is about 50 %us rest intl with 5% emerging. I find that canada being four percent market cap we are overweighting but there are tax implications that people debate to death and I ignore.
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I have a s&p 500 etf, a tsx etf and an international excluding North America one. Whenever I buy I get whichever I have the least of, so they're more or less evenly balanced. This way I figure I own a tiny piece of every sector in every market in the world.
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I think I'm sitting at approximately 5% Canadian stocks right now.
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Thanks everyone for the responses.
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Your rental homes will also be Canadian hedged. So you can go lower with Canadian equities.
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I have no bonds and 15%vcn and 85%vxc. Too lazy to do full breakdown but vxc is about 50 %us rest intl with 5% emerging. I find that canada being four percent market cap we are overweighting but there are tax implications that people debate to death and I ignore.
Ideally I'd be pretty close to this one. I am 25% VCN and the rest is split 50/50 between US and international so VXC would be a perfect choice. In reality it's a little more complicated because of work stock which is foreign company, therefore I throw some VUN in the mix to keep the percentages where I need.
As a few other posters above have mentioned I also hold no bonds. My wife has a DB pension so that is quite safe don't see the need to hold bonds on top of that.
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Your rental homes will also be Canadian hedged. So you can go lower with Canadian equities.
Good point Ben.
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Equal weight equities for Canada : US : International; plus bonds.
I am evaluating when it makes sense to hold bonds, and how much, versus my mortgage. I need bonds to rebalance, so there is that, but numerically, it is looking like I need to make 3.5% bond/fixed returns or better to justify keeping the mortgage so large....
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I wouldn't be heavily invested in the Canadian market except for the dividend tax breaks. You say it isn't diversified - no shit, half the listed economy is banks + energy. And while I understand that financial companies allow business to happen, they are *pretty much* parasites - they output nothing useful themselves. Not saying they shouldn't exist or anything, but as an investable market, such a high proportion in one sector... no, in 5-6 companies? The TSX60 is horrible, a horrible index. The Composite isn't all that much better. Compare the market caps of anything past the first 50, to the bulk of the S&P 500...
10%, maybe. For a plain vanilla couch potato portfolio, 10% TSX Composite, 30% US, 40% ex-US and Canada, 20% bonds. Something like that. And the 10% unregistered; RRSP full of VTI, TFSA full of ZEA + XEF or whatever.
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I wouldn't be heavily invested in the Canadian market except for the dividend tax breaks.
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And the 10% unregistered; RRSP full of VTI, TFSA full of ZEA + XEF or whatever.
For unregistered, if your income is under $45k per year, investing in canadian dividends has negative to zero tax.. so I am putting my canadian % into my non-registered. (Dividend tax credit).
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Quote from: daverobev on Today at 06:45:47 PM
I wouldn't be heavily invested in the Canadian market except for the dividend tax breaks.
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And the 10% unregistered; RRSP full of VTI, TFSA full of ZEA + XEF or whatever.
For unregistered, if your income is under $45k per year, investing in canadian dividends has negative to zero tax.. so I am putting my canadian % into my non-registered. (Dividend tax credit).
I'll be doing the same the moment I no longer have a salary income. 0% taxes... Hell yes!
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I wouldn't be heavily invested in the Canadian market except for the dividend tax breaks.
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And the 10% unregistered; RRSP full of VTI, TFSA full of ZEA + XEF or whatever.
For unregistered, if your income is under $45k per year, investing in canadian dividends has negative to zero tax.. so I am putting my canadian % into my non-registered. (Dividend tax credit).
That's what I meant; 'the 10%' meaning the Canadian 10%.
Bonds, too, though they have no benefit except you are shielding likely higher growth stuff.
Also worth mentioning if you have children, the 'gross up' of the divi tax credit means it has an overeffect on benefits (the grossed up amount is taken, I believe).
So if you have $40k in eligible dividends, it would act as $40k x 1.38 for Child Benefit calcs.
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I guess this is my asset comp... maybe reading too much of "Ratioanal Expectations" and "The Intelligent Asset allocator" made me do this! lol
88% of the assets are in low cost index funds
young and can tolerate risk and tracking error
Canadian equity 24%
Canadian Energy 4%
Canadian small-cap equity 5%
Canadian real estate 6%
=== Total Canadian Equity 39%
US equity 20%
US small-cap equity 10%
=== Total US Equity 30%
EAFE equity (EUROPE) 12%
International equity 3%
Emerging markets equity 6%
=== Total International Equity 21%
Government bonds (VAB) 10%
Corporate bonds 0%
Real-return bonds 0%
Cash 0%
===Total Fixed Income 10%
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I guess this is my asset comp... maybe reading too much of "Ratioanal Expectations" and "The Intelligent Asset allocator" made me do this! lol
88% of the assets are in low cost index funds
young and can tolerate risk and tracking error
Canadian equity 24%
Canadian Energy 4%
Canadian small-cap equity 5%
Canadian real estate 6%
=== Total Canadian Equity 39%
US equity 20%
US small-cap equity 10%
=== Total US Equity 30%
EAFE equity (EUROPE) 12%
International equity 3%
Emerging markets equity 6%
=== Total International Equity 21%
Government bonds (VAB) 10%
Corporate bonds 0%
Real-return bonds 0%
Cash 0%
===Total Fixed Income 10%
In my humble opinion - not that you asked for it - ~40% Canada is just insane.
Canadian equity, assuming a TSX Composite, is already about 1/3 energy, as well.
Especially if you are still using your registered room... yeah, cut back on Canada, increase the rest. Even if you're using unregistered, the divi tax credit isn't worth going wild over.
Could the Canadian stuff outperform dramatically over the next 30 years? I mean... it *could*. Not very likely. Sure, lots of educated people here, lots of immigrants meaning stuff is growing. Still.
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I guess this is my asset comp... maybe reading too much of "Ratioanal Expectations" and "The Intelligent Asset allocator" made me do this! lol
88% of the assets are in low cost index funds
young and can tolerate risk and tracking error
Canadian equity 24%
Canadian Energy 4%
Canadian small-cap equity 5%
Canadian real estate 6%
=== Total Canadian Equity 39%
US equity 20%
US small-cap equity 10%
=== Total US Equity 30%
EAFE equity (EUROPE) 12%
International equity 3%
Emerging markets equity 6%
=== Total International Equity 21%
Government bonds (VAB) 10%
Corporate bonds 0%
Real-return bonds 0%
Cash 0%
===Total Fixed Income 10%
There's really no need to hold 10 ETFs. If you backtest this type of allocation to a simpler 3 - 5 ETF portfolio, you will find the results are very similar but the management of a 5 ETF portfolio is much easier than a 10 ETF portfolio.
The benefits of rebalancing get significantly reduced when your holdings are small. Even the guys at Alpha Architect use just 7 ETFs in their Robust Asset Allocation strategy (one of the more complex TAA strategies out there which apparently have a long term edge over a standard 60/40 or similar).
The big benefit of TAA strategies in general is discipline and cost control, not complexity. Data mining can always reveal certain historical edges that could have generated an extra 0.5% here or 0.3% there. However, a small annual edge in the past does not guarantee that same edge in the future. Data mining for portfolio optimization is a danger of TAA strategies.
I'm personally not a TAA-style investor so take what I have to say with a grain of salt. Unless you have a massive portfolio ($1M+) to justify cost and adequate position sizing, keep it simple and hold no more than 5 ETFs. You're more likely to stick with it, control your costs, and limit tinkering. Also, as daverobev states, your Canada allocation is very high.
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My investment allocations are
40% VCE Canada
40% VFV USA S&P
20% VDU International large cap
100% stocks
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I recently read an interview (from 2017) with Bogle, and he reminded the readers that the US stock market (DJIA, S&P) indices actually reflect up to 50% international exposure.
Why? Because the top companies on the NYSE are actually international companies, with international sales exposure. This is why he thinks a 100% US focused portfolio is not so crazy.
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I recently read an interview (from 2017) with Bogle, and he reminded the readers that the US stock market (DJIA, S&P) indices actually reflect up to 50% international exposure.
Why? Because the top companies on the NYSE are actually international companies, with international sales exposure. This is why he thinks a 100% US focused portfolio is not so crazy.
For an American perhaps. You open yourself to more political/regime risk. Perception risk ("that company is American", even if its business is more than 50% overseas). Also Estate tax if you have a lot of money in US domiciled ETFs.
I mean, if you're going to invest in one 'country', the US is the one to invest in, and I take your point. But... no, there is no reason to, IMHO. There are enough ETFs out there. I'm reading Intelligent Investor (slowly and with difficulty), and one thing mentioned is that if you avoid X you may avoid the next big thing (eg all that is currently pulling up the S&P and Nasdaq is FB/Google/Netflix/etc). So you'll generally be better off taking the world.
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davrobev -- I agree with you, at least, that is how I invest, so my money agrees with you.
I also think that having a solid foundation of investments in your own currency (or the country you will retire in) is a good move, so I will always keep my fixed as well as Cdn portions, even though I am attracted to world markets for the diversity and returns. Having lived in three countries now, experiencing currency fluctuations that appear random that chew up 25% of your money in one season... well, I like things I can rely on for retirement and currency exchange rates just isn't it.
I do like to read un-expected and well-thought points of view, and this one by Bogle is worth consideration, especially for those that like extra simplicity in their investments. If you are going to have one fund, the US version is not a bad choice (as you said).
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Thanks for the heads-up! I did not realize how much of a canadian bias I've built into my allocation.
As for the many funds, I am aiming for higher returns and higher risks with a higher tracking error, that is why I hedged by country allocation with additional small cap funds. I've got low transactions fees and some cost me 0$ so I do not mind the more exotic bird in the portfolio.
Looking at the couchpotato AA even aggressive recommends 30% canadian exposure so I'll rebalance to that high watermark
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PTF/reference.
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davrobev -- I agree with you, at least, that is how I invest, so my money agrees with you.
I also think that having a solid foundation of investments in your own currency (or the country you will retire in) is a good move, so I will always keep my fixed as well as Cdn portions, even though I am attracted to world markets for the diversity and returns. Having lived in three countries now, experiencing currency fluctuations that appear random that chew up 25% of your money in one season... well, I like things I can rely on for retirement and currency exchange rates just isn't it.
I do like to read un-expected and well-thought points of view, and this one by Bogle is worth consideration, especially for those that like extra simplicity in their investments. If you are going to have one fund, the US version is not a bad choice (as you said).
Thing is, if a country's currency drops hard, their stock market tends to go up to compensate. Because those companies are suddenly cheaper.
For me, it's the pound. I mostly - somewhat - think in pounds, but the pound has been down and up and since Brexit down again. But the FTSE has held up pretty well. Compared to the TSX - and considering the FTSE 100 contains a lot of mining companies, oil companies just like the TSX - the *currency* is just not much of a factor.
It all kind've smooshes out (and that lends weight to your suggestion, actually - might as well just buy the US). I think it argues to not have a high portion in Canada, though. /shrug
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What I meant by currency fluctuation...
I was living in the US, and had a heavy US / international weighting... No CDN exposure... The Cdn Dollar rose up to par quite quickly, right around the time that I returned to Canada, so my cash dropped in value.. and there was nothing to compensate for it.. just less money in CDN dollars.
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What I meant by currency fluctuation...
I was living in the US, and had a heavy US / international weighting... No CDN exposure... The Cdn Dollar rose up to par quite quickly, right around the time that I returned to Canada, so my cash dropped in value.. and there was nothing to compensate for it.. just less money in CDN dollars.
Oh, yeah, you should keep bonds in the country you are to retire in if at all possible.
Tricky when you aren't sure what the future holds, though. We had my wife's aunt visiting who has lived in the US for decades but is likely moving back here in retirement. Hopefully the exchange rate - for when she sells her house - works out. My feeling is that CAD:USD is 'right' at the moment, but who knows.
CAD gets yanked around with oil. Or, it did... not so much now apparently.
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I just stick with Canadian Couch Potato's Model Portfolio (I own no property).
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My passive portfolio accounts for 95% of my wealth and savings.
Fixed Income
20% All Canadian Bonds (VAB)
20% Canadian Preferred Share Index (CPD)
Equities
20% Canadian (VCN)
40% World Ex-Canada (VXC)
This portfolio is heavily influenced by two popular Canadian model portfolio's:
1) The Canadian couch potato (http://canadiancouchpotato.com):
- A very good model to use for cheap, broad and easy to set up portfolios for all net worth levels
2) Garth Turner's Millennial ETF portfolio. (http://www.greaterfool.ca/2014/05/15/the-millennial-portfolio/)
- Has more of a focus on balance and includes a dollop of preferred shares for their income stability, positive co-relation with interest rates and huge tax credit
- VCN and VXC both have REIT's so I don't include those like Garth does.
- Also VAB includes government and corporate bonds so I don't have separate allocations like Garth recommends because I think it's too complicated.
The other 5% is in whatever I want, mostly berkshire hathaway stock and lending loop loans right now.