Author Topic: How's this for an investment policy?  (Read 6583 times)

smilla

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How's this for an investment policy?
« on: October 06, 2014, 06:31:34 PM »
Hello, I am a month into Mustachianism and am starting with the investing side of things as my process until now has been irregular and unfocused.  So I did some research here and at canadiancouchpotato and here is my tentative plan:

Pertinent Details:  My pay is sporadic so my investing new money happens in $2,000 to $3,000 chunks, 6-8 times a year.

My Investment Rules:
1.   Keep Investing Simple, Stoopid
2.   “Be balanced most of the time, take the long view all of the time and be contrarian at the extremes.”  - ?not sure who said this?
3.   Don’t get greedy

Base Allocation:  10% bonds / 90% stocks _ 30% Canadian / 30% US / 30% International

Rebalancing Methods*: 
A.   by calendar:  annually in January
B.   by threshold:  when an asset class drifts off target by an absolute 5%
C.   with cash flow:  always rebalance as much as possible when investing new money, i.e. by buying, not selling

Changing the Base Allocation*:
The base allocation is not to be changed for at least 2 years however there are two times when it can be temporarily disregarded in favour of tactical asset allocation.

I.   If stocks are priced high:
At 50% over my average price per unit, rebalance if needed per method B + all new money to bonds (to max 15% bond allocation).
At 70% over my average p/u, sell an absolute 5% (rebalancing equities) + all new money to bonds (to max 20% bond allocation).
At 80% over my average p/u, sell an absolute 5% (rebalancing equities) + all new money to bonds (to max 30% bond allocation).
Rinse and repeat to a maximum 40% bond allocation.

II.   If stocks are priced low:
At 10% below my average price per unit (from at least 25% up), sell 1/3rd of bond holdings (rebalancing equities) + all new money to stocks.
At 20% below my average p/u, sell remaining bond holdings (rebalancing equities) + all new money to stocks (to 0% bond allocation).
At 30% below my average p/u, borrow double the final bond sale amount from HELOC** (rebalancing equities) + all new money to stocks.
Rinse and repeat to a maximum 60% of HELOC balance (and obviously a 100% stock allocation). 

*Before any rebalancing or allocation changes, review the 5 & 10 year graphs of each index, keeping the rules in mind, and use your discretion.
** There may be no bond allocation & HELOC balance at the same time.  Also until non-taxable retirement accounts are maxed, the HELOC is only to be used in times of extreme discount.  Once stock prices rise to above new average price per unit, new money is to be divided 50/50 to payoff HELOC and buy new stock.  Once prices reach original ap/u, all new money goes to payoff HELOC.

So I guess my main question is what do you think? 

I feel like maybe I'm breaking rule number 1 but on the other hand I would only be checking my allocations (and prices) every couple months when I add new money so it wouldn't be that bad.  Can I make it simpler with out losing the extra emphasis on selling high & buying low? 

Do you think this plan will give me a better result than if I stuck with my base allocation above and only rebalanced to that and never did the extra buying low or selling high?

Thank you.
« Last Edit: October 06, 2014, 06:40:11 PM by smilla »

RichMoose

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Re: How's this for an investment policy?
« Reply #1 on: October 06, 2014, 09:17:25 PM »
If you're basing your personal feeling of when stocks are priced high or low on the value of your units relative to weighted average cost you will likely get thrown way off over time. There are much more accurate ways to determine market values (P/E ratios, CAPE, P/B ratios, Cap/GDP, etc.). At 90/10 you have an aggressive growth allocation. I would just stick to that as long as you are in your accumulation stage and more than 5 years away from retirement.

Try and avoid selling & buying to re-balance as this will just incur commissions. You are purchasing in lump sums so simply buy whatever asset is under-performing to maintain your desired ratios.

A suggestion to maximize your returns... you could always use your HELOC to invest in a taxable account when standard market metrics are telling you that stocks are way under-valued like they were in 2009. Then just pay the HELOC interest payments with your dividends so you don't incur capital gains taxes. This will ensure your HELOC interest is tax-deductible and let you take advantage of market movements. This will of course add extra risk as its a form of leveraging, but I guess it all depends what you are comfortable with.

Are you using TD-e or Questrade with ETF's?

smilla

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Re: How's this for an investment policy?
« Reply #2 on: October 07, 2014, 09:09:49 AM »
Thank you very much for your response. 

Yes, I will be opening up a Questrade acct this month, with $5000 to start, and buying ETFs so no commission.  (I do have a TFSA and RRSP at Scotia and RBC respectively but I am ready for more options and more control.)

I will do as you suggest and use purchasing rather than selling to rebalance.  Also about using my average cost, you're right: dumb idea.  I just thought it was easier for me to understand than the things you talk about.  I will leave it at 90/10 and perhaps in a few years as I get more comfortable and more educated I can consider doing more.

So you're thinking it is ok to use the HELOC to invest in a taxable account even if my non-taxable accounts aren't maxed?  I know that the interest is only deductible if I use it for a taxable account.  Should I only use it for taxable accounts or can I also use it to top up my rrsp and get a tax deduction instead of deducting the interest?  My tax bracket is 30% between fed & prov.  (Obviously I would only use the HELOC when "standard market metrics are telling you that stocks are way under-valued..." as you say.)

RichMoose

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Re: How's this for an investment policy?
« Reply #3 on: October 07, 2014, 09:41:21 AM »
Quote
So you're thinking it is ok to use the HELOC to invest in a taxable account even if my non-taxable accounts aren't maxed?  I know that the interest is only deductible if I use it for a taxable account.  Should I only use it for taxable accounts or can I also use it to top up my rrsp and get a tax deduction instead of deducting the interest?  My tax bracket is 30% between fed & prov.  (Obviously I would only use the HELOC when "standard market metrics are telling you that stocks are way under-valued..." as you say.)

I would use it only to fund a taxable account, buying Canadian dividend stocks / ETF. Try and maximize your RRSP and/or TFSA as much as possible with your regular earnings, with consideration to your income. It depends on your province, but the general rule of thumb is: Income > ~$41000 = Invest in RRSP until you get to ~$41,000 in taxable earnings. Once you hit ~$41,000 invest in your TFSA instead.
To help visualize, here's an example for an Albertan: Target tax bracket: ~$44000. Income: $50,000, of which I can invest $15,000. I will invest only $6,000 in RRSP to get my taxable income down to $44,000. Then maximize TFSA: $5,500. Total investing in tax-advantaged: $11,500. The last $3,500 should be invested in taxable account, not RRSP, purchasing Canadian dividend stocks / ETF's.
Using this strategy will minimize your tax bill, especially in retirement. It will also prevent OAS / GIS clawbacks and other benefits because TFSA income isn't considered taxable income. Canadian dividend income is taxed ridiculously low, sometimes even negative for low incomes.

smilla

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Re: How's this for an investment policy?
« Reply #4 on: October 07, 2014, 01:13:05 PM »
Thanks again.  Very clear and helpful. 

Kaspian

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Re: How's this for an investment policy?
« Reply #5 on: October 07, 2014, 02:39:04 PM »
I don't think there's anything wrong with your allocation, though I don't think Dan at Couch Potato would ever advocate a 90% equities position--unless you had REITs, a pension, or something else.  He's pretty much a 75/35% or 60/40% kind of guy.

That said, I think you're overthinking your rebalancing way, way, WAY too much.  You're also giving yourself too many loopholes for tinkering with it.  I'd say pick a concrete day or two annually (January 2nd, June 30) for the activity and stick with them.  That way your emotion can't get involved at all. 

But with your point C), if I get extra new little bits of money to stash over a year I buy at that moment the underperforming asset--to try and equalize things up.

And yes--don't get greedy!!  Tune out the people who say that equities rock and bonds suck.  They won't tell you about when the inverse was true only 3 years ago.  It's pure recency bias and they never would have said that in 2008 or 2011.  A decent portfolio should average you about 8% a year. 

smilla

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Re: How's this for an investment policy?
« Reply #6 on: October 07, 2014, 03:31:00 PM »
Hi Kaspian,

I like the info at CCP a lot but I do think his bond allocations are too high for me right now.  At most I'd go up to 20/80. 

I agree on your other point.  I am giving myself way too many reasons to tinker.  I will stick with one annual rebalance (in January) and otherwise when I have cash to add, I will buy underperformers.

Thanks

Kaspian

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Re: How's this for an investment policy?
« Reply #7 on: October 08, 2014, 11:28:33 AM »
I agree on your other point.  I am giving myself way too many reasons to tinker.  I will stick with one annual rebalance (in January) and otherwise when I have cash to add, I will buy underperformers.

Awesome!  Don't performance chase, stick with your plan and tune everything else out.  I've printed out quite a few articles like the following and keep them beside my desk, in case I get stupid and try and mess with things.  :)

http://www.marketwatch.com/story/you-are-your-portfolios-worst-enemy-2014-08-25?page=1

smilla

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Re: How's this for an investment policy?
« Reply #8 on: October 08, 2014, 06:21:42 PM »
It depends on your province, but the general rule of thumb is: Income > ~$41000 = Invest in RRSP until you get to ~$41,000 in taxable earnings. Once you hit ~$41,000 invest in your TFSA instead.
To help visualize, here's an example for an Albertan: Target tax bracket: ~$44000. Income: $50,000, of which I can invest $15,000. I will invest only $6,000 in RRSP to get my taxable income down to $44,000. Then maximize TFSA: $5,500. Total investing in tax-advantaged: $11,500. The last $3,500 should be invested in taxable account, not RRSP, purchasing Canadian dividend stocks / ETF's.
Using this strategy will minimize your tax bill, especially in retirement. It will also prevent OAS / GIS clawbacks and other benefits because TFSA income isn't considered taxable income. Canadian dividend income is taxed ridiculously low, sometimes even negative for low incomes.

Tuxedo (and anyone else who cares to comment), I played with my numbers and this would be my situation in BC: 
Gross earnings:  75,000
Target tax bracket:  44,000
BUT annual spending:  40,000 (includes mortgage princ & int & prop tax)

I calculate my annual income tax (+cpp & ei) to be 19,400 before deductions.
The max I could put to RRSP would be 23,000 to give me a tax discount of 6,900 (30%).

75,000 - 23,000 - (19,400 - 6,900) = 39,500 to live on.

My question is (since I don't have enough to get down to the target tax bracket AND put money to my TFSA, nevermind have leftover for a taxable investments) should I still put all my savings to the RRSP to get as much of a discount on my taxes as I can and let the TFSA slide for now?  I'm assuming yes but would like to be sure.

I have springy emergency cushions (CC, LOC & HELOC) and no debt aside from the mortgage so I don't need the TFSA for those purposes.  Also in case it matters, once i achieve FIRE & house payoff my annual expenses would be under 20,000.

Le Barbu

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Re: How's this for an investment policy?
« Reply #9 on: October 09, 2014, 06:27:18 AM »
In your situation, I would just follow this sequence

1-max RRSP every single year
2-RESP if you have children
3-mortgage principal
4-TFSA
5-taxable account

btw, your AA look pretty good !
« Last Edit: October 09, 2014, 06:31:07 AM by Le Barbu »

RichMoose

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Re: How's this for an investment policy?
« Reply #10 on: October 09, 2014, 09:10:00 AM »
+1 for Le Barbu's recommendation.

On that note, mortgage principal vs TFSA is a toss-up. One thought is to take advantage of low mortgage rates for the forseeable future, pay it down as slow as possible. Invest the difference in a TFSA where you could earn more than 2.9% (my current mortgage rate). Then, when you're ready to retire you could pay your mortgage in a lump sum by cashing out your TFSA, or keep the mortgage going and use your TFSA to pay it each month without consequence because TFSA withdrawals don't count as taxable income anyways.

Also, be careful not to run your RRSP up too high. When you retire, do the Canadian hack of a Roth IRA conversion. Withdraw enough money from your RRSP (as long as your total income stays belong that lowest tax bracket) every year to max out your TFSA. This will help bring the value of the RRSP down before you turn 71 and are forced to start big draw downs as part of the RRIF.

Bob W

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Re: How's this for an investment policy?
« Reply #11 on: October 09, 2014, 09:19:31 AM »
Consider the Buffet theory of buying good companies when the market undervalues them as part of your game.   Then hold them forever.   You can pass them to your grandkids at your purchase basis (US).  Buffet has done pretty well with this theory,  although your mileage may vary.

Le Barbu

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Re: How's this for an investment policy?
« Reply #12 on: October 09, 2014, 09:28:35 AM »
Neat and advanced tax planning advices from TuxedoEagle!

It's exactly for that same reason I dont bother maxing out my TFSA right now. It just keep some room for RRSP transfer (withdrawal) after I quit my cashcow job, being in a lower tax bracket.

side note :

My only concern about filling accounts this way this is a possibility this TFSA room could "disapear" for any reason. Law changes etc. As an example, my father in law died earlier this year and have no TFSA investments. Now, his wife gets the life insurances, no more debt, good pension revenu, but a lot of money in taxable account. On top of that, she invest in GICs only! To bad this 30k TFSA room is not available anymore! If it was used before death, the account would just roll over to spousal like RRSP.

smilla

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Re: How's this for an investment policy?
« Reply #13 on: October 09, 2014, 02:13:58 PM »
Thank you all for you input.  Much nicer than having to talk to people who are trying to sell me something :)

smilla

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Re: How's this for an investment policy?
« Reply #14 on: October 13, 2014, 09:39:24 PM »
I opened an RRSP and TFSA at Questrade and am waiting for the funding to go through but in the meantime wanted to post the list of ETFs that I am planning to buy for your consideration.  My choices are based generally on the advice in The Elements of Investing and specifically on the Canadian Couch Potato's recommendations.  Is there anything you would change?

In the TFSA
Canadian Equities 30% - Vanguard FTSE Canada All-Cap Index (VCN) mer .06

In the RRSP
Canadian Bonds 10% - Vanguard Canadian Aggregate Bond Index (VAB) mer .13
US Equities 30% - Vanguard US Total Market Index (VUN) mer .17
International Equities 30% - 20% iShares Core MSCI EAFE IMI Index (XEF) mer .22 /
                                             10% iShares Core MSCI Emerging Markets IMI (XEC) mer .28

RichMoose

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Re: How's this for an investment policy?
« Reply #15 on: October 13, 2014, 10:20:29 PM »
I opened an RRSP and TFSA at Questrade and am waiting for the funding to go through but in the meantime wanted to post the list of ETFs that I am planning to buy for your consideration.  My choices are based generally on the advice in The Elements of Investing and specifically on the Canadian Couch Potato's recommendations.  Is there anything you would change?

In the TFSA
Canadian Equities 30% - Vanguard FTSE Canada All-Cap Index (VCN) mer .06

In the RRSP
Canadian Bonds 10% - Vanguard Canadian Aggregate Bond Index (VAB) mer .13
US Equities 30% - Vanguard US Total Market Index (VUN) mer .17
International Equities 30% - 20% iShares Core MSCI EAFE IMI Index (XEF) mer .22 /
                                             10% iShares Core MSCI Emerging Markets IMI (XEC) mer .28

I think it looks good! Personally I would go with VCE or ZCN instead of VCN because Canada's small caps tend to be heavily weighted in mining and oil/gas, but its a matter of personal preference. I would also move your International to TFSA and consider bumping EM up to 15%. Put your highest growth potential in TFSA because you will never pay taxes on it again and there's no tax advantage to holding in a RRSP. This, of course, would mean that some, or all, of your Canadian Equity goes to RRSP.

And thanks for posting this, it led me to the Vanguard Canada site where I noticed that they've lowered fees again... I love this company! They are showing a real commitment to setting the standard for low cost investing in Canada. I will be considering a switch to VFV as my US stock ETF.
« Last Edit: October 13, 2014, 10:51:45 PM by TuxedoEagle »

Le Barbu

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Re: How's this for an investment policy?
« Reply #16 on: October 14, 2014, 07:38:14 AM »
Looks pretty good to me. I don't know your total portfolio invested but if the RRSP is over 50k I would use the US listed ETF for lower MER.

Altough TuxedoEagle as a good comment about putting the growth stuff in TFSA, if you planned to use it for a downpayment on a house as an exemple, it's a bit different. I also think that the withholding taxes have to be claimed to be recovered in the TFSA.

You opened at Questrade probably for lower trade fees but in Vanguard, you have NO trade cost...

For the bonds portion, if your goal is really to be safe, just take the VSB (short term) instaed of VAB. MER is lower and this ETF is less sensible to interest raises.
« Last Edit: October 14, 2014, 07:43:56 AM by Le Barbu »

RichMoose

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Re: How's this for an investment policy?
« Reply #17 on: October 14, 2014, 09:51:49 AM »
I also think that the withholding taxes have to be claimed to be recovered in the TFSA.

There are a lot of common misconceptions about withholding taxes. Basically there are three ways to avoid paying them or getting them back.
1. You have a USD RRSP account and invest in a US listed stock or ETF (like VTI). In this case, you don't have withholding taxes deducted at all because your brokerage will "should" have you complete a form W8-BEN when you set up your account.
2. You have a USD investment account and invest in a US listed stock or ETF directly. In this case you can claim back the foreign tax amount listed on your T5 as foreign tax withheld on your Canadian tax return.
3. You buy a Canadian listed swap-based ETF (like HXS.TO). You won't pay foreign withholding tax in any account, but they charge up to 0.30% as a swap fee in addition to the 0.15% MER so it will cost you more in the end.

Tax treaties don't cover the TFSA because its a not recognized registered account. Due to tax treaties, Canadians don't get dinged the full 30% withholding tax. We only are charged 15% and the tax applies to dividends / distributions paid only. So you need to decide whether or not its worthwhile to have a USD RRSP account. Is the currency exchange cost going to benefit you? Unless you're investing in US dividend paying stocks with high yields, I would guess that for most of us its not worth it; take your 15% hit and move on.
For example, VTI yields 1.85% right now. After tax this drops to 1.57%. So currently for every $10,000 you invest it costs you $28 per year. Right now RBC will give you USD .85 for every dollar even though the market is USD .89 per dollar. That is 4 cents per dollar you will never get back. Now I'm sure there are cheaper ways to go about it, but the point is either way you lose and have a USD account is a lot more work.

smilla

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Re: How's this for an investment policy?
« Reply #18 on: October 14, 2014, 10:59:44 AM »
I would also move your International to TFSA and consider bumping EM up to 15%. Put your highest growth potential in TFSA because you will never pay taxes on it again and there's no tax advantage to holding in a RRSP. This, of course, would mean that some, or all, of your Canadian Equity goes to RRSP.

Tuxedo, do you suggest 15% for Emerging Markets because you believe that is a more accurate share of the foreign equities market (50%) or is it that EM is just a better deal right now?  Also I think the EM index (XEC) holds a US-listed ETF, so wouldn't it be better in the RRSP where the US withholding is waived or doesn't it work that way for Canadian-listed ETFs?

Looks pretty good to me. I don't know your total portfolio invested but if the RRSP is over 50k I would use the US listed ETF for lower MER.

Altough TuxedoEagle as a good comment about putting the growth stuff in TFSA, if you planned to use it for a downpayment on a house as an exemple, it's a bit different. I also think that the withholding taxes have to be claimed to be recovered in the TFSA.

I have read about Norbert's gambit for investing in US-listed ETFs but I think I will wait a couple years and get comfortable with doing the self-directed thing before I go there.  My portfolio is 50k but mostly in 2 big bank registered accounts and I don't want to transfer those either for awhile.

I have a house and emergency LOCs so the TFSA is purely for retirement purposes.

Thank you both for your comments.

 


Le Barbu

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Re: How's this for an investment policy?
« Reply #19 on: October 14, 2014, 11:33:29 AM »
Good plan smilla, just go ahead with your plan!

fyi, I just made some little changes in my own portfolio this morning. I transfered 60k CAD to USD and it cost me +/-50$ to do it (2 transaction + bid/ask spread).

Now my portfolio looks like this: 10%VSB, 30%ZCN, 30%VTI, 5%VBR and 25% VXUS. Average MER 0.08%. Can't believe 2 years ago I was 100% RBC funds with average MER close to 2% !


Kaspian

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Re: How's this for an investment policy?
« Reply #20 on: October 14, 2014, 11:36:39 AM »
I opened an RRSP and TFSA at Questrade and am waiting for the funding to go through but in the meantime wanted to post the list of ETFs that I am planning to buy for your consideration.  My choices are based generally on the advice in The Elements of Investing and specifically on the Canadian Couch Potato's recommendations.  Is there anything you would change?

In the TFSA
Canadian Equities 30% - Vanguard FTSE Canada All-Cap Index (VCN) mer .06

In the RRSP
Canadian Bonds 10% - Vanguard Canadian Aggregate Bond Index (VAB) mer .13
US Equities 30% - Vanguard US Total Market Index (VUN) mer .17
International Equities 30% - 20% iShares Core MSCI EAFE IMI Index (XEF) mer .22 /
                                             10% iShares Core MSCI Emerging Markets IMI (XEC) mer .28

Nope smilla, this is good for now.  (Though I did mention the bond allocation was too low for my own portfolio.)  Anyway, let it run for a little while.  People get overly concerned with tax implications because there's a) too much information out there and b) too much of it is conflicting information. 

When (if) you ever end up maxing out your RRSPs and TFSA and need to setup a non-registered investment account, you'll want to re-visit where you're keeping your holdings.  ...But until then, just let it ride.  Things can get a little complicated on CPP about the whole tax thing.  I find Preet's article (the bit at the very bottom) sums up placement the best:
http://www.moneysense.ca/invest/asset-ocation-everything-in-its-place

But for now, I'd just ignore it if I was you.  Things look copasetic to me.

RichMoose

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Re: How's this for an investment policy?
« Reply #21 on: October 14, 2014, 06:11:00 PM »
I would also move your International to TFSA and consider bumping EM up to 15%. Put your highest growth potential in TFSA because you will never pay taxes on it again and there's no tax advantage to holding in a RRSP. This, of course, would mean that some, or all, of your Canadian Equity goes to RRSP.

Tuxedo, do you suggest 15% for Emerging Markets because you believe that is a more accurate share of the foreign equities market (50%) or is it that EM is just a better deal right now?  Also I think the EM index (XEC) holds a US-listed ETF, so wouldn't it be better in the RRSP where the US withholding is waived or doesn't it work that way for Canadian-listed ETFs?

It's really a personal opinion or different way of looking at the world. From a market cap perspective EM is small compared to Developed. From a population perspective, EM is huge compared to Developed. In the All-World ex-US, just the UK and Japan take up ~30% of the index. Considering your already heavy weight in developed markets (Canada & US) you should decide for yourself where you want to invest and where you think the growth potential is. Do you think over a long investment horizon that UK, Japan, France, Germany, Australia, etc will offer returns greater than China, Russia, India, Brazil, Thailand, Indonesia, Turkey, or South Africa? Personally I like the odds of the latter when you factor population, productivity potential, urbanization, etc but it will be a bumpy ride. Something to chomp on :)

It doesn't work that way, if its a Canadian-listed ETF you will pay 15% tax on distributions in your RRSP or TFSA regardless of whether it holds US listed ETF's or not. Unless you invest via a USD RRSP account and purchase a US ETF directly. If that's the case you can claim back a part of the withholding tax, but not all of it because some of the tax is from countries other than the US.

As I said before, going the USD route is a lot of work for minimal financial gains.

smilla

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Re: How's this for an investment policy?
« Reply #22 on: October 14, 2014, 06:52:13 PM »
My RBC RRSP has a poor average MER too, Le Barbu, although I have about half in the index fund options.  Oh well, that will be improved when I rebalance the account in January and switch everything to the index options in one fell swoop.

Kaspian, thanks for the link.  I definitely want to stick with A Plan because my previous MO has been unfocussed and whimsical to say the least and it hasn't been fun trying to simplify after the fact.  That's part of the reason I put US and Foreign Equity in the RRSP - because if I eventually do decide to switch to US-listed ETFs, they are cheaper held in an RRSP than in a TFSA (per CCP True Cost of FWT article).  Of course like Tuxedo says that adds a level of complication that may not be worth it for me anyway so...

Agreed Tuxedo, I will up my EM percentage to 15.

I am wondering if you all divide your equity allocation equally between Canada, US & Foreign or do you weight one or two sections more or less heavily? 

Le Barbu

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Re: How's this for an investment policy?
« Reply #23 on: October 14, 2014, 07:35:48 PM »
Equity will perform about the same on the long run. 1/3 of each is what most Canadians do. Just make sure you are confortable with  your choices. Can I suggest 15% bonds, 30% canadian, 30%US and 25% international for a while ?