What should I invest in? Canadian with maxed out TFSA and RRSP accounts

[Dee]

Hi all,

I'm in my early 40s, employed full-time for the federal government (with a great defined benefit pension plan). I'm in a common law relationship and my spouse owns the house we live in (it isn't paid for, but I'm not on title).

I hold my investments through Questrade. I started in 2012 and was interested in holding mostly individual Canadian dividend stocks. Since then, I've sold most of these and generally hold index funds. There are a few individual stocks I haven't sold yet, some because of preliminary asset allocation decisions I made (which I'm now reviewing and would like input into) and some because they are down in value from when I bought them and I don't want to actualize the losses (I'm down 3 k on both Potash and Husky).

Currently, my RRSP and TFSA accounts are both maxed. For the little RRSP contribution room I get these days, once my pension adjustment is calculated, I throw that into a spousal RRSP, since my spouse is working full-time renovating his house (that we both live in) and does not earn any income.

Due in small part to my own savings and in large part to an inheritance following my mother's death, I also have an unregistered account at Questrade, and, now, about an additional $85k to invest.

Currently, I hold all my US products in my RRSP. This includes some US-dollar ETFs (VOO and IDV) and some Cdn-dollar US-market ETFs (mainly VUN, and a bit of VGG). Together, my US-market holding are worth some $64k (Cdn). Also in my RRSP are some Cdn stocks (such at Potash and Enbridge) and REITS worth about $18k. So my RRSP is worth approx. $82k and is maxed out.

My TFSA is worth approx. $67.5k and is maxed out. This is where I hold international ETFs (the world outside Canada and the US) - I have about $54k in ZEA and VIU. I have just under 5k in a bond fund - VAB. The rest is individual Canadian stocks and REITs (about $9k).

And, currently, in my unregistered account, I have another $5k in the same bond fund as in my TFS (VAB) and some Canadian ETFs - CDZ and ZCN (a little over 30k in each). There is some cash (about $25k) sitting in the unregistered account and another sum of cash on its way to my Tangerine saving account to earn some interest while I figure out what to do.

The asset allocation I had thought I wanted was 25% Cdn stock (mostly or exclusively ETFs, and not counting REITs) 25% American stock (all ETFs); 25% international stock (all ETFs); and the last quarter split between 10% bonds and 15% REITs.

But I'm not sure.

I don't know if I'm overly worried about tax efficiency but I am reluctant to buy anything but Canadian content in my unregistered account.

I am also not sure about my decision to hold bonds at all, given that I have a defined benefit pension plan.

REITS seem like a good idea since I'm not currently holding any real estate directly. But I do live in the house my partner owns and we are planning on being together for life (i.e. marriage-like level of commitment). Our plan is to keep living in his house, where he's live since way before we met, for the next 3 years or so, while he finishes renovating it and I build up my stash, then sell the house and move to Victoria Island. (We currently live within Ottawa city limits.) We would then expect to buy a house there, jointly, so at that point I would expect to shift some of my assets from my portfolio into direct home ownership. So I'm not sure what role to give REITs in my current portfolio.

So I'm having trouble deciding what to invest the rest of my money in; my asset allocation; what to hold where (i.e. RRSP, TFSA and unregistered), whether to hold bonds at all, how often to rebalance, and whether there are other investments I should be looking into instead or in addition to ETFs.

Any constructive input into the situation would be welcome.

(And, yes, I fully recognize that I'm in a really great situation!)

[Retire-Canada]

Asset allocation is more important than tax efficiency so I would decide on what your desired %'s by asset class are and then fit them in to the space available as best as possible.

[RichMoose]

Asset allocation is more important than tax efficiency so I would decide on what your desired %'s by asset class are and then fit them in to the space available as best as possible.

Exactly! I always say: Don't let the tax tail wag the investing dog.

The common argument for/against bonds due to DB pension is not really valid in my book. The reason to hold bonds is mostly related to your personal tolerance for market volatility. What is the max portfolio loss you think you can handle before you crumble, sell everything, and run to your bank for a GIC? If it's 50% or more, go with an all stock portfolio. If it's 25%, you better put at least 40% of your portfolio in bonds.

Regarding your question of what to put in which account, I put together a guide on my little hobby blog which some of the other people on this forum have used. Feel free to check it out if you wish.

You have other tax efficient options for your unregistered account. HXS.TO (tracks S&P 500), HXX.TO (tracks Eurostoxx 50), HBB.TO (tracks Solactive Canadian Bond Universe) are good index products which use a swap-based design to track the total return of these indices. This means they roll all distributions into the total NAV of each unit, converting dividends/interest into unrealized capital gains. Basically you only pay tax when you sell the ETF units and you pay capital gains tax, of which only 50% is included in your income.

I personally feel that REITs are more of an income play in retirement than anything else. They tend to increase in value similar to stocks, but are more interest rate sensitive. Unless you're a real estate junky (I'm most certainly not), just keep your portfolio simple and hold stock ETFs.

Also, don't let a psychological loss hold you back from streamlining your portfolio. I don't know when Potash and Husky will recover and I suspect you don't have any special insight into that either. Sometimes you just gotta bite the loss, take your lesson learned, and move on with a strong foot forward.

[daverobev]

The common argument for/against bonds due to DB pension is not really valid in my book. The reason to hold bonds is mostly related to your personal tolerance for market volatility. What is the max portfolio loss you think you can handle before you crumble, sell everything, and run to your bank for a GIC? If it's 50% or more, go with an all stock portfolio. If it's 25%, you better put at least 40% of your portfolio in bonds.

If you have a DB and add in the actuarial value to your total net worth, and see that not fluctuating... Right? Otherwise aren't you really actually overweight in 'safe' investments?

I'm not in that enviable position (ie, I don't have a DB pension), but it sounds to me that this is purely about psychology. And psychology is something you can... at least work on.

Same thing with early mortgage payoff. This whole forum is about... thinking stuff through rationally. Don't do X, because it's not optimal at all.

I'd certainly factor the DB stuff into my fixed/safe stuff, particularly (or, only) if I was past whatever service threshold that I was guaranteed part or all of it (some require a certain number of years of service before you get anything, I think? Or no, perhaps they buy you out into a locked in account).

[Retire-Canada]

My GF has a nice DB pension that will cover all her essential spending in FIRE so her investments are all for luxuries and travel. She holds no bonds since she's not overly concerned about volatility in her investments. She may well do what I plan to do and switch a portion to bonds just before she FIREs so she has a pool of $$ to draw from in case she gets a poor sequence of returns risk. Until she gets close to FIRE she doesn't have a use for them in her portfolio.

[RichMoose]

The common argument for/against bonds due to DB pension is not really valid in my book. The reason to hold bonds is mostly related to your personal tolerance for market volatility. What is the max portfolio loss you think you can handle before you crumble, sell everything, and run to your bank for a GIC? If it's 50% or more, go with an all stock portfolio. If it's 25%, you better put at least 40% of your portfolio in bonds.

If you have a DB and add in the actuarial value to your total net worth, and see that not fluctuating... Right? Otherwise aren't you really actually overweight in 'safe' investments?

I'm not in that enviable position (ie, I don't have a DB pension), but it sounds to me that this is purely about psychology. And psychology is something you can... at least work on.

Same thing with early mortgage payoff. This whole forum is about... thinking stuff through rationally. Don't do X, because it's not optimal at all.

I'd certainly factor the DB stuff into my fixed/safe stuff, particularly (or, only) if I was past whatever service threshold that I was guaranteed part or all of it (some require a certain number of years of service before you get anything, I think? Or no, perhaps they buy you out into a locked in account).

You're right that the DB pension should be calculated into your overall financial picture. I think many people with a DB pension who are comfortable with investing will realize that their risk/volatility tolerance can be much higher because of their pension. But you have to work on that psychological issue and it takes time for most people.

What I mean by that is, if you can only stomach a 25% loss right now, start with a portfolio designed for that for the time being. As you get more comfortable, direct your portfolio to more and more stocks. A person who invests 60/40 and sticks to it through every up and down will do much better than an overconfident 100/0 who freaks out and dumps their stocks after seeing their portfolio drop a few hundred grand.

I realize this could be judgemental and presumptuous considering it's based on a short post, but the OP seems to be wary of realizing a relatively small loss on two stocks due to a psychological loss aversion factor. I don't intend this as a criticism, as it is an extremely common issue which many investors have, but it is indicative of investor behaviour.

I've always been bold in my personal investing, probably to a fault. But as my understanding of the markets and human psychology matures over time, I am realizing that you can't really be overweight in safe investments. Start your portfolio only as aggressive as you feel comfortable with and work up from there.

On my blog, and with my younger friends, I tell new investors to go 100% stocks with XAW.TO. It's aggressive, but I want them to focus on the weighted average cost of their ETF as they make regular purchases each month. I feel this is a great way to deal with building your psychological confidence before your portfolio gets big. The difference here is that new contributions make a huge impact on your overall portfolio when you start investing. This strategy would be silly for someone with more than $50,000 to invest as contributions don't impact the portfolio as much.

Edit: Sorry I went off a little tangent there...

[Kaspian]

Asset allocation is more important than tax efficiency so I would decide on what your desired %'s by asset class are and then fit them in to the space available as best as possible.

Exactly! I always say: Don't let the tax tail wag the investing dog.

The common argument for/against bonds due to DB pension is not really valid in my book. The reason to hold bonds is mostly related to your personal tolerance for market volatility. What is the max portfolio loss you think you can handle before you crumble, sell everything, and run to your bank for a GIC? If it's 50% or more, go with an all stock portfolio. If it's 25%, you better put at least 40% of your portfolio in bonds.

^^ I third both of these!  I own a balanced portfolio (including bonds) and have a pension, but you never know when the day might come where you show up to a pink slip on the chair.  I'll have faith in my pension the day I cross that finish line.

As for allocation--it really sounds like you already know what you're doing well enough.  Don't over-diversify.  This is a good reminder:  http://canadiancouchpotato.com/2016/01/25/why-simple-is-still-a-hard-sell/

And YES--ditch those two stocks!  ...Because if you expect a miraculous recovery of them why wouldn't you buy even more?

[daverobev]

I absolutely agree to simplification... because it is so much easier to see 'where you are'.

Smallest number of accounts, smallest number of ETFs = best.

I've slowly been clearing out clutter with my own stuff.

[GreatLaker]

It looks like you have built a good portfolio, although your uncertainty about asset allocation does show in the exact securities.

Finiki, the Canadian Financial Wiki is a great investing resource for Canucks.
http://www.finiki.org/wiki/Getting_started
http://www.finiki.org/wiki/Portfolio_design_and_construction
http://www.finiki.org/wiki/Simple_index_portfolios

Once you determine your fixed income/equity mix based on timeline and risk tolerance then you can determine how to invest each of the sub categories. If the commuted value of your pension is equal or greater than your fixed income allocation, then you can skip bonds, provided you can stand the volatility in your own holdings.  Also if you expect your pension to pay all your non-discretionary expenses in retirement then you can take some risks in your own holdings. Hope that is not too basic an explanation.

Nothing wrong with a mix of indexing and individual stocks if it is still within you portfolio intent and asset allocation. With stocks, it's not where they have been, it's where you think they are going. If you don't expect them to recover why hold on to them? Capital losses can be used to offset capital gains, and IIRC they can be carried back 3 years and carried forward indefinitely.

Re your portfolio questions:
I'm not familiar with IDV or VGG. It helps if you give the fund name in addition to the symbol, especially for non-mainstream ones.

Re bonds in your non-registered, this blog from CCP explains how tax inefficient bond funds can be in non-registered these days because they take a capital loss the bonds reach maturity. There are bonds like HBB, BXF and ZDB that are designed to be held in non-registered funds but better to just hold in registered if you have room.
http://canadiancouchpotato.com/2015/03/27/ask-the-spud-gics-vs-bond-funds/

Re REITs and CDZ. By holding those you are concentrating your portfolio rather than diversifying it. ZCN will already hold a market weighted allocation of REITS and dividend stocks. CDZ has an MER around 0.6, compared to 0.06 for ZCN. Do you really think it will outperform to the extent that it can overcome its higher MER? Unless you really think those assets will outperform, or give enough diversification benefit or you need the income, why hold them when ZCN is so broadly diversified and cheap. I'm not telling you to hold them or sell them, but consider what you really expect from them and why. This blog talks about why simple is such a hard sell:
http://canadiancouchpotato.com/2016/01/25/why-simple-is-still-a-hard-sell/

Re foreign stocks in non-registered... we do the best we can for tax-efficiency, but getting the absolute optimum portfolio is elusive. I have heard it is better to move Cdn stocks to non-reg first because of dividend tax credit, then US stocks next because they have low dividend yield, then global stocks next because their yield is higher than US stocks and foreign dividends are taxed at marginal rate as other income. A portfolio that's not perfectly tax optimized is better than sitting in cash.

Starting with the finiki links above should help get past this decision making logjam.

Also if you don't mind laying out your portfolio in a very specific format, the finiki forum is another good place for advice:
http://www.financialwisdomforum.org/forum/viewtopic.php?f=29&t=116284

(Not to take away anything from the wonderful mustachians here, but sometimes different eyes from a different angle are helpful.)

[Dee]

Thanks a million, you guys, especially GreatLaker and Mr. Rich Moose. I especially appreciate your thoughts on the role a DB pension plays in a portfolio and the specific links to get more information. I will definitely be looking into those.

Definitely psychology plays a role in every portfolio. While I think I could mentally bear a big downturn, this hasn't really been tested yet. Though, honestly, I thought that by holding on to stocks that took a big hit (i.e. Potash and Husky), I was demonstrating willingness to stick with the program despite a loss (rather than taking the hit of selling at a loss). And I won't be dumping those positions at a loss until I've set my direction for my portfolio more firmly. Once I have a set investment manifesto for myself, I will act in accordance with that in relation to those stocks and sell if that is the appropriate move based on that.

One of my psychological quirks, and the reason I tent to want more ETFs rather than fewer (i.e. the dividend aristocrat CDZ on top of the all-Canada ETF ZCN) is psychological since it won't be a whole quarter of my portfolio that is up or down the same amount at the same time.

Also, now that my portfolio is worth more, I may be more fearful than I was when I started out with much smaller amounts. There was literally less to lose then. Now, with this amount on the line, I am certainly more cautious. Which I think is a good thing if that means I do a good amount of research and act accordingly. Not a good thing if I get analysis paralysis and leave big sums sitting in cash for a long time while I purport to figure things out (but in reality just procrastinate).

My approach to decision-making in my life in general (not just investments) is to give things a lot of thought before making a decision but to not look back or second guess something once I have finally made a decision.

While I am familiar with Canadian Couch Potato, the other resources you pointed to are new to me and I am looking forward to looking at those.

[GreatLaker]

These sites are good for understanding markets and controlling the emotional and psychological aspects of investing:

http://jlcollinsnh.com/stock-series/

https://www.etf.com/docs/IfYouCan.pdf

[Blissful Biker]

Great advice on this thread.  Posting to follow and prepare for when I start a taxable account.  Thanks.