Trevor Abes: Writer

Tag: etfs

August 25, 2021

Young Canadian Investor #33 – How I’m Invested

After 32 posts covering investing basics for the young Canadian investor, I figured I should show how I apply the principles I’ve written about thus far. Here’s what my personal investment portfolio looks like.

I currently have two TFSAs, one RRSP, and one taxable brokerage account.

One TFSA holds indexed mutual funds and ETFs and individual stocks. Its allocation breaks down into:

  • Canada: 30% (including 10 per cent to individual small cap and micro cap stocks)
  • USA: 25% (including 10 per cent to small cap stocks)
  • Developed International: 20%
  • Emerging Markets: 20%
  • Canadian bonds: 5%

The rationale here is to hold even slices of every public stock market in the world, which index funds offer, with tilts toward small cheap companies, which have historically offered higher average returns compared to their large counterparts.

The index mutual funds are no load, meaning I can stuff small amount of money in them without paying a commission, compared to ETFs, which, at this bank, cost me a commission of $10 every time I buy or sell them. The mutual funds have higher annual fees than indexed ETFs, but not that much for the size of my investments, making me comfortable about using them as accumulation vehicles I’ll eventually transfer over to ETFs when I’ve saved enough for the annual fees to matter.

I do pick individual stocks in this account, and I’m fully aware that the odds are against me. That said, I’m happy to take the extra risk, tempered by thorough research, for the promise of higher returns compared to just owning index funds.

The incredible cover of my book on getting started with index funds, which is linked at the end of the article.

The other TFSA is at an institution that allows me to buy ETFs commission free. Indexed ETFs charge much cheaper annual fees than mutual funds, and I was interested in not having all of my accounts at the same institution, so it made sense for me to open the second account. It holds only index ETFs as follows:

  • Canada: 20% (including 5% to real estate)
  • USA: 20% (including 10% to small companies)
  • Global value stocks: 10%
  • Developed International: 20%
  • Emerging Markets: 20%
  • Global bonds: 5%
  • Canadian bonds: 5%

Besides institutional diversification, the rationale here is to lower my overall investment costs by investing in ETFs, which are the cheapest way for everyday investors like you and me to benefit from stocks. Again, everything is more or less evenly split across the world with value and small company tilts.

I own bonds in both accounts so I have cash around in case markets drop, offering me a discount. I also own them as a second layer to my emergency fund, just in case I find myself in a royal jam. Additionally, the bonds and the real estate pay me monthly income, and I like a slug of my portfolio doing that, again for diversification’s sake.

The RRSP, and this will start to sound like a broken record, is invested in indexed ETFs, even slices, you get the deal. It looks like this:

  • Canada: 25%
  • USA: 25%
  • Developed International: 25%
  • Emerging Markets: 25%

Not bothering with the small caps here, just broad index funds that represent what their names say. I may change my mind about that later, but for now, the extra simplicity is welcomed, and the four funds are likely to do their fair share to get me to my financial goals anyway. I get granular in the TFSAs because there’s academic evidence supporting it, but also because investing is a passion. Mindlessly socking away money in a diversified portfolio of index funds will serve you well over the long term.

There isn’t much money in the RRSP or taxable brokerage account because a TFSA offers me tax-free investment growth and I can take the money out no penalty as I please. You can’t get your money from RRSPs without paying a 5-15% withholding tax per withdrawal, plus adding it to your income for the year. Alternatively, you could ask your bank to turn the account into a Registered Retirement Income Fund and start paying you out the money, which nixes the withholding tax, but you’re not retired, so that makes no sense.

I opened the taxable brokerage account just to do it, because eventually, when I run out of RRSP and TFSA room, that’ll be the only place left to sensibly invest for the long term. Unlike a TFSA, which offers tax-free investment growth, and RRSPs, which offer tax-deferred investment growth, investments in taxable brokerage accounts will ding you for every gain.

Here’s what it looks like:

  • Canada: 50%
  • Berkshire Hathaway: 50%

The Canadian allocation is to an ETF that doesn’t pay any dividends as part of its mandate. That means I can just hold the ETF and let it rise over time without having to worry about taxes until I sell, which I plan on doing in a few decades. The investment company offers international ETFs with the same no dividend mandate, but I find their fees too expensive, so I’m eschewing proper diversification for now.

The Berkshire allocation is strategic in that no dividends is also part of its mandate, and it owns a broad selection of companies in different industries, but I’m also just fanboying out on owning Warren Buffet’s company, exercising my belief in what he and Charlie Munger have built and the structures they’ve left in place to steer the ship when they’re gone. I don’t even care that the institution where I have the account robs its investors by charging 1.5% per C/USD conversion. It’s such a small percentage of my overall portfolio, and I believe in management enough to feel good about them earning me a return I’m satisfied with over time.

I’d like to eventually make some investments in private companies when that gets easier here in Canada, but that’s just me nerding out again. As you can see, the core of my holdings is made up of index funds, which is basically equivalent to owning the entire global stock market, a strategy that has beaten active managers or stock pickers 90% of the time or so over periods longer than 10 years. Not really a popular stance in Canada, where pretty much everyone relies on active management, but the evidence is on my side.

Oh yeah, I own a little Bitcoin and Ethereum as well. They’re 1% each of my overall holdings, small as venture investments ought to be. I feel I’ve gone down the rabbit hole and learned enough to be happy to be there in that capacity.

Another oh yeah, the ETFs I own come from Ishares and Vanguard.

If you read this far, I bet you have questions. Feel free to drop them below.

I also have a book on index investing you can learn more about here.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal financial situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

January 16, 2021

Young Canadian Investor #21 — What It Costs To Invest

While investing is an essential part of being financially responsible, it’s important to know that it isn’t something you can do for free. There are costs associated with acquiring and owning stocks and bonds to save for your future, so you might as well learn about them now instead of being startled by them on a monthly statement years down the line. Let’s get going.

First off, anyone who buys or sells shares of stock has to pay a commission to the brokerage house facilitating the transaction. Usually that’s between $5-$10—if you do business with Questrade or one of the big banks—but Wealthsimple recently became the first financial institution in Canada to let you trade stocks for free.

If you own shares of a mutual fund or ETF that owns numerous stocks, bonds, or both, you’re going to pay something called a Management Expense Ratio (MER). The MER includes the salaries of investment professionals in charge of overseeing the fund, as well as any associated legal and administrative costs. What you’re charged is a percentage of the money you have invested on a yearly basis. Ex: suppose your fund’s MER is 0.5% per year. That means 0.5% of your investment will be taken by the fund to keep the lights on, usually calculated daily and withdrawn monthly from your balance.

Funds will also charge you a Trading Expense Ratio (TER), which is simply the amount of brokerage commissions the fund incurs to implement its investment strategy. The more stocks and bonds the strategy dictates that they buy and sell, the higher the TER will be.

If your fund engages in active management, that means its portfolio managers try to pick what they consider to be the stocks and bonds with the highest potential return. This tends to entail a hefty research budget to figure out what investment to pick, as well as a higher TER that reflects the buying and selling of these investments as they fall in and out of the research results. In Canada, an active fund will generally cost you 1%-2% of your investment per year all things considered.

If your fund engages in passive management, that means its portfolio managers don’t go to the trouble of trying to make predictions about the best investments to own. They opt instead for owning every stock, bond, or both in the markets they cover, or at the very least a sample or index of them that’s representative of the whole. The managers take this route because they believe that human progress will continue indefinitely, which will be reflected in the long-term rise in value of their stocks and bonds. A passive or index fund in Canada will cost you 0.1%-0.3% per year depending on what parts of the world it covers.

Which style has made investors the most money dependably over time? The evidence is squarely in passive investing’s corner.

Then there’s always the option of hiring a financial advisor to make all of your investment decisions for you. If you truly feel that you don’t have the time or patience to learn by yourself, this is the way to go. An advisor will probably cost you about 1%-1.5% of the value of your investments per year—and that’s on top of any fund MERs and TERs—but the fee is worth it if it frees up your time to do more of the things you love.

Now you have a good working sense of what it costs to invest, making you better prepared to make informed financial decisions.

Feel free to ask any questions in the comments!

If you are ready to learn how to invest on your own, have a look at my new investing guide for young Canadians. It’ll give you the tools you need to put your money to work in index funds in no more than an afternoon.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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December 19, 2020

Young Canadian Investor #16 — The Costs of Not Investing

Why I Invest

I don’t know about you, fellow twenty or thirty-something, but my main goal right now is to have the freedom to do what I want with my time.

As a writer, I know that working alone isn’t going to get me that freedom—unless something I create takes off, catches loads of public attention, and grows to complement my history of barely livable wages and price-per-word rates. That means I need to be creative about the number and nature of income streams I put into place. That’s where investing comes in.

Here I am being writerly at Word Sound Power Open Mic in Toronto.

I’ve been diligently investing into a couple tax-free savings accounts for the past two years. I own mostly exchange-traded funds (ETFs) that hold the global stock and bond markets with about a fifth of my portfolio in individual stocks. As businesses improve and their stock prices rise over the long term, my investments will grow for me on their own while I focus on the rest of my life. It’s a small total right now—the entire portfolio provides me with about $1000 of dependable income per year— but it will eventually become enough to let me focus on putting words together full time. That’s why I do it.

Here are five more general reasons I invest and you should too.

  1. Inflation is the phenomenon of the prices of things going up over time. In Canada, it’s about 2 percent per year—about 3.3 percent when you factor taxes in. In other words, your cash buys you about 3 percent less stuff every year you hold on to it. Conversely, it’s reasonable to expect that owning the global stock and bond markets through ETFs will earn you around 7 percent per year over a couple decades. By simple addition, investing puts you 7-3.3=3.7 percent ahead.
  2. If you don’t invest, you may have to confront the reality of Unfulfilled Goals. And we’re talking big goals here, like a car, a down payment on a house, tuition for a degree, or the head start you need to start that family. It’s a lot easier to accumulate 20 thousand dollars over a handful of years if that money is invested and growing, as opposed to you putting it in a savings account that makes you 0.01 percent per year.
  3. The difference between peace of mind and Financial Insecurity is having enough money to meet your basic needs, say for six months, just in case you fall on hard times. This emergency fund is insurance against the ups and downs of life and everyone should work toward building one. But once you have that emergency fund sitting safely in cash, it’s important to start investing and building your nest egg for the future. The simple fact is this: when it’s time for a pivot in your professional or personal life, having tens of thousands of dollars around to help you achieve it will make a huge difference.
  4. Living paycheck to paycheck entails A Poorer Quality of Life. One where there isn’t a whole lot of breathing room at the end of the month after accounting for expenses. That said, a diligent investing plan is one way to generate more room for you to spend your time as you please. What would life be like if your investment portfolio provided you with even $200 of extra income per month? What kind of pressure would that relieve? If you start investing today, you can get there.
  5. The biggest consequence of not investing is the Inability to Retire. A good rule of thumb is to multiply your current salary by 25 to get a sense of how much you need to stop working at 65 years old. Whatever that number is for you, counting on investment growth to reach it is a lot easier than putting your cash in a savings account or under your mattress where it’ll lose money to inflation over time.

If you’re interested in learning the ins and outs of investing prudently to meet your financial goals, you can read my new investing guide for young Canadians. It’s short, to-the-point, and will set you up for making the most of your money regardless of how much you have. Feast your eyes on the luxuriously cheesy cover below.

 

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop any questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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April 29, 2020

Young Canadian Investor #10 – Common Investing Questions Answered

1. Don’t I need to already have a considerable amount of money to invest? Not anymore. It used to be commonplace for funds to have $1000 or $2500 minimums to invest, but you can now buy ETFs for free on Questrade without a commission, even if it’s one share at a time. And just for reference, the Vanguard FTSE All Cap Canada ETF, which invests in a basket of stocks meant to represent the entire Canadian stock market, currently trades for $26.03 per share.

2. What’s wrong with enjoying myself and my money now if life is short and you never know what could happen tomorrow? Nothing at all. In fact, another way to look at investing is as a way to prolong your enjoyment of life until the very end. It’s a trade-off, really, between putting a few dollars away without sacrificing too much in the now, and risking going broke when you can’t work anymore. Whether that means saving $100 a month or $10000, the point is that your future self will really appreciate it. 

3. This investing stuff is way too complicated for me. Has anyone put it all into plain language so I can educate myself at my own pace? Yes, indeed. Behold.

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4. If investing in the stock market is so great over the long term, and helps set you up for a more comfy retirement, why do only about half of Canadians engage in it? Because holding stocks for decades requires a strong stomach. It isn’t easy to watch your globally diversified investment portfolio drop by 20% about every five years, and by a third to half or more every decade or so, on its way to providing you with an average 7% return.

5. What’s inflation? Inflation refers to the sustained rise in price that most goods experience over time. In Canada, it’s 2% a year or so, meaning that the 7% return mentioned above is actually 5% adjusted for inflation.

6. Isn’t a house a better investment than putting money in the stock market? No, because of the money it costs you to maintain and live in it. Here’s a detailed breakdown courtesy of Ben Felix, an investment and financial planning professional based in Ottawa.

7. Can’t I just save money instead of investing? Sure, so long as you’ll be able to give yourself the life you want when you’re older. If you save $300 a month for the next 20 years, you’ll have $72,372 by the end of it. If, instead, you invest that money, and earn a 7% return over the same period, you end up with $157,489. Give this compound interest calculator a whirl and figure out how much money you’ll need to lead your idea of a good life.

Feel free to drop any questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

 

 

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April 1, 2020

Young Canadian Investor #6 – Know What You Own

Say you’re 30 years old and you own four index-based ETFs that track stock markets across the world. One of them tracks Canada, another the US of A, another Developed International Markets (Japan, Europe, Australia), and the last Emerging Markets (China, India, Brazil, South Africa, etc). Suppose further that you allocate 25% of your money to each for an even split.

Two loons...
Two loons…
...one crisis of self-worth.
…one crisis of self-worth.

Now, since you need to own ETFs for the very long term to let them grow—minimum 5 years, but ideally a couple decades or more—it pays to know how much a given stock market could drop. That way, you can calibrate expectations and avoid selling your investments due to a drop you should have been prepared for. 

Thankfully, a data provider called Morningstar offers access to this information all in one place. All you have to do is:

  1. Type a broad market ETF ticker symbol into the search bar and click on the appropriate result
  2. Click on the ‘Performance’ tab
  3. Click on ‘Show Full Chart’ on the top left of the chart
  4. Click “Max’ to see the full price history

Here are ticker symbols for four popular ETFs so you can try this out for yourself—VCN (Vanguard FTSE Canada All Cap ETF) for Canada, VUN (Vanguard US Total Market ETF) for the USA, XEF (iShares Core MSCI EAFE IMI ETF) for Developed International Markets, and XEC (iShares Core MSCI Emer Mkts IMI ETF) for Emerging Markets. Historical results are, of course, no guarantee of future performance, but they’re the best indication we have to determine the bounds of what is normal.

If it hits you that the four investments linked above have all been in existence for less than 10 years, and you’re curious about previous historical drops, have a look at the worst market plunges in US history. It should quickly become apparent that a stock market crash could be anywhere between 20% to over 80% according to past data. And if you lose 3/4 of your investments in only a couple of years, it may take the next decade for you to get back to even.

That’s why it’s so important to know your risk tolerance and calibrate it by owning an appropriate percentage of bonds. The more bonds you own, the less your portfolio will fall during the next stock market crash. To see this dampening effect in action, check these Vanguard portfolios out and focus on how the lowest 12-month return gets bigger the more stocks the portfolio contains.

As a 30-year-old, you have many years to recover from down years in the market, meaning that these down years are actually opportunities for you to invest at lower prices. But as you grow older, you’ll want to transfer an increasingly larger percentage of stocks to bonds to keep your money safe for retirement.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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March 11, 2020

Young Canadian Investor #3 – A Step-by-Step Checklist

You’ve probably heard plenty about investing your money, perhaps through coworkers, your parents, or by mistakenly flipping the channel to CNBC. The question about how to actually accomplish this, though, doesn’t yield a readily-available answer. Well, here’s your answer.

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I won’t go on at length about each numeral, because you can already find that information in my intro to investing. This is more about offering you an eagle’s eye view of that intro so you can take in how the investing process works. Here we go:

  1. Choose financial goals. Could be retirement, a car, an education, whatever you like.
  2. Choose investments that will allow you to meet those financial goals. If it’s short-term, a high-interest savings account that pays you around 2% per year will do. If it’s medium-term, say 3-5 years, an aggregate bond fund, which pays out a long-term average of 2-4% per year, will serve you well. If your goal is 5 years away or more, investing in a global portfolio of stock funds is your best bet because you can expect a long-term average return of 7% per year.
  3. Determine your risk tolerance. If you are risk-averse, you should have more bonds and cash than stocks in your portfolio. If you have the stomach to see your investments fluctuate in value, sometimes by half or more, with the probability of a higher return, you should own more stocks.
  4. Construct your portfolio. Whether that’s 20% bonds and 80% stocks, the inverse, or some other mix, depends on your risk tolerance and the return you need to meet your financial goals. That said, unless you’re a stock-picking genius, you should always diversify, which means owning stocks and bonds from all over the world in many different industries. ETFs are the cheapest and most efficient way for young folks just starting out like you and me to put such a portfolio together. Here’s an example for you. Focus on the lowest 12-month drawdown to get a sense of how much stocks can drop from year to year.
  5. Open a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA) to hold your investments in. The former allows you to defer taxes by minimizing your taxable income by the amount of your contribution, which only makes sense if you’re making a good salary, while the latter can only be funded with after-tax dollars. Both allow investments to grow tax-free.
  6. Buy shares in your chosen investments to match the percentages in your portfolio. See the “Build an ETF Portfolio” video series for instructions from Justin Bender of Canadian Portfolio Manager.
  7. Contribute to your investments on a regular schedule that works for you.
  8. Rebalance once per year. This means selling some of your investments that have done well over the year and buying more of those that have done poorly to get you back to the percentages you chose in step 4.
  9. Repeat steps 7 and 8 until you meet your financial goals.

FIN

If you have any questions, feel free to leave them in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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