rrsp | Trevor Abes: Writer

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 30, 2021

Young Canadian Investor #25 — Why You Can and Should Invest on Your Own

As you’ve learned over the last 24 articles, there’s a lot to absorb before you can invest your money comfortably and confidently into the world’s stock and bond markets. You need to make decisions about which financial goals to pursue, for example, as well as how long you have to save before those goals can hopefully be met. That means taking a stand about how your future’s gonna look a few decades down the line and committing to it, even though you’ll likely be slapped around by life enough to periodically reconsider your priorities.

Then there’s the whole technical side of things where you get a grasp on what stocks, bonds, and index funds are, and how the different investment accounts on offer may or may not suit your situation.

It adds up and I get how the overwhelm can start to creep in. That’s why I understand if, after all this reading, you’re still feeling hesitant about opening your account and investing. Even though you know how fortunate we are as Canadians to have access to TFSAs and RRSPs, and you can see the benefits of saving money that’ll grow on its own over time, such as fulfilling dreams of all sizes, it’s still somehow not as easy as just doing it.

To that end, I came up with a list of aspects of the investing process that might cause newbies to give up or lose confidence + my own two cents as to possible solutions.

The mechanics of inputting buy and sell orders for your investment funds is not everyday knowledge. You need to type numbers in that represent real money and you don’t want to make a costly mistake. That’s a normal feeling. Thankfully, portfolio manager Justin Bender has got you covered with his instructional videos on that exact subject. He has videos for pretty much every major brokerage in Canada and you’ll benefit from his approachable explanatory style.
It can be a tall order to demystify how the stock market actually works. All those stock tickers, performance metrics, and constantly changing prices can be hard to crack. You should always seek out educational help tailored to how you learn. If you absorb knowledge more efficiently by reading, you can take a look at my investing guide for young Canadians. If you’re more of a visual learner, this TED video might help to fill in some gaps.
Another scary part of tackling the craft of investing on your own is not having an expert check over your work and give you the go-ahead. If you can’t seem to get past this barrier and take the plunge, set up an appointment with a financial advisor in person to open your account when covid allows and have them run you through the investing process. If you’re a customer with their bank, it’s their job to help you. Just be wary of any sales pitches and stick to your plan, whether that’s engaging in active investing or setting up your portfolio of diversified index funds.

Forever is quite the stretch and the prospect of having to tend to your investments on your own for that long can seem daunting. But I know you can do it. You know why? Because you’re taking time out of your day to read an article about investing. That means you’re already part of the chosen few who are capable of investing for themselves. You wouldn’t be here otherwise. So long as you take your time and give yourself room to learn, you will prevail.

As always, if you have any questions at all, fell free to drop them in the comments.

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.

January 23, 2021

Young Canadian Investor #23 — Common Investing Mistakes

Just like the practitioners of any other discipline, investors have to deal with a set of common mistakes the avoidance of which separates the average from the exemplar. You don’t need specialized knowledge to avoid them, just the ability to keep your emotions in check and the willingness to read a book or two to learn how stock markets work. Being a successful investor is within anybody’s grasp. Let’s discuss why by exploring some of those common mistakes below.

First thing most investors fail to consider is the appropriateness of the fees they pay. If you’re invested in funds that charge you 1-2% of whatever money you have invested every year, are the funds’ portfolio managers earning you enough money to justify those fees? Seeing as owning the global stock market through index funds has historically made you about 5% per year after inflation on average, that means a 2% fee fund needs to earn you about 9% per year, supposing 2% inflation, just to keep up.
With so much praise showered on Buffett, Lynch, Templeton, and other legendary investors, too many people believe in the promise of stock-picking expertise. Truth is, though, these individuals are outliers, and research-based stock picking is just as much an art as it is a science. Over the long-term, the vast majority of practitioners will underperform those who simply buy the entire global stock market through a diversified portfolio of index funds.
Unless you know what you’re walking into, it’s very easy to let your emotions get the best of you as a new investor. On any given year a stock fund can fluctuate in price, sometimes by half or more, on its way to making you money over 10 or 15 years. Investing is a long-term practice, one where businesses need to be allowed to innovate, grow, and create lasting value; to be successful, you just need to live your life and stay out of their way. That means ignoring your urge to sell an investment simply because other investors are overreacting and causing its price to drop, even though the quality of the business hasn’t changed.
Many young investors think you need lots of money to participate in the world’s stock and bond markets. Thankfully, this is no longer true. Wealthsimple, for example, allows you to open an RRSP or TFSA and buy as little as one share of the investment fund of your choice without having to pay a commission. If you have a spare $50, you can start investing today.
It’s a widely-held misconception that investing in the stock market is basically gambling. You can definitely use stocks to gamble by, say, buying some shares in a company your coworker gave you a tip on, or a company that makes products you’re deeply familiar with even though its business prospects may not be all that bright. Whenever you invest hastily, you’re taking a flyer and could lose money. And you already read numeral 2. If you take a more measured approach, though, and invest prudently through index funds, which offer you a long-term positive expected return—5% per year or so after inflation—you’re golden.
The key to investing is staying invested long enough so that compound interest can work its magic. That means you need to buy more shares of your stock and bond funds at every paycheck over a handful of decades for satisfactory results to show. Making the rash decision to give up on funds after a few short years is always a mistake.
You may also be thinking that all this investing stuff is too complicated for you to handle it yourself, meaning you need to resort to a financial advisor to put your money to work. Not the case at all, if you ask me. As someone who put the reading in, learned about which investment accounts to open, and has been building his investment portfolio over the last two years, I can tell you with absolute certainty that you are more than capable of doing the same.

If you’re interested in a short and digestible investing guide to get you going, consider my new book, Nine Steps to Successful Investing: A Guide for Young Canadians. I designed it to cut through how financial literacy is one of the most boring things you can learn. You’ll get nothing but the essentials, expressed in plain language, with extra resources only if you’re interested in learning more. Whatever you decide, don’t hold off on building your nest egg. Your future self will love you dearly for it.

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

Feel free to drop any questions in the comments!

March 18, 2020

Young Canadian Investor #4 – The Privilege of Registered Investment Accounts

One of the great things about living in Canada is that the government allows you to open investment accounts where you can either, 1) defer your taxable income to much later in life, or 2) buy investments that can grow without you ever having to pay taxes on them period.

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Any money you invest in your RRSP, or Registered Retirement Savings Plan, will minimize your taxable income for that year by that amount. So if you contribute $5000, your taxable income for that year will be reduced by $5000. Your investments will also grow tax-free, meaning you receive dividends and capital gains in full. But when you withdraw any money, you’ll be taxed on it as income at whatever rate applies to you at that time.

RRSP contribution limits rise every year with inflation. For 2019, you may contribute up to 18% of your taxable income for the year up to a maximum of $27,830.

Any money you invest in your TFSA, or Tax-Free Savings Account, will grow tax-free and can be withdrawn without cost at any time. The contribution limit goes up every year with inflation and currently sits at $6000.

If you’re 18 or older, and a Canadian citizen, you can contribute an amount equivalent to the total contribution room that has accumulated since TFSAs came into existence in 2009. That total is $69,500.

Any withdrawals you make will give you an equivalent amount of contribution room come January 1st of the following year. So if you take $2000 out this year, you’ll get $2000 of contribution room in 2021 on top of the limit the government imposes.

These accounts are ways to park money and let it grow while you focus on living your life. Every major bank offers them and all you have to do to open one is ask. Seeing that a globally diversified portfolio of index funds has earned 7% a year as a long-term average, there’s no good reason not to invest your excess cash and let it multiply while you’re young.

When you really need the money, whether because of illness, lack of work, or not wanting to work anymore, it’ll be there to give you optionality and make for easier decisions.

Any questions? Drop em in the comments!