Canadian Couch Potato a la MMM version

[ransom132]

Ok, last year I read about Canadian Couch Potato and decided to learn more about it and I decided to invest 60% in VXC, 30% in VCN and 10% in VAB. Now I can live with just 10% being invested in bonds since I am only 32 and to be honnest, I have no clue when I will stop working, but it's fine with me, I can live with the risk. Many websites say the bonds % should be equal to my age (or in some case equal to my age-10 or 20 depending where you read)....however, as I was reading MMM blogs, he mentions that he never invests in bonds, I just can't find the reason why he doesn't. Can someone explain why when I reach 60 (for example), I should still keep my bonds % low?? What about when you hit 70 or 80, is there a reason for me to still stick with just stocks?

Thank you in advance for your replies.

[Le Barbu]

Assuming you are Canadian AND mustachian, 70% VXC and 30%VCN is fine. Bonds are to risky for expected return. When you are old and/or millionnaire, then 10% VSB is acceptable...

[ransom132]

Assuming you are Canadian AND mustachian, 70% VXC and 30%VCN is fine. Bonds are to risky for expected return. When you are old and/or millionnaire, then 10% VSB is acceptable...

So I might as well just sell the VAB and reinvest it in VXC (so it becomes 70%). I always thought I should at least keep 10% in VAB in order to rebalance my portfolio once in awhile.

[Le Barbu]

Only is your transaction cost is 0$. If not, just keep buying VXC and keep VAB (don't bother)

[Le Barbu]

The stock/bond ratio is more related to personal situation and minding then age. I may keep 1 year expenses worth in short term bonds like VSB when I retire just to smooth the withdrawal

[ransom132]

Only is your transaction cost is 0$. If not, just keep buying VXC and keep VAB (don't bother)

I am with Questrade, I think there is a small % fee only if I sell if I am not mistaken.

[Heckler]

We are 40 y.o and I'm happy with my 21k VSB for short term emergency fund ( I won't spend it unless I really need to due to job loss) plus an allocation of VAB to make up 30% total bonds.  They've smoothed the ride nicely, as I'm two years into understanding where my $ are invested.  Admitted, they don't grow fast, but they are just as risky as stocks, so I don't see a reason not to hold them long term, past their duration. 

This past year of oil price crisis, Alberta, Loonie tumbling have not really affected my psyche, likely due to global diversification.

I plan to stick with 30% bonds long term, none of this increasing allocation as you age BS. 

[Heckler]

CCP has many great articles on bonds. Read them to understand what and why you're buying.

http://canadiancouchpotato.com/category/bonds/

[jaizan]

I'm 49 and have nothing in bonds.  Considering we have a bond price bubble.   

I have 91% stocks and 9% cash.   

Also, bonds do not provide effective inflation protection, so even if I was 60 and thinking about living another 20~25 years, I would not want a high proportion of my wealth in something that does not keep up with inflation.   Living off dividends seems like a more attractive option.

[Retire-Canada]

I am with Questrade, I think there is a small % fee only if I sell if I am not mistaken.

The cost for selling ETFs at QT is $5 - $10. There can be some additional fees as well on top of this. You need to read:

http://www.questrade.com/pricing/DIY-Trading/commissions/stocks

[Rightflyer]

One possible way to look at your "fixed income" allocation.

Impute a value to your expected CPP/OAS and count that as your "bonds".

You, hopefully (as in I hope it is still around), in the future will also have GIS as a top up in certain years in retirement.



 

[ransom132]

We are 40 y.o and I'm happy with my 21k VSB for short term emergency fund ( I won't spend it unless I really need to due to job loss) plus an allocation of VAB to make up 30% total bonds.  They've smoothed the ride nicely, as I'm two years into understanding where my $ are invested.  Admitted, they don't grow fast, but they are just as risky as stocks, so I don't see a reason not to hold them long term, past their duration. 

This past year of oil price crisis, Alberta, Loonie tumbling have not really affected my psyche, likely due to global fiv

I plan to stick with 30% bonds long term, none of this increasing allocation as you age BS.

mmmm...You made me think of something, I wonder if my VAB can be my backup EF....meaning right now, I am saving up for 3K$ and I would use the funds from my VAB funds if I really needed more funds.

[Kaspian]

The main goal of bonds is to reduce volatility through diversification.  Since you said you don't care about volatility in your portfolio, then I'm not going to talk you into a higher percentage than what you have.

That said, there were two years (recently) where bonds outperformed equities by a longshot--like 15%.  Rebalancing that money from those into equities (while equities were low) is, welll...  The main reason I have more money now than somebody who just held equities through the whole period.

[Heckler]

mmmm...You made me think of something, I wonder if my VAB can be my backup EF....meaning right now, I am saving up for 3K$ and I would use the funds from my VAB funds if I really needed more funds.

I wouldn't use VAB as emergency fund you might need to sell in the next 2 years.  The average duration of those bonds is 7.6 years, meaning they'll fluctuate in value as interest rates go up and down.  You'd have to hold VAB for it's duration in order to make up for capital losses if the interest rates go up.

VSB on the other hand, has a 2.7 year duration.  It's has much less price fluctuation in the short term, thus less risk of loss (or gain).

some reading for you...

http://canadiancouchpotato.com/2013/08/07/is-your-bond-fund-really-losing-money/

http://canadiancouchpotato.com/2015/05/18/how-changing-interest-rates-affect-fixed-income/

My VSB has stayed at $20.9k +/- $50 since September 2015 when I stopped contributing to it.  It makes me $35-40 per month that I DRIP into 1 unit per month (~$25), and the spare change goes towards VCN in my next contribution.

[ransom132]

So my best strategy would be to save up 3K$ in my savings account by putting 100$ a month in there...once I hit 3K$ (about 3 month EF for me), I would continue putting the 100$ I usually put in EF, but into VSB instead. So if I somehow get hit with an emergency that cost me more than 3K$ (although it would be unlikely), the VSB can be my last hope to bail me out of a difficult situation....how does the strategy sound?

[Le Barbu]

So my best strategy would be to save up 3K$ in my savings account by putting 100$ a month in there...once I hit 3K$ (about 3 month EF for me), I would continue putting the 100$ I usually put in EF, but into VSB instead. So if I somehow get hit with an emergency that cost me more than 3K$ (although it would be unlikely), the VSB can be my last hope to bail me out of a difficult situation....how does the strategy sound?

If you pay for trade, sounds like an expensive strategy. My trades are 9.95$ and I do not buy less than 5k$ at a time. I either keep it in cash or buy index mutual funds (like RBF556, 0.7%MER) with no trading fees until I got 5k$ or more to invest.

[ransom132]

So my best strategy would be to save up 3K$ in my savings account by putting 100$ a month in there...once I hit 3K$ (about 3 month EF for me), I would continue putting the 100$ I usually put in EF, but into VSB instead. So if I somehow get hit with an emergency that cost me more than 3K$ (although it would be unlikely), the VSB can be my last hope to bail me out of a difficult situation....how does the strategy sound?

If you pay for trade, sounds like an expensive strategy. My trades are 9.95$ and I do not buy less than 5k$ at a time. I either keep it in cash or buy index mutual funds (like RBF556, 0.7%MER) with no trading fees until I got 5k$ or more to invest.

I don't pay for trade (with Questrade).

[Heckler]

You don't pay to buy at Questrade.  You will pay to sell, so come up with a plan (cash first level EF) that will result in you not selling unless the zombies attack.

[Heckler]

And I assume this EF is in your TFSA so you won't pay taxes on the interest, and can take it out anytime...

[ransom132]

And I assume this EF is in your TFSA so you won't pay taxes on the interest, and can take it out anytime...

I actually keep it in my savings account because I would rather have my ETF's filling up my TFSA and I expect to max it out in 2 years, holding the EF in the TFSA would just limit my space.

[snacky]

I have a vanguard bond ETF because the monthly dividends are sweet. It's the only of my ETF's that isn't floundering badly right now. It might be a bad long term strategy, but I haven't encountered a good reason not to allocate a portion of my investment funds to the bond ETF. I would welcome some reasons why I'm wrong, since I actually have no clue what I'm doing.

[ransom132]

I lol'd at that because I am sometimes guilty like you.

[Heckler]

I actually keep it in my savings account because I would rather have my ETF's filling up my TFSA and I expect to max it out in 2 years, holding the EF in the TFSA would just limit my space.

Sorry, I meant the proposed VSB.

[ransom132]

I actually keep it in my savings account because I would rather have my ETF's filling up my TFSA and I expect to max it out in 2 years, holding the EF in the TFSA would just limit my space.

Sorry, I meant the proposed VSB.

To be honest, I haven't thought about where putting the VSB if I do decide to use that strategy or if I should leave it out of it and let my Canadian couch potato portfolio sit there alone.

[Le Barbu]

There is no rational reason to hold bonds while having any kind of debt, just emotive reasons. Being mustachian reduce needs for a big EF. I focus on controling expenses an improving future cashflow. 100% stock inventments and 3k$ in checking account is my way to go!

[Heckler]

There is no rational reason to hold bonds while having any kind of debt, just emotive reasons. Being mustachian reduce needs for a big EF. I focus on controling expenses an improving future cashflow. 100% stock inventments and 3k$ in checking account is my way to go!

I totally agree, and for the past 15 years have barely had even 3k cash and 100% in equity mutual funds (divested, thank god!).  It wasn't till I realized I can eliminate banking fees a couple years ago by holding $3500 deadweight in a chequing account that I even considered a cash EF.  Now 100% debt free, I've allocated 30% bonds for way down the road.

[ransom132]

There is no rational reason to hold bonds while having any kind of debt, just emotive reasons. Being mustachian reduce needs for a big EF. I focus on controling expenses an improving future cashflow. 100% stock inventments and 3k$ in checking account is my way to go!

I do agree with you, however, I occasionally need to bail out my family at times (and I don't mind doing so either) so it's important for me to have liquidity and not having to rely on stocks for that, that's why I like to keep a 3K$ EF....oh and I have no debt, fyi. It has more to do with the fact that I can withdraw the funds without worrying if I am losing or not (at this moment, none of my ETF's except VAB is positive). But I guess I got my answer, I am better off keeping 3K$ in the EF funds and that's it. If an unexpected scenario happens, then I would withdraw from my investments if the amount is way too big or simply put it on my line of credit and pay it down asap if the amount isn't huge.

[Kaspian]

There is no rational reason to hold bonds while having any kind of debt, just emotive reasons.

^^ Exactly!  And "emotive reasons" are the primary reasons most people screw up their portfolio and therefore the main reason they should hold some bonds.

[Le Barbu]

There is no rational reason to hold bonds while having any kind of debt, just emotive reasons.

^^ Exactly!  And "emotive reasons" are the primary reasons most people screw up their portfolio and therefore the main reason they should hold some bonds.

Other serious screwing portfolio reasons are mutual funds with MER over 2% and not investing enough.