Author Topic: Building a portfolio with a trust fund caveat  (Read 4391 times)

Jerm

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Building a portfolio with a trust fund caveat
« on: July 22, 2014, 10:27:05 PM »
Hello MMM,

About me:

I'm a relatively new 30 year old investor living in Canada. I consider myself quite comfortable with risk and being able to liquidate my assets quickly is not a priority for me. I have an adequate emergency fund. A year ago I took a job with an employer that will match my RRSP (Canada's 401k) contributions up to 9% for a total of 18%. Currently my portfolio which has a total value of about $15,000 is allocated as follows:

RBC Canadian stock index (25%)
RBC US stock index (25%)
RBC International stock index (20%)
RBC Canadian bond index (30%)

Nothing crazy, pretty boring, and aside from re balancing I have no intentions of touching this money until retirement (other than using some as a down payment on a house under the First Time Home Buyer's Plan eventually). Since I've began making RRSP contributions I've read a couple books (The Millionaire Teacher, The Four Pillars of Investing, The Wealthy Barber, Rich Dad, Poor Dad) and a ton of forums and blogs about index investing. One of the key lessons in these books is that it is advisable to increase your bond allocation as you get older (hence why I went with 30% bonds as a 30 year old).

Here's the kicker: I have a trust fund that was set up in my name when I was born that is worth close to $300,000 now. It is currently in an actively managed fund that I cannot touch until I turn 35 years old. The thought of paying 1.4% MER on $300,000 is a little disturbing, but this money is completely out of my control for the next five years so there's nothing I can do about that.

My question is in regards to portfolio theory when a person has a sizeable chunk of cash that is guaranteed to come in the future. I'm curious if this trust fund should influence the stock to bond ratio of my current portfolio.

The risk taker in me says that with such fund guaranteed me in a few years time, and no plans for this money in the near future (~25 years), I can move some of my bonds over to stocks until such time that I receive control of the trust fund (I have every intention of investing it into indexes).

The conservative person in me says I should stick to the plan and increase the percentage of bonds in my portfolio as I age regardless of external events, no matter how significant they may be.

Is there any good documentation or opinions out there about a situation like this, where a person is investing their income while waiting for a large amount of money to come to them? I'd imagine that inheritance, annuities, settlements, etc would all fall under the same category.

Thanks a ton


This_Is_My_Username

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« Reply #1 on: July 23, 2014, 12:16:01 AM »

Some things to consider

Are there any restrictions on withdrawing all of the 300k as soon as you turn 35?  Check the trust deed (rules). 

Are there any restrictions on what you spend it on?

Who are the trustees of the trust?  Can you persuade them to change the investment strategy, to avoid the 1.4% MER ?  Can you become a trustee?

Are there tax (or other) benefits to keeping money in the trust?  can you contribute to the trust to receive tax benefits? 

Do you pay capital gains tax if you withdraw from the trust?

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Also, I am a similar age to you.  I am in 100% shares. The return on shares is higher than bonds in the long term, so you should have more shares.

you should have more shares because "risk" simply means volatility.  and volatility averages out to zero in the long term.  Also, risk is not "Bad".  it is only bad 50% of the time, the other 50% of the time, risk is good. 

TomTX

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Re: Building a portfolio with a trust fund caveat
« Reply #2 on: July 23, 2014, 05:40:26 AM »
Conventional wisdom says "have some bonds! More as you age!"

Analysis doesn't seem to be bearing this out, particularly while you are in the accumulation phase.

Personally, I wouldn't bother with bonds unless I were getting close to FI and planning to live off my investments. I will re-evaluate at that point.

Personally, I wouldn't bother with bonds until I have a lot more than $15,000 I'm investing.

Personally, I would be calling the trustee managing the trust and asking them pointed questions about why they need such high expenses. In the US, I believe the correct term is "fiduciary duty" - they need to look out for YOUR interests, not skim off as much as they can. Index fund expenses should be in the range of 0.05-0.25%.

Jerm

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Re: Building a portfolio with a trust fund caveat
« Reply #3 on: July 23, 2014, 01:13:28 PM »
Thanks for the replies,

Its worth noting that the 1.4% MER I mentioned is for the actively managed trust with the 300k in it, not the 15k that I personally have contributed to indexes. To my knowledge 1.4% MER for an actively managed account is about average in Canada, its the fact that its ACTIVELY managed account that makes it undesirable.

Are management fees for active and passive mutual funds generally lower in the states? The lowest MER I've been able to find in Canada is 0.33% via TD e-series funds. Here is a list of every fund available through Royal Bank of Canada, definitely one of the more popular banks around here.

http://fundinfo.rbcgam.com/mutual-funds/rbc-funds/overview/default.fs

As you can see actively managed funds can push close to 2.5% MER, while their index options have a 0.71% MER. This is significantly higher than the numbers that tend to get quoted on the primarily American message boards that I visit.

I'm puzzled about why you wouldn't bother with bonds until you have much more than $15000 invested. I understand why you wouldn't bother with bonds until later in life, but why would the size of your portfolio affect your bond allocation?

In regards to the restrictions and taxes on my trust when it is released to me - I have no idea. I really do need to find these things out ASAP - thank you for bringing them to my attention.




TomTX

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Re: Building a portfolio with a trust fund caveat
« Reply #4 on: July 23, 2014, 09:10:32 PM »
Let me clarify: With a goal of FIRE in mind, I wouldn't bother considering bonds until I had much more than $15,000.

Stocks are the main ticket to growth through passive investments, particularly with longer time horizons. $15,000 is a long way from FIRE - thus a long time horizon.

Overdiversification increases cost, increases time spent on fiddling with investments and is a distraction.

This_Is_My_Username

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Re: Building a portfolio with a trust fund caveat
« Reply #5 on: July 24, 2014, 12:55:09 AM »
0.71% for a passively managed index fund? 
that is super-expensive. 

with 20 seconds of searching, I found a canadian index Exchange-Traded-Fund with a MER of 0.09%

https://www.vanguardcanada.ca/individual/etfs.htm

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I think that is the difference between a "Mutual Fund" and a "Exchange-Traded Fund" ??

defenestrate

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Re: Building a portfolio with a trust fund caveat
« Reply #6 on: July 27, 2014, 06:29:28 PM »


Here's the kicker: I have a trust fund that was set up in my name when I was born that is worth close to $300,000 now. It is currently in an actively managed fund that I cannot touch until I turn 35 years old. The thought of paying 1.4% MER on $300,000 is a little disturbing, but this money is completely out of my control for the next five years so there's nothing I can do about that.



You may be able to do more about this than you think. I have had a similar situation, and believed the same thing as you, but it may make sense to set up a call with the trustees of the account. As the beneficiary, you do have some rights, and often Trustees do want to do what is best. Put together a comprehensive plan of how you would like the assets invested, taking into consideration tax ramifications, and set up a call.

The more professional you are about this, the more likely the trustee will make concessions and listen.

If it is being actively managed, ask for a reduction of fees in exchange for a more passive approach to investing. I have used all of these tactics with some success.


AssetGrinder

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Re: Building a portfolio with a trust fund caveat
« Reply #7 on: July 28, 2014, 09:45:38 AM »
First of I would find a different index fund than RBC. Try BMO or Ishares with ETF index funds at .05% to .10%

Secondly your portfolio is very conservative at your age with index investing and bond allocation. Its not a bad thing as its very safe but conservative so you could add some risk if you are comfortable with it. You could drop your bonds entirely or move into more corporate bond funds for more return.

As far as the trust is concerned. I say until you get that money invest like you dont expect it coming. Stick to you goals and when you do get it in just  spread it evenly to your current allocation.

I have a big inheritance coming but I dont know when so I just invest for today.

Best of luck man!

Jerm

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Re: Building a portfolio with a trust fund caveat
« Reply #8 on: July 29, 2014, 06:19:13 AM »
Thanks again for your replies. It makes perfect sense to invest as if I don't have a trust coming.

Unfortunately I'm involved in a group plan through work. Its a great plan - 9% matching for a total of 18% - but I'm forced to chose between two different companies to invest with. RBC and manulife financial. RBC index funds appear to be my least expensive option.

I know RBC has ETF index funds but I understand there's a break-even point where the up-front fee for purchasing an ETF plus it's MER works out to be less total fees than indexed mutual funds with no fee and a higher MER. I think its around the $50,000 mark.

TBH I'm a little surprised to hear that a 70/30 equity/bond split is considered so conservative. What books do this board generally recommend, if any?  I've pretty much gotten my information from The Millionaire Teacher by Andrew Hallam and The Four Pillars of Investing by William Bernstein. Prior to reading these books I had little to no investment knowledge (and the more I learn the less I feel like I know!)

ProfWinkie

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Re: Building a portfolio with a trust fund caveat
« Reply #9 on: July 30, 2014, 10:29:36 AM »
Stay very short on bonds funds - this will buffer spikes in intrest rates