Author Topic: Asset allocation for Canadian  (Read 10516 times)

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Asset allocation for Canadian
« on: March 25, 2017, 08:08:53 PM »
Our actual asset allocation is 30%ZCN (Canadian stock index etf),  25%VTI, 10%VBR and 35%VXUS

I manage all of our accounts (6) as a big portfolio with only 1 ETF/account for most of them. Nothing is complicated, fees and taxes are low etc. BTW, total investments are close to 1M$ now...

I'm just thinking to add few more asset classes with good expected return. I actually think about buying VNQ, maybe 5%, and lower my VXUS target to 30%.

Then, the next step would be to reduce again the VXUS to 25% and invest the difference into VSS. At the end, I would get: 30%ZCN, 25%VTI, 10%VBR, 5%VNQ, 25%VXUS and 5%VSS

I really appreciate broad index but also find appealing the small cap, value and real estate tilts.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 6629
Re: Asset allocation for Canadian
« Reply #1 on: March 25, 2017, 11:55:17 PM »
I don't personally agree with a real estate tilt, but that doesn't stop me from helping you extend that idea.  Have you considered VNQI?  Where VNQ is US-only real estate, VNQI covers international real estate.

Sticking to Vanguard while gaining international small/value is a bit more difficult.  Another approach is to tilt towards emerging markets.  According to Vanguard's VXUS listing, about 19% is emerging markets.  So of a 25% allocation, that's about 20% developed markets and 5% emerging markets in your portfolio.  You could split VXUS into VEA and VWO components, and then push VWO slightly higher.

Any reason for 0% bonds?  As [you] close in on retirement, it becomes more important to protect what you have than risk it.  It would be better to have a percentage in bonds based on when you plan to retire.
« Last Edit: March 27, 2017, 02:08:06 AM by MustacheAndaHalf »

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #2 on: March 26, 2017, 06:15:39 AM »
True enough that VNQ is US only but VNQI is ex-US only, that is the adavantage then? At some point, I could own bot

I also like your EM idea (VWO) but if I decide to go this way, I would keep VXUS wich include small cap, DM and EM. I may have 25%VXUS and 5%VWO

About the bonds, I think to include them at some point to reduce my Canadian stock %. To do so, I think of VSB for 5-10% but not now. We have a +1M$ NW but still use leverage (18% now) and I think it makes little sense to own bonds while leveraging...

I keep a 3-4 months of expenses in cash and think to work part time for another 5 years, I'm 45 now

What is your AA?

SweetLife

  • Bristles
  • ***
  • Posts: 330
  • Location: Ontario
Re: Asset allocation for Canadian
« Reply #3 on: March 26, 2017, 06:57:59 AM »
Fellow Canadian soaking up advice on investing ;) 

Would love to see another Post from you on general investing topic Le Barbu !!!!



Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #4 on: March 26, 2017, 08:08:14 AM »
Fellow Canadian soaking up advice on investing ;) 

Would love to see another Post from you on general investing topic Le Barbu !!!!

Really?

RichMoose

  • Pencil Stache
  • ****
  • Posts: 965
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Asset allocation for Canadian
« Reply #5 on: March 26, 2017, 09:56:32 AM »
You're already well diversified Le Barbu. My older and wiser co-worker often tells me: if it isn't broken, don't fix it and tinkering only fixes boredom.

If you do decide to move ahead with more real estate exposure, I would be hesitant to take it out of VXUS. Personally if anything is a little overweight right now it's your ZCN.

So maybe do ZCN to 20% and add 5% VNQ and 5% VNQI. I gotta say that VNQI looks positively cheap, but not sure about the tax efficiency. Also keep in mind that real estate is vulnerable to interest rate risk, more so than anything beside bonds.

PS: always good to see a Le Barbu post. I admire your thought process and questions.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #6 on: March 26, 2017, 02:07:35 PM »
Hello Tux! ;)

Good to read your comments, thanks for your kind words

I also think my % into Canadian stock market is high, especially because it's poorly diversified. On the brigth side, it gives me exposure to commodities (oil, gold) with no more effort. Someday, I may reduce this to 20-25% but for now, tax efficiency holds me to do it.

I already tougth of buying a Canadian reits etf but MERs are quite expensive and diversification is poor (20 holdings or so), not worth it I think...

Your co-workers advices are full of wisdom! But another saying is "to strong doesnt break"! I did not changed my AA much over 5 years now. I dont trade much neither, usualy once per account/annum. My US denominated holdings (VTI, VBR and VXUS) are not eligibles to DRIP at RBC DI. I use TDB217 to reinvest quaterly dividends without trading fees. When it reach 5k$, I proceed to buy the lagging asset (usualy VXUS!!)

Meanwhile, I will continue to think about it before I do anything
« Last Edit: March 27, 2017, 09:35:20 AM by Le Barbu »

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1612
Re: Asset allocation for Canadian
« Reply #7 on: March 26, 2017, 05:23:12 PM »
My US denominated holdings (VTI, VBR and VXUS) are not eligibles to DRIP at RBC DI. I use TDB417 to reinvest quarterly dividends without trading fees. When it reach 5k$, I proceed to buy the lagging asset (usualy VXUS!!)


I have the same USD DRIP problem with VTI in BMO Investorline - does anyone have a similar recommendation for BMO fund

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #8 on: March 26, 2017, 08:51:12 PM »
My US denominated holdings (VTI, VBR and VXUS) are not eligibles to DRIP at RBC DI. I use TDB417 to reinvest quarterly dividends without trading fees. When it reach 5k$, I proceed to buy the lagging asset (usualy VXUS!!)


I have the same USD DRIP problem with VTI in BMO Investorline - does anyone have a similar recommendation for BMO fund

Did you looked if TDB417 is available at BMO investorline? I searched for a while before finding this fund. Pick any USD index fund with MER lower than 1% (TDB217 is 0.5% I think). Good luck!
« Last Edit: March 27, 2017, 09:36:01 AM by Le Barbu »

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1612
Re: Asset allocation for Canadian
« Reply #9 on: March 26, 2017, 11:49:17 PM »
Thanks Barbu.  I couldn't quote TDB417, but maybe with some more research. I think I need its fundcode.

http://fundfacts.bmo.com/RetailEnglish/BMO_US_Dollar_Equity_Index_Fund-EN-Series_A.pdf

This one is SP500 with 1,17 MER.  Yuck, but better than $200 sitting idle, or paying 5% commission to get it into VTI.
« Last Edit: March 27, 2017, 12:07:31 AM by Heckler »

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 6629
Re: Asset allocation for Canadian
« Reply #10 on: March 27, 2017, 02:19:15 AM »
Le Barbu - Maybe I misunderstood, but are you saying you're age 45 and planning to retire at age 50? 

Don't take my word on what to do - look at Vanguard.  Vanguard has Target Retirement 2020 and 2025 funds.  The earlier fund, for people retiring in 3 years, holds 43% in bonds.  The Target 2025 fund holds 36% in bonds.

Meanwhile it sounds like your bond allocation is -18% (I'll explain the negative).  A loan is a negative bond - instead of receiving money, you're paying it.  So from your 0% bonds subtracting the loan of ~18% of assets gives about -18% exposure to bonds.  For your time horizon, I must not be understanding something because that risk level is too high for retiring in 5 years.

In general as you approach retirement, you want to protect your retirement assets.  When growing those assets doesn't matter as much... when you have "enough", you want bonds to keep what you already have.  If the stock market corrects right around the time you retire, your withdrawal rate might go from ~4% to ~6%, and retirement might need to be delayed.  When retired with enough, rapidly growing your money doesn't accomplish more retirement - but risking it and losing can push you out of retirement.  So that's why the role of bonds becomes much larger close to retirement, and why Vanguard is allocating in the 36% - 43% bonds range while your allocation is very different.

But hopefully I just misunderstood, and someone else can make use of the above explanation.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #11 on: March 27, 2017, 07:01:04 AM »
Thank you MustacheAndaHalf to care so much, so take no offence into my following comments!

My leverage is through HELOC @ 2.05% minus tax deduction (net 1.4%). Do we really consider people debt (mortgage & cars) in their financial picture (portfolio)? Many think they have a nice 40/60 balanced 50k$ portfolio but carry a 375k$ mortgage...scarry!

I know that the financial industry recomend more bonds as you get older or closer to retirement. The car industry recomends to trade-in every 2-4 years, etc

I am a real mustachian, badass and DIYer and I was never worried in the dotcom crash, the great recession crash etc.

In another field like strength and fitness, the common person is recomended to train with bodyweigth exercises, 10#dumbells, sets of 12reps, 30 minutes jogging, etc. I educated myself and now train with 200-400# for sets of 5 twice per week. I gained 15# of BW (probably 10#muscle, 5#fat) and I never felt better, no more back pain, happier etc.

Being 45, I have to expect my remaining life to be in the 40-50 years range. For that timespan, a 90%-118%* stock portfolio is not risky at all. I also see no positive expected return after inflation from bonds, the only advantage is to reduce volatility and rebalance in an efficient way.

I can consider myself FI on a barebone budget as for today. I do not want to work 40+hours/week for the next 20 years. I have been out of the work force for many months and came to the conclusion that a 20-30 hours/week job would be perfect for me. I may change my mind later, I dont know...

So, you did not misunderstood!

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #12 on: March 27, 2017, 09:33:53 AM »
My US denominated holdings (VTI, VBR and VXUS) are not eligibles to DRIP at RBC DI. I use TDB417 to reinvest quarterly dividends without trading fees. When it reach 5k$, I proceed to buy the lagging asset (usualy VXUS!!)


I have the same USD DRIP problem with VTI in BMO Investorline - does anyone have a similar recommendation for BMO fund

Did you looked if TDB417 is available at BMO investorline? I searched for a while before finding this fund. Pick any USD index fund with MER lower than 1% (TDB417 is 0.5% I think). Good luck!

Sorry Heckler, I was wrong with my USD fund ticker, it's TDB217

I will change this in my original comment as well

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #13 on: March 27, 2017, 09:42:59 AM »
Thanks Barbu.  I couldn't quote TDB417, but maybe with some more research. I think I need its fundcode.

http://fundfacts.bmo.com/RetailEnglish/BMO_US_Dollar_Equity_Index_Fund-EN-Series_A.pdf

This one is SP500 with 1,17 MER.  Yuck, but better than $200 sitting idle, or paying 5% commission to get it into VTI.

MER are almost irrevelent in this situation. Convenience have a price and your maths are good!

Often, I read post with people complaining about high MER with less than 5k$ invested...

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1612
Re: Asset allocation for Canadian
« Reply #14 on: March 27, 2017, 08:30:29 PM »
Thanks!  Now I just need another Quarter of dividends to get above the $500 minimum buyin.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #15 on: March 28, 2017, 05:25:59 AM »
Thanks!  Now I just need another Quarter of dividends to get above the $500 minimum buyin.

I managed the same kind of situation into my RESP. When I openned a new RESP at RBC DI to buy ETF (and save 500$ of fees/year!). I left 550$ in the former to have the minimum 500$ and invest in rbf556. Some grants will still be paid in that account next year...

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #16 on: April 04, 2017, 11:44:40 AM »
I did backtesting to compare 4 differents AA. All of them are 100% stocks, 30% canadian, 35%US and 35% Intl. My backtest covers only 2011-2017 for simplicity (availability of ETFs)

1-30%XIC/70%VT=9.91%CAGR & 9.98%stdev

2-30%XIC/35%VTI/35%VXUS=10.13%CAGR & 9.89%stdev

3-30%XIC/25%VTI/10%VBR/35%VXUS (my actual AA)=10.25%CAGR & 10.00%stdev

4-30%XIC/20%VTI/10%VBR/5%VNQ/20%VXUS/5%VSS/5%VWO/5%VNQI=10.24%CAGR & 9.84%stdev

So, between the most simple (2 ETFs) and the "silice & dice" (8 ETFs) I only gained 0.33%CAGR and reduced stdev by 0.14%. Most of the job was done with a 2 ETFs portfolio and most improvement came from splitting US and Intl. indexes. Simplicity won again!

RichMoose

  • Pencil Stache
  • ****
  • Posts: 965
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Asset allocation for Canadian
« Reply #17 on: April 04, 2017, 12:25:14 PM »
I did backtesting to compare 4 differents AA. All of them are 100% stocks, 30% canadian, 35%US and 35% Intl. My backtest covers only 2011-2017 for simplicity (availability of ETFs)

1-30%XIC/70%VT=9.91%CAGR & 9.98%stdev

2-30%XIC/35%VTI/35%VXUS=10.13%CAGR & 9.89%stdev

3-30%XIC/25%VTI/10%VBR/35%VXUS (my actual AA)=10.25%CAGR & 10.00%stdev

4-30%XIC/20%VTI/10%VBR/5%VNQ/20%VXUS/5%VSS/5%VWO/5%VNQI=10.24%CAGR & 9.84%stdev

So, between the most simple (2 ETFs) and the "silice & dice" (8 ETFs) I only gained 0.33%CAGR and reduced stdev by 0.14%. Most of the job was done with a 2 ETFs portfolio and most improvement came from splitting US and Intl. indexes. Simplicity won again!

And how much impact did reduced average MERs for the diced products have? I would guess it made up for a good part of the difference. Then add rebalancing / trading costs and you're probably even.

Simple is good!

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #18 on: April 04, 2017, 01:05:27 PM »
I did backtesting to compare 4 differents AA. All of them are 100% stocks, 30% canadian, 35%US and 35% Intl. My backtest covers only 2011-2017 for simplicity (availability of ETFs)

1-30%XIC/70%VT=9.91%CAGR & 9.98%stdev

2-30%XIC/35%VTI/35%VXUS=10.13%CAGR & 9.89%stdev

3-30%XIC/25%VTI/10%VBR/35%VXUS (my actual AA)=10.25%CAGR & 10.00%stdev

4-30%XIC/20%VTI/10%VBR/5%VNQ/20%VXUS/5%VSS/5%VWO/5%VNQI=10.24%CAGR & 9.84%stdev

So, between the most simple (2 ETFs) and the "silice & dice" (8 ETFs) I only gained 0.33%CAGR and reduced stdev by 0.14%. Most of the job was done with a 2 ETFs portfolio and most improvement came from splitting US and Intl. indexes. Simplicity won again!

And how much impact did reduced average MERs for the diced products have? I would guess it made up for a good part of the difference. Then add rebalancing / trading costs and you're probably even.

Simple is good!

If someone keep trading cost very low, sterring new money toward loosers, it may worth and stay pretty cheap. But keeping a more complex AA for years without thinkering about it is more difficult!

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8678
Re: Asset allocation for Canadian
« Reply #19 on: April 05, 2017, 07:00:31 AM »
My AA currently is:

- VTI [40%]
- VUN [10%]
- VCN [30%]
- VIU [10%]
- VEE [10%]
- Bonds [$0]

When I get to FIRE [2-3yrs] I'll buy something like $150K in bonds as a sequence of returns risk mitigator I won't try and keep a constant %, but rather just leave that alone. If there is an early crash I'll use the bonds to live off as well as probably get a PT job. If I get toward 10yrs with no really nasty crash I'll either spend down the bonds or just let them become a smaller and smaller component of the portfolio.

GreatLaker

  • Stubble
  • **
  • Posts: 150
  • Location: Canada
Re: Asset allocation for Canadian
« Reply #20 on: April 05, 2017, 07:48:28 AM »
My AA currently is:

- VTI [40%]
- VUN [10%]
- VCN [30%]
- VIU [10%]
- VEE [10%]
- Bonds [$0]

When I get to FIRE [2-3yrs] I'll buy something like $150K in bonds as a sequence of returns risk mitigator I won't try and keep a constant %, but rather just leave that alone. If there is an early crash I'll use the bonds to live off as well as probably get a PT job. If I get toward 10yrs with no really nasty crash I'll either spend down the bonds or just let them become a smaller and smaller component of the portfolio.

Interesting approach. What if there is a big crash just before you retire? You could get hit with sequence of return risk. I believe an investors can have 0% FI until about 10 years before they plan to retire, then gradually increase it to the target retirement allocation. Stock markets can get seriously out of sync with fundamentals, like in the stagflationary 1970s (stocks peaked in late 60s and did not reach that level again until the early 1980s) or the lost decade of the 2000s. Gradually ramping up FI over several years minimizes that risk.

I do agree that a retiree's FI % can gradually decline as they get older. Some people say after retirement the % FI should continue to increase. But that does not make sense to me. As your life expectancy declines, so does the need for fixed income. I plan to keep enough FI (bonds, GICs) to weather a long bear market, and the rest in equity.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8678
Re: Asset allocation for Canadian
« Reply #21 on: April 05, 2017, 07:59:10 AM »
Interesting approach. What if there is a big crash just before you retire? You could get hit with sequence of return risk. I believe an investors can have 0% FI until about 10 years before they plan to retire, then gradually increase it to the target retirement allocation. Stock markets can get seriously out of sync with fundamentals, like in the stagflationary 1970s (stocks peaked in late 60s and did not reach that level again until the early 1980s) or the lost decade of the 2000s. Gradually ramping up FI over several years minimizes that risk.

I do agree that a retiree's FI % can gradually decline as they get older. Some people say after retirement the % FI should continue to increase. But that does not make sense to me. As your life expectancy declines, so does the need for fixed income. I plan to keep enough FI (bonds, GICs) to weather a long bear market, and the rest in equity.

If there is a big crash just before I was going to retire I would keep working - this would be true whether I had just bought my bonds or hadn't done that yet. While I have lived through the tech bubble and 2008 without doing anything stupid I would not have the stomach to FIRE the day after a 30%+ market crash no matter what my allocation is. Working through that crash would set me up for success of the back end so it would be worth it.

Posthumane

  • Bristles
  • ***
  • Posts: 396
  • Location: Bring Cash, Canuckistan
    • Getting Around Canada
Re: Asset allocation for Canadian
« Reply #22 on: April 05, 2017, 12:03:04 PM »
I was just coming to the forum to ask for a critique of my AA and account distribution, but I hope you don't mind attaching it to this thread instead. Currently what I have is:
25% Canadian all cap (VCN) - RRSP
12.5% Canadian dividend (ZDV) - Taxable
12.5% US total market (VUN) - TFSA/RRSP
12.5% Canadian REIT (Mostly CSH.UN but recently some CAR.UN) - TFSA/RRSP
12.5% Gold (PHYS) - TFSA
12.5% US long term treasuries (TLT) - TFSA/RRSP
12.5% Canadian bonds and cash (Mostly savings account, some CIB476 in RRSP)

I know this probably looks a bit haphazard, so a bit of history. When I first started the MMM journey I opened up a self directed RRSP investment account at my local bank, and did a usual stock/bond mix. I then opened a TFSA at questrade and decided to make that one a Permanent Porfolio. Eventually I ran out of contribution room due to having a significant pension adjustment from a defined benefit pension I have, so I opened a taxable account at questrade and started buying ZDV there as it's almost entirely eligible dividend distributions. Anyway, I'm in my mid 30's with about 180k of investible assets and have started to consolidate all of my investments into one portfolio split between my accounts. There are a number of things that I think should be fixed; for example I have TLT mostly in my TFSA, which means there is US witholding tax on it. I am slowly moving it to my RRSP to avoid that. My cash allocation doubles as my emergency fund, which is why it's not all in bonds. The part that is in bonds should probably be moved to VAB. Gold can probably be moved to the taxable account since it has no distributions.
« Last Edit: April 05, 2017, 12:06:17 PM by Posthumane »

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #23 on: April 05, 2017, 12:26:45 PM »
I was just coming to the forum to ask for a critique of my AA and account distribution, but I hope you don't mind attaching it to this thread instead. Currently what I have is:
25% Canadian all cap (VCN) - RRSP
12.5% Canadian dividend (ZDV) - Taxable
12.5% US total market (VUN) - TFSA/RRSP
12.5% Canadian REIT (Mostly CSH.UN but recently some CAR.UN) - TFSA/RRSP
12.5% Gold (PHYS) - TFSA
12.5% US long term treasuries (TLT) - TFSA/RRSP
12.5% Canadian bonds and cash (Mostly savings account, some CIB476 in RRSP)

I know this probably looks a bit haphazard, so a bit of history. When I first started the MMM journey I opened up a self directed RRSP investment account at my local bank, and did a usual stock/bond mix. I then opened a TFSA at questrade and decided to make that one a Permanent Porfolio. Eventually I ran out of contribution room due to having a significant pension adjustment from a defined benefit pension I have, so I opened a taxable account at questrade and started buying ZDV there as it's almost entirely eligible dividend distributions. Anyway, I'm in my mid 30's with about 180k of investible assets and have started to consolidate all of my investments into one portfolio split between my accounts. There are a number of things that I think should be fixed; for example I have TLT mostly in my TFSA, which means there is US witholding tax on it. I am slowly moving it to my RRSP to avoid that. My cash allocation doubles as my emergency fund, which is why it's not all in bonds. The part that is in bonds should probably be moved to VAB. Gold can probably be moved to the taxable account since it has no distributions.

As a Canadian, your bonds should be held in CAD. Bonds are there to proctect you, I would never hold bonds outside Canada. Actualy, I do not hold any, to much risk! Someday, I may buy VSB...

About gold, you know this produce nothing? It's been a hedge to stocks for years, but who know the future? Read Buffet's takes on gold...

ZDV carry 0.39% or 8x more than ZCN or VCN. Dividends are great but capital gain is still taxed lower than eligible dividends.

No Intl stock exposure? Actually, the lower P/E ratio are outside US and Canada...

I think you have to much holdings for a 180k$ portfolio, make it simpler and enjoy!

Posthumane

  • Bristles
  • ***
  • Posts: 396
  • Location: Bring Cash, Canuckistan
    • Getting Around Canada
Re: Asset allocation for Canadian
« Reply #24 on: April 05, 2017, 01:25:06 PM »
Thanks for your thoughts Le Barbu!

Regarding gold and the US long term treasuries, they are there simply as a rebalancing placeholder since they tend to have a low correlation with the US stock markets. Of course, US treasuries also add currency risk for Canadians. Harry Browne's permanent portfolio had an allocation of 25% each of US stock, long term treasuries, short term bonds/money market, and gold. The historical CAGR was somewhere around 9% with less standard deviation than a total stock index. Of course, it's more difficult to reproduce that using Canadian only funds. I'll have to think about that.

Can you explain the taxation on capital gains vs. eligible dividends? I was under the impression that capital gains are taxed at half your marginal rate, which for me would be 15.25% (20.5% fed bracket, 10% provincial). With the elegible dividend tax credit, my tax bill on over $1k of distributions ended up being $65 this year. Granted, if I wait until after retirement to realize capital gains my marginal rate would be lower, but probably not lower than 25% (15% fed, 10% prov).

Definitely a good point on the intl stock. In my wife's portfolio we have VXC rather than a US market fund, perhaps I should do the same in mine.

GreatLaker

  • Stubble
  • **
  • Posts: 150
  • Location: Canada
Re: Asset allocation for Canadian
« Reply #25 on: April 05, 2017, 01:35:43 PM »
Can you explain the taxation on capital gains vs. eligible dividends? I was under the impression that capital gains are taxed at half your marginal rate, which for me would be 15.25% (20.5% fed bracket, 10% provincial). With the elegible dividend tax credit, my tax bill on over $1k of distributions ended up being $65 this year. Granted, if I wait until after retirement to realize capital gains my marginal rate would be lower, but probably not lower than 25% (15% fed, 10% prov).
You can see the tax tables here for Alberta (based on your profile):
http://www.taxtips.ca/taxrates/ab.htm

Tax rate in AB on eligible dividends is lower than capital gains right up to $142k of income. Note it varies by province.

Posthumane

  • Bristles
  • ***
  • Posts: 396
  • Location: Bring Cash, Canuckistan
    • Getting Around Canada
Re: Asset allocation for Canadian
« Reply #26 on: April 05, 2017, 01:49:33 PM »
Thanks for the link GreatLaker. I guess if I lived in Quebec then eligible dividends in my bracket would indeed be taxed more than cap gains, but in Alberta they are significantly less. That being said, it looks like the majority of VCN's distributions are also eligible dividends (with some "other income"), and it has a lower MER and better trailing returns than ZDV.

runewell

  • Bristles
  • ***
  • Posts: 416
  • Age: 52
  • actuary
Re: Asset allocation for Canadian
« Reply #27 on: April 05, 2017, 01:56:02 PM »
Canada's market capitalization is <3% of the global total.

So why do you have so much in your portfolios??

runewell

  • Bristles
  • ***
  • Posts: 416
  • Age: 52
  • actuary
Re: Asset allocation for Canadian
« Reply #28 on: April 05, 2017, 01:57:37 PM »
As a Canadian, your bonds should be held in CAD. Bonds are there to proctect you, I would never hold bonds outside Canada. Actualy, I do not hold any, to much risk!

go on...

I don't see why you wouldn't purchase a more diversified set of bonds than just from one country.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8678
Re: Asset allocation for Canadian
« Reply #29 on: April 05, 2017, 02:10:09 PM »
Canada's market capitalization is <3% of the global total.

So why do you have so much in your portfolios??

Personally I'm not trying to match my portfolio to the global capitalization of the various markets. There are lots of US MMMers that hold 100% US stocks and the US is not 100% of the total global market.

http://www.moneysense.ca/invest/bias-towards-canadian-stocks/

http://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #30 on: April 05, 2017, 02:16:39 PM »
Thanks for the link GreatLaker. I guess if I lived in Quebec then eligible dividends in my bracket would indeed be taxed more than cap gains, but in Alberta they are significantly less. That being said, it looks like the majority of VCN's distributions are also eligible dividends (with some "other income"), and it has a lower MER and better trailing returns than ZDV.

Many diffents topics here. In Quebec, for an individual with a 50k$ gross income, eligible dividends are taxed at 17.5% and capital gain at 18.6% so very close. Lower income (less than 40k$) favours dividends and higher income (more than 90k$) favours capital gain. Even if Alberta tax rate favours eligible dividends at your tax rate, those are taxed now, through your prime income years vs lower income when FIRE (assumption). Capital gains can be reported as long as you want. You kind of "manage" them. The 0.39% MER will never be recovered in any ways neither.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #31 on: April 05, 2017, 02:26:51 PM »
As a Canadian, your bonds should be held in CAD. Bonds are there to proctect you, I would never hold bonds outside Canada. Actualy, I do not hold any, to much risk!

go on...

I don't see why you wouldn't purchase a more diversified set of bonds than just from one country.

Because when I buy an asset outside my home country, I aim for something else than an expected return matching the inflation rate, especially when carrying a currency risk!

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #32 on: April 05, 2017, 02:32:24 PM »
Canada's market capitalization is <3% of the global total.

So why do you have so much in your portfolios??

Personally I'm not trying to match my portfolio to the global capitalization of the various markets. There are lots of US MMMers that hold 100% US stocks and the US is not 100% of the total global market.

http://www.moneysense.ca/invest/bias-towards-canadian-stocks/

http://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/

And holding 3% in Canada would mean having 97% of our money outside Canada! I would say anything between 20% and 35% is acceptable for us.

GreatLaker

  • Stubble
  • **
  • Posts: 150
  • Location: Canada
Re: Asset allocation for Canadian
« Reply #33 on: April 05, 2017, 03:57:08 PM »
Thanks for the link GreatLaker. I guess if I lived in Quebec then eligible dividends in my bracket would indeed be taxed more than cap gains, but in Alberta they are significantly less. That being said, it looks like the majority of VCN's distributions are also eligible dividends (with some "other income"), and it has a lower MER and better trailing returns than ZDV.
When I consider investing in specific segments like dividend paying equities or REITs I consider the following: 1) Will they outperform in the future after costs since segment funds have higher MERs (No one knows what future performance will be); 2) Do they have a diversification benefit by way of lower correlation with core assets that will reduce portfolio volatility; and 3) Do I need the regular income that some segments like dividend stocks and REITs pay.

Note that broadly based equity ETFs contain a market weighted allocation to dividends and REITs so adding something like ZDV or XDV, or ZRE or VRE does not diversify a portfolio, it concentrates it. I used to hold ZRE, but that was back when MERs on funds like XIC were much higher. Recently the MER on ZCN, VCN, XIC dropped considerably to 0.06% yet on ZRE and XRE stayed around 0.6%. In the end I decided that ZRE was unlikely to overcome its cost handicap, and it also may be susceptible to higher interest rates.

I may choose to buy individual stocks in specific segments, but at this time I have not done so.
« Last Edit: April 05, 2017, 04:43:24 PM by GreatLaker »

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #34 on: April 05, 2017, 04:13:08 PM »
Thanks for the link GreatLaker. I guess if I lived in Quebec then eligible dividends in my bracket would indeed be taxed more than cap gains, but in Alberta they are significantly less. That being said, it looks like the majority of VCN's distributions are also eligible dividends (with some "other income"), and it has a lower MER and better trailing returns than ZDV.
When I consider investing in specific segments like dividend paying equities or REITs I consider the following: 1) Will they outperform in the future after costs since segment funds have higher MERs (No one knows what future performance will be); 2) Do they have a diversification benefit by way of lower correlation with core assets that will reduce portfolio volatility; and 3) Do I need the regular income that some segments like dividend stocks and REITs pay.

Note that broadly based equity ETFs contain a market weighted allocation to dividends and REITs so adding something like ZDV or XDV, or ZRE or VRE does not diversify a portfolio, it concentrates it. I used to hold ZRE, but that was back when MERs on funds like XIC were much higher. Recently the MER on ZCN, VCN, XIC dropped considerably to 0.06% yet on ZRE and XRE stayed around 0.6%. In the end I decided that VRE was unlikely to overcome its cost handicap, and it also may be susceptible to higher interest rates.

I may choose to buy individual stocks in specific segments, but at this time I have not done so.

Excellent post GreatLaker! In investing, you get what you dont pay for (MERs, commisions, fees, taxes etc)

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Asset allocation for Canadian
« Reply #35 on: April 06, 2017, 01:05:10 PM »
Too much Canada. Far too much.

Re the point about Americans having 100% US stuff... yeah... except it's 100% US domicile, not place of business. Lots and lots of "American" businesses are multinational. Sure, so are some Canadian ones, but in nothing like the same way.

If you buy 100% "American" you get Amazon, Apple, Microsoft, GE, GM, Ford, Exxon, Coca-Cola...

If you buy 100% Canada you get... Bombardier? Hudson's Bay? RBC, TD, Scotia sure but... You get what I'm saying, I hope.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8678
Re: Asset allocation for Canadian
« Reply #36 on: April 06, 2017, 01:27:49 PM »
Too much Canada. Far too much.

I posted links to articles discussing Canadian home country bias. They provide a number of reasons why holding more than Canada's global market cap makes sense. I'm comfortable with 30% Canadian stocks. If you are not hold a smaller %.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #37 on: April 06, 2017, 01:57:56 PM »
Too much Canada. Far too much.

Re the point about Americans having 100% US stuff... yeah... except it's 100% US domicile, not place of business. Lots and lots of "American" businesses are multinational. Sure, so are some Canadian ones, but in nothing like the same way.
E
If you buy 100% "American" you get Amazon, Apple, Microsoft, GE, GM, Ford, Exxon, Coca-Cola...

If you buy 100% Canada you get... Bombardier? Hudson's Bay? RBC, TD, Scotia sure but... You get what I'm saying, I hope.

Daverobev, what is your % of Canadian stocks?

We all know, Canadian stock market is mostly financials, energy and materials (75% for 3 sectors!!!)

The 10 biggest Co. make for almost 40% of TSX!!! (And the 250 biggest=99%!!!)

The positive side? I dont feel any appeal to hold gold or commodities...

Anyway, I would hold at least 20% Canadian stocks for a minimum, probably if I ever decide to hold bonds. My Canadian holdings would be 20%ZCN and 10%VSB. The remaining 70% evenly splitted between VTI and VXUS

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Asset allocation for Canadian
« Reply #38 on: April 06, 2017, 03:34:14 PM »
Too much Canada. Far too much.

I posted links to articles discussing Canadian home country bias. They provide a number of reasons why holding more than Canada's global market cap makes sense. I'm comfortable with 30% Canadian stocks. If you are not hold a smaller %.

OP asked for opinions; that's mine. I just disagree with the opinion pieces I've read. Perhaps being 'not Canadian' brings more sharply into focus the... hmm.. not blinkeredness exactly, but something.. of being so overweight in Canada. If/when we leave Canada I don't expect to hold anything like 30% of Canadian stuff, so why would I while here?

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Asset allocation for Canadian
« Reply #39 on: April 06, 2017, 03:36:12 PM »
Too much Canada. Far too much.

Re the point about Americans having 100% US stuff... yeah... except it's 100% US domicile, not place of business. Lots and lots of "American" businesses are multinational. Sure, so are some Canadian ones, but in nothing like the same way.
E
If you buy 100% "American" you get Amazon, Apple, Microsoft, GE, GM, Ford, Exxon, Coca-Cola...

If you buy 100% Canada you get... Bombardier? Hudson's Bay? RBC, TD, Scotia sure but... You get what I'm saying, I hope.

Daverobev, what is your % of Canadian stocks?

We all know, Canadian stock market is mostly financials, energy and materials (75% for 3 sectors!!!)

The 10 biggest Co. make for almost 40% of TSX!!! (And the 250 biggest=99%!!!)

The positive side? I dont feel any appeal to hold gold or commodities...

Anyway, I would hold at least 20% Canadian stocks for a minimum, probably if I ever decide to hold bonds. My Canadian holdings would be 20%ZCN and 10%VSB. The remaining 70% evenly splitted between VTI and VXUS

Remember VXUS is already 8% Canada!!

My holding is maybe 10%, though my portfolio is certainly a case of 'do as I say, not as I do'! I have some ZPR and ZDV as I keep thinking I'm retired but keep working. Actual Canadian broad index is pretty low.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #40 on: April 06, 2017, 04:06:09 PM »
daverobev, since you are actually in Canada but not Canadian...I would probably invest a lot less in Canadian stocks being in this situation.

The currency risk is real, especially if someone plan to stay in Canada forever.


Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #41 on: April 06, 2017, 04:09:45 PM »
Some accounts are a lot more tax efficient if invested in Canadian stocks (taxable) or other Canadian investments (TFSA, RESP) as the US stocks are better than Intl in RRSP

Al1961

  • Stubble
  • **
  • Posts: 225
  • Age: 62
  • Location: Alberta - B.C.
  • Dad of a husky Husky
Re: Asset allocation for Canadian
« Reply #42 on: April 06, 2017, 04:24:11 PM »
<snip>

The currency risk is real, especially if someone plan to stay in Canada forever.

And that's the thing.

I'm retired in Canada, spending CAD. I have most of my portfolio in Canadian securities - more bonds than stocks, though. But pensions will account for something like 94% of our cash needs once CPP and OAS kick in, so it really doesn't matter to our retirement success if I'm sufficiently globally diversified or not.

Obviously, not everyone is in that position. I chose to minimize exchange risk, and take on more portfolio concentration risk.

There's a chance that we may spend a few years in the UK/EU a decade or so from now. If it looks like that will happen, I'll adjust the portfolio. We'll have a lot of currency risk from pensions being in CAD though, so more foreign investments may help hedge that.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Asset allocation for Canadian
« Reply #43 on: April 06, 2017, 04:52:34 PM »
daverobev, since you are actually in Canada but not Canadian...I would probably invest a lot less in Canadian stocks being in this situation.

The currency risk is real, especially if someone plan to stay in Canada forever.

I'm dual, now.

But, with stocks, currency 'risk' is a good thing, if you rebalance. You rebalance to bonds as you get older. Currency fluctuations along the way should help, not hinder.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #44 on: April 06, 2017, 05:27:31 PM »
daverobev, since you are actually in Canada but not Canadian...I would probably invest a lot less in Canadian stocks being in this situation.

The currency risk is real, especially if someone plan to stay in Canada forever.

I'm dual, now.

But, with stocks, currency 'risk' is a good thing, if you rebalance. You rebalance to bonds as you get older. Currency fluctuations along the way should help, not hinder.

I understand that, I would definetly like to have my % of Canadian stock drag below 30% in the future. Probably more comfortable at 20% or so...

My RRSP is 50% VTI and 50% VXUS but some accounts like TFSA, RESP and taxable (wich actually represents 30% of my total portfolio) are better served with Canadian holdings.

Makes me think of  people wich only asset is the house (no investment) and think it's ok. It would make me scarry but they feel comfortable. Not easy to say who is rigth even when you have succes, some of it can be pure luck/timing.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Asset allocation for Canadian
« Reply #45 on: April 06, 2017, 06:10:43 PM »
I understand that, I would definetly like to have my % of Canadian stock drag below 30% in the future. Probably more comfortable at 20% or so...

My RRSP is 50% VTI and 50% VXUS but some accounts like TFSA, RESP and taxable (wich actually represents 30% of my total portfolio) are better served with Canadian holdings.

Makes me think of  people wich only asset is the house (no investment) and think it's ok. It would make me scarry but they feel comfortable. Not easy to say who is rigth even when you have succes, some of it can be pure luck/timing.

Yes, that's 'tail wagging dog' - the preferential treatment on Canadian dividends when unregistered. Depends on your tax rate, of course. But certainly, it's nicer to NOT pay 20% in tax if you don't have to!

VXUS in an RRSP is great, as is VTI. In a TFSA, Canadian domiciled funds that hold foreign, non-US, stocks are fine - XEF, ZEA and the like.

Without a house, it's certainly less worrying to have more of your money in Canadian stocks... though I don't suppose rent prices correlate too closely to the general economy. The local economy, yes.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #46 on: April 06, 2017, 06:59:27 PM »
When I use the house as an exemple, here is what I meant

My house represent 25% of my total assets. The second most important one is RBC.TO with less than 1.4%!!! In $$, this would not be enough to buy a 2017 Civic. Then, we are here, discusing about this being ok or not...

Many people, like Sean Cooper bought a big house and repayed the mortgage superfast instead of investing. The perfect exemple of poor diversification!



Lews Therin

  • CMTO 2023 Attendees
  • Magnum Stache
  • *
  • Posts: 3896
  • Age: 34
  • Location: Gatineau
  • Fee-only Financial Planner
Re: Asset allocation for Canadian
« Reply #47 on: April 07, 2017, 04:51:52 AM »
There are hundreds of posts here showing the ineffectiveness of Sean Cooper's story. Sure he's making lots now by selling his book, but mathematically, he would've made a lot more money investing rather than paying down the mortgage. It's a better than leaving it in a checking account story, but a lot worse than simply investing.

Toronto and Vancouver increases in house prices is not a valid long term retirement plan. Some will make a ton, but that's a huge risk!

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Asset allocation for Canadian
« Reply #48 on: April 07, 2017, 07:41:12 AM »
There are hundreds of posts here showing the ineffectiveness of Sean Cooper's story. Sure he's making lots now by selling his book, but mathematically, he would've made a lot more money investing rather than paying down the mortgage. It's a better than leaving it in a checking account story, but a lot worse than simply investing.

Toronto and Vancouver increases in house prices is not a valid long term retirement plan. Some will make a ton, but that's a huge risk!

He would probably worth twice as much with better diversification just keeping the mortgage!

Stories about Trump are the same, lifetime return not even close to The Market!

Sensationnalism sells, cold analysis does not...

Where are most of these Sean Cooper's post?

Lews Therin

  • CMTO 2023 Attendees
  • Magnum Stache
  • *
  • Posts: 3896
  • Age: 34
  • Location: Gatineau
  • Fee-only Financial Planner
Re: Asset allocation for Canadian
« Reply #49 on: April 07, 2017, 09:25:57 AM »
Every single forum post on: Should I pay down the mortage, or invest.

There's a million different variants.

Including my preferred: Don't pay don't the mortgage challenge.

 

Wow, a phone plan for fifteen bucks!