Early Start, Early Retirement? Critique my initial portfolio.

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
firebraj
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Early Start, Early Retirement? Critique my initial portfolio.

Post by firebraj »

Hello All,

I hope this is the right place to post this, I am looking to have some wiser investors critique my plan for investing over the next 10-15 years. I hope to eventually retire early, or earlier than most. I track my monthly expenses and currently am aggressively saving and plan to invest as per the following plan. Please critique as necessary, I appreciate any input.

Emergency funds: Not part of my asset allocation, will accumulate a cash buffer as I start to pay rent (not the case now)
Debt: -
Tax Rate: 20.5%% Federal, 9.15% Provincial
Provincial Residence: ON
Desired Asset Allocation: 90% stocks / 10% bonds
Desired Stock Allocation outside Canada: 66.67% (2/3) of stocks
Age: 25
Gross Income: $50k
Initial Investment Amount ~ $20k
I have a TFSA and un-registered account open with Questrade and plan to open an RRSP with them as well.
Cash ~ 12k
TFSA ~ 20k
RRSP - 0
Unregistered - 0

My preliminary plan is as follows;

(Canadian) Bonds - VSB - 10%
Domestic Equity - VCN - 30%
US Equity - VUN/VOO? - 30% (US Market or S&P500?)
International Equity - XEF/VIU? - 24% (difference between Blackrock & Vanguard?)
Emerging Markets Equity - XEC/VEE? - 6% (difference between Blackrock & Vanguard?)

Since I am starting young I feel as if I should worry little about a downturn as it would allow me to invest in a cheaper market. I am relatively sure I can stomach the volatility although no one really knows until it happens. I plan to invest throughout the year, as it costs nothing for me to buy ETFs with Questrade. I have a relatively high savings rate at the moment, and look to invest spare monies.

Additional Questions:

PREFERRED'S - Would it be wise to include CPD which is a Canadian Preferred Share Index and replace a portion of Canadian Equity with it to increase yield? My thought would be to replace (VCN - 30%) with (VCN - 20%, CPD - 10%).

REITs - Would anyone recommend including REITs? Up to what % (I am thinking 5-7%). I am looking to increase yield. I would strictly look for REITs focused on apartment rentals which I think is relatively safer in comparison to the majority.

The other peculiarity which I am unsure how to tackle is how I should allocate these investments in the TFSA / RRSP / un-registered. I am not really sure when this starts to make an impact in respect to taxes but I would rather learn this and implement it sooner than later as it will likely smooth adjustments required down the road.

I really appreciate any input, thank you.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by Quebec »

Welcome to the forum firebraj! A high savings rate is key to early retirement, so congratulations on your early savings discipline, and lack of debt.

TFSA / RRSP / un-registered: see Prioritizing investments and TFSAs versus RRSPs. Non-registered comes last.

PREFERREDS and REITs: I would keep it simple for now. So no. There is no need to increase yield at age 25, since you don't need investment income now.

How many ETFs: see Simple index portfolios, in particular How many funds?.

If I was just starting, I would go with three ETFs at Questrade, or four e-funds at TD.

And I would keep my age in bonds, 90% stocks is too aggressive to my taste (overs will disagree) .

Two thirds of stocks outside Canada is fine.

US Market or S&P500? - in general, the broader the better.

Cheers,

-Qc
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by deaddog »

Quebec wrote:And I would keep my age in bonds, 90% stocks is too aggressive to my taste (overs will disagree) .
Yup I disagree. :)

If stock outperform bonds in the long run and you are going to invest for the long run, why would you even consider bonds?

Bonds keep volatility in your portfolio to a minimum, however while in the accumulation phase you should welcome volatility and use dollar cost averaging to accumulate more shares. Perhaps you might consider bonds as you get closer to your goal but just starting out you want to take advantage of the superior returns of equities.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by AltaRed »

I wouldn't keep 10% in bonds either at a young age. Tons of time to build a portfolio and then at a later age, add fixed income (FI).

BUT what is important is the sleep-at-night factor. If you are likely to panic and sell when your portfolio decreases in value by 40% during a 40% downturn in equity markets, then you don't have the stomach for that much volatility and you need a bit of a FI saftey net to keep you from leaping. Thus keep a well funded emergency fund and perhaps have a bit of a 5 year GIC ladder (or short term bond ETF) on the side just to keep you from potentially committing hari-kari.

Take a look at the TSX index or the S&P500 index over the 2008-2012 period to see how you think you would have weathered that storm. We seem to have one of those every 5-10 years in recent times (1997 Asian flu/1998 Russian ruble crisis, 2000 tech bust, 2008 financial bust). What and when is the next one? Euro/Brexit? China?
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by FI40 »

About the equity allocation, I think your age in bonds is not a bad rule of thumb. You don't know how you'll react yet to an equity market crash. Keep in mind, it's not just that your investments have lost 40% and everything else is fine in life. People will be telling you you're risking your (family's) future, this time is different for reasons x y and z, and it's the end of the equity market as you knew it because of x. You may lose your job at the same time, or be going through other negative things in your life. All the fear and uncertainty will be real, and will be difficult for a rational, cautious person to ignore. There is a fine line between bravery and stupidity, so it may feel smart to "cut your losses" so to speak.

Anyway this is all just to say, consider erring on the side of a safer portfolio until you have lived through a proper market crash.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by FI40 »

FI40 wrote:About the equity allocation, I think your age in bonds is not a bad rule of thumb.
I should add, although it's not a bad rule of thumb, a better rule I think is to plan to increase the bond allocation as your net worth gets closer to your target for hitting retirement. If you'll be retiring at 35 for instance, you might want to have more bonds in the portfolio than 35% at that time, since the first few years of retirement are the most important to have a safer allocation. I think the latest research says you should gradually increase the equity exposure after retirement, so that the bond allocation makes a U shape with retirement at the bottom of the U. Here's the paper about it.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by firebraj »

Quebec wrote:Welcome to the forum firebraj! A high savings rate is key to early retirement, so congratulations on your early savings discipline, and lack of debt.

TFSA / RRSP / un-registered: see Prioritizing investments and TFSAs versus RRSPs. Non-registered comes last.

PREFERREDS and REITs: I would keep it simple for now. So no. There is no need to increase yield at age 25, since you don't need investment income now.

How many ETFs: see Simple index portfolios, in particular How many funds?.

If I was just starting, I would go with three ETFs at Questrade, or four e-funds at TD.

And I would keep my age in bonds, 90% stocks is too aggressive to my taste (overs will disagree) .

Two thirds of stocks outside Canada is fine.

US Market or S&P500? - in general, the broader the better.

Cheers,

-Qc
Thank you! Any particular reason to use three ETFs over five? I think the main reasons being simplicity and slightly lower fees. For some reason I am drawn to the five fund portfolio. I think it's because I want a slightly higher % in Emerging Markets.

I do have a Questrade account so I do not pay to buy ETFS thankfully.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by firebraj »

AltaRed wrote:I wouldn't keep 10% in bonds either at a young age. Tons of time to build a portfolio and then at a later age, add fixed income (FI).

BUT what is important is the sleep-at-night factor. If you are likely to panic and sell when your portfolio decreases in value by 40% during a 40% downturn in equity markets, then you don't have the stomach for that much volatility and you need a bit of a FI saftey net to keep you from leaping. Thus keep a well funded emergency fund and perhaps have a bit of a 5 year GIC ladder (or short term bond ETF) on the side just to keep you from potentially committing hari-kari.

Take a look at the TSX index or the S&P500 index over the 2008-2012 period to see how you think you would have weathered that storm. We seem to have one of those every 5-10 years in recent times (1997 Asian flu/1998 Russian ruble crisis, 2000 tech bust, 2008 financial bust). What and when is the next one? Euro/Brexit? China?
Thanks AltaRed,

I agree on the sleep at night factor, although I wish to lean to a higher equity allocation. I do not plan to sell but only to continuously add to my investments. I plan to keep a cash buffer/emergency fund and I will look into the GIC ladder for when I have more cash although wouldn't the interest be taxed? In the event of a downturn though, I hope to use it as an opportunity to buy in at lower prices, is this is a sane strategy? I hope to have at least $1000/mo to invest.

I hope to reach the point where investing is an emotionless task essentially, I wish there was a way to do it Questrade to not even see the value of my portfolio and yet add to it :p
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by gobsmack »

firebraj wrote:Desired Asset Allocation: 90% stocks / 10% bonds
Given your age, I agree with the others who suggested a 100% equity portfolio. A 10% bond allocation would not provide much ballast anyway. A severe correction would probably be just as painful to watch at 90% or 100%. The main thing is to mitigate the risk of being forced to sell during a severe downturn. This can be accomplished with an appropriately sized emergency fund.
firebraj wrote:Any particular reason to use three ETFs over five? I think the main reasons being simplicity and slightly lower fees. For some reason I am drawn to the five fund portfolio. I think it's because I want a slightly higher % in Emerging Markets.
Usually, it is advisable to keep it simple. It is more important to pick a simple strategy that you can consistently follow overtime. Low costs and simplicity will go a long way in order to help you succeed.
firebraj wrote:The other peculiarity which I am unsure how to tackle is how I should allocate these investments in the TFSA / RRSP / un-registered. I am not really sure when this starts to make an impact in respect to taxes but I would rather learn this and implement it sooner than later as it will likely smooth adjustments required down the road.
You may want to read this article covering foreign withholding taxes.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by firebraj »

gobsmack wrote:
firebraj wrote:Desired Asset Allocation: 90% stocks / 10% bonds
Given your age, I agree with the others who suggested a 100% equity portfolio. A 10% bond allocation would not provide much ballast anyway. A severe correction would probably be just as painful to watch at 90% or 100%. The main thing is to mitigate the risk of being forced to sell during a severe downturn. This can be accomplished with an appropriately sized emergency fund.
firebraj wrote:Any particular reason to use three ETFs over five? I think the main reasons being simplicity and slightly lower fees. For some reason I am drawn to the five fund portfolio. I think it's because I want a slightly higher % in Emerging Markets.
Usually, it is advisable to keep it simple. It is more important to pick a simple strategy that you can consistently follow overtime. Low costs and simplicity will go a long way in order to help you succeed.
firebraj wrote:The other peculiarity which I am unsure how to tackle is how I should allocate these investments in the TFSA / RRSP / un-registered. I am not really sure when this starts to make an impact in respect to taxes but I would rather learn this and implement it sooner than later as it will likely smooth adjustments required down the road.
You may want to read this article covering foreign withholding taxes.
Not the first time I've come across this paper.. I will give it a good read.

As for now I think you could have a good point with the 100% equities. I will reference to see how the foreign witholding taxes apply to a 100% equity portfolio.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by 8Toretirement »

I would read one of William Bernstein's books on portfolio structure before going all in 100% stocks.

stocks roared back post 2009, however, if we have a Japan scenario you won't be so lucky. FI is for safety.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by BRIAN5000 »

Given your age, I agree with the others who suggested a 100% equity portfolio.
Your 1 mile from the grocery store and you need a gallon of milk, which do you take your Ferrari or the Honda.

The Ferrari is nice, great cocktail fodder but comes with all the hassles and cost of owning that type of car.

The Honda will get you there safely, on time without as many hassles as the Ferrari.

Seems to me about the same as comparing 90/10 or a 50/50 approach to asset allocation.

The fact that you are young and have a high saving rate will get you to your goal with a lower stock allocation. MAYBE not as fast as a 90/10 but will give you more options/choices along the way. If the average market correction lasts 18 months (?) might need a pretty big emergency fund to make it that long. I agree 10 % is not enough fixed income to make a large impact or to have funds available for large correction purchases.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by longinvest »

BRIAN5000 wrote:The fact that you are young and have a high saving rate will get you to your goal with a lower stock allocation. MAYBE not as fast as a 90/10 but will give you more options/choices along the way. If the average market correction lasts 18 months (?) might need a pretty big emergency fund to make it that long. I agree 10 % is not enough fixed income to make a large impact or to have funds available for large correction purchases.
This post makes a lot of sense.

Mathematically, when starting at $0 and contributing a regular amount, asset allocation has a negligible impact on total wealth accumulation during the first 10 years. Contributions simply dwarf asset returns.

I can't recommend a specific asset allocation to someone else; volatility tolerance, taste for risk in the hope of higher wealth accumulation, and too many other considerations get into it. It's all pretty personal. But, I do recommend to remain prudent and never put all of one's eggs into the single Stocks basket. I think that putting at least 25% into bonds (something like VAB*) is the prudent thing to do.

* Not into VSB (short-term bonds) which is usually done for timing the bond market while waiting for higher rates.

As I said, in the first 10 years, it won't make a significant difference on accumulation. But, holding bonds will help one learn about this awesome asset class. There's more to bonds than we are lead to believe by the financial press. Bonds are a pretty complex asset class.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by longinvest »

firebraj wrote: US Equity - VUN/VOO? - 30% (US Market or S&P500?)
International Equity - XEF/VIU? - 24% (difference between Blackrock & Vanguard?)
Emerging Markets Equity - XEC/VEE? - 6% (difference between Blackrock & Vanguard?)
I see no good reason for all this complexity. I would simply go with XAW (cheaper by a few negligible basis points, with a few positive aspects in its composition) or VXC (if a Vanguard fan). That would take care of avoiding mistakes like combining XEF and VEE, which would cause some overlap because iShare and Vanguard use indices which define emerging markets differently.

I am a fan of simplicity. If I was you, I would go with VCN/XAW/VAB and be done with it.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by longinvest »

About Brian's 50/50 suggestion...

Actually, given the flexibility of the TFSA's withdrawal rules, a young 50/50 investor would not need a separate emergency fund; the portfolio could play that role, among other roles. Of course, one would still need to keep a mini emergency fund (EF) in a savings account, to cover liquidity needs between a sell transaction and the money arriving into one's chequing account, which could easily take a couple of weeks during the holiday season.

This might require one to fully understand that money is fungible. Even if the TFSA is full of stocks, and the RRSP full of bonds, one can sell stocks in the TFSA (for the withdrawal) and compensate by selling bonds in the RRSP to buy back stocks (in the RRSP) with the proceeds, getting the asset allocation back to target across all accounts.

Ever since I've built an emergency fund, emergencies have somehow disappeared from my life. I did adopt the mini EF idea and counting the portfolio as a gigantic EF (specially that mine spills into non-registered). It works when one has a significant allocation to bonds.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by gobsmack »

longinvest wrote:Actually, given the flexibility of the TFSA's withdrawal rules, a young 50/50 investor would not need a separate emergency fund; the portfolio could play that role, among other roles.
This is an interesting idea. Can you elaborate?
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by longinvest »

gobsmack wrote:
longinvest wrote:Actually, given the flexibility of the TFSA's withdrawal rules, a young 50/50 investor would not need a separate emergency fund; the portfolio could play that role, among other roles.
This is an interesting idea. Can you elaborate?
It's pretty simple, actually.

Let's say that I am young and I have 32K to my name, 20K TFSA contribution room, and more than 10K RRSP contribution room.
  • I would leave, let say, 2K in a savings account*. That would be my mini emergency fund (EF). I would never use this money for normal expenses. It should be money never to be touched, unless a real emergency happens.
  • I would put 20K into my TFSA. With it, I would buy 15K of stocks (let say 7.5K VCN, 7.5K XAW) and 5K of VAB.
  • I would put 10K into my RRSP. With it, I would buy 10K of VAB.
Note how the portfolio (e.g. anything not in a chequing or savings account) is divided 50/50 between stocks and bonds.

Let's say that a big emergency happened a few days later... :wink: I proposed to my nice lady, and I now want to pay my part of the wedding and honeymoon without going into debt. I need 15K (the lady provides 15K too). How do I get it?

I need to withdraw 15K from my TFSA. Temporarily, I can use the 2K from the mini EF to pay for immediate expenses (if somehow I can't use my credit card for it), but I'll have to replenish the mini EF, so I better withdraw the entire 15K.

I need to sell 15K of assets in my TFSA. So, I sell 5K of VAB. I also sell 3.75K of VCN and 6.25K of VXC. On the settlement date (sell date + 3 business days), I transfer 15K into my chequing account**.

My portfolio has lost its balance. I now have 10K of VAB, 3.75K of VCN, and 1.25K of VXC.

To put things back into balance, I sell 2.5K of VAB in my RRSP and buy 2.5K of VXC with it. Now I'm back to balance: 3.75K VCN / 3.75K VXC / 7.5K VAB.

Code: Select all

Initial
-------
savings: 2K
TFSA: 7.5K VCN, 7.5K VXC, 5K VAB
RRSP: 10K VAB

Transactions:
TFSA: sell 3.75K VCN, sell 6.25K VXC, sell 5K VAB
RRSP: sell 2.5K VAB, buy 2.5K VXC

After 15K TFSA Withdrawal
-------------------------
savings: 2K
TFSA: 3.75K VCN, 1.25K VXC
RRSP: 2.5K VXC, 7.5K VAB
Note that this can only work because we can withdraw money from the TFSA without losing contribution room. We wouldn't want to withdraw any money from the RRSP (other that through the Home Buyer's plan, which keeps contribution room intact). It a good idea, specially for a young person, to fill the TFSA to the maximum before putting a single dime into the RRSP.

* This amount should be adapted to one's circumstances. Many people will want more than just 2K. But, for someone with 32K to his name, it seems OK to me.
** It arrives a few days later, thanks the the very inefficient electronic link between brokers and banks in this electronic age!
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by gobsmack »

But you may be facing an emergency while the market is undergoing a severe correction. Wouldn't it be a good idea to have an emergency fund anyway? Are you betting on the idea that stocks and bonds usually move in opposite directions? Is this the reason why you could use the portfolio itself as the emergency fund?
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by longinvest »

gobsmack wrote:But you may be facing an emergency while the market is undergoing a severe correction. Wouldn't it be a good idea to have an emergency fund anyway? Are you betting on the idea that stocks and bonds usually move in opposite directions? Is this the reason why you could use the portfolio itself as the emergency fund?
I always assume that stocks could lose half of their value. This would leave the TFSA with: 15K/2 (stocks) + 5K (bonds) = 12.5K. Adding the 2K in savings, we're really close to 15K, which is more than the OP has in cash today. Even if this empties the TFSA, rebalancing the RRSP will give reacquired stocks a chance to bounce back.

Depending one's portfolio distribution, one could simply keep more bonds in the TFSA and keep more stocks into the RRSP.

The thing to note is that the 30K portfolio is only reduced to 22.5K after a 50% drop in stocks, which is why I say it's OK to use the portfolio as emergency fund. But, you are right, keeping an eye on liquidity through bonds placement, when necessary, is important.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by firebraj »

longinvest wrote:About Brian's 50/50 suggestion...

Actually, given the flexibility of the TFSA's withdrawal rules, a young 50/50 investor would not need a separate emergency fund; the portfolio could play that role, among other roles. Of course, one would still need to keep a mini emergency fund (EF) in a savings account, to cover liquidity needs between a sell transaction and the money arriving into one's chequing account, which could easily take a couple of weeks during the holiday season.

This might require one to fully understand that money is fungible. Even if the TFSA is full of stocks, and the RRSP full of bonds, one can sell stocks in the TFSA (for the withdrawal) and compensate by selling bonds in the RRSP to buy back stocks (in the RRSP) with the proceeds, getting the asset allocation back to target across all accounts.

Ever since I've built an emergency fund, emergencies have somehow disappeared from my life. I did adopt the mini EF idea and counting the portfolio as a gigantic EF (specially that mine spills into non-registered). It works when one has a significant allocation to bonds.
Thank you longinvest for your multiple comments! I sort agree with the emergency fund portion, as at the moment I am in a relatively safe situation as I have no major monthly expenses and am young as well. I will create more of a cash buffer over time in order to shield the investment account from impact. I will always have >$2k in a savings/chequing account.

The reason I lean towards a five fund is tax efficiency, I don't know how much of a difference I can make but holding VTI as my US equity in USD in an RRSP is one benefit. Although the conversion costs, currency fluctuations, and additional steps may affect the real life situation. Other than this, I am not sure of any other tax advantages, I will have to read through Dan & Justins white paper "Foreign Withholding Taxes" one more time thoroughly.

In your opinion, would this be a reasonable substitute?;
VCN - 30%
XAW - 45%
VAB - 25%

I was aiming for a slightly higher % in Emerging Markets, do you know approx what % it would be in this case? I'm guessing around 2-3% max. I guess I could always buy a few more shares of XEF if necessary.

There are some others in this thread that lean towards 100% equity, but as you say it doesn't make much of a difference in the asset accumulation phase, I think that does make sense, and in the event of a downturn bonds will be a buffer which will inspire confidence.

Simplicity is key, I just want to have a solid, diverse, portfolio I can add to as often as possible. Confidence is key, and simplicity goes a long way into not overthinking things so once I pull the trigger I want to be sure about it.

Honestly, I expect a growth rate of 4% over the next decade, and I want to cost-average aggressively during any downturns. I really wish I had started with this earlier, but there is no time better than now, it's just a matter of pulling the trigger.

Also in regards to Blackrock vs. Vanguard, on surface level there doesn't seem to be much difference. But the last thing I want to be is holding an ETF where it's assets have been further loaned out. Some ETFs have quite a high % of debt, while Vanguard funds are closer to 1%, so in the event of a large downturn the owners cannot get screwed. I was reading a thread on a forum in regards to this, and I have no idea of the specifics to terminology or details about this, but I hope to hold high-quality ETFs where the management company actually holds these assets.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by BRIAN5000 »

Seems to me about the same as comparing 90/10 or a 50/50 approach to asset allocation.
Although this is what I wrote I didn't mean to recommend 50/50 I was using that as an example. longinvest's usual suggestion of a min/max 25/75 - 75/25 with pick your allocation somewhere within that range that makes sense to you and your situation seems appropriate to me.

To put things back into balance, I sell 2.5K of VAB in my RRSP and buy 2.5K of VXC with it. Now I'm back to balance: 3.75K VCN / 3.75K VXC / 7.5K VAB.
Are Asset allocations rules or are they guidelines (?) and how much attention should be made to keeping it exactly right at all times. With the above-posted example and a contribution rate of $1000 a month OP could be back in balance in a little over 2 months. No reason to sell the 2.5 VAB and buy 2.5K of VXC if you can direct new investment to rebalance in a "reasonable (?)" time frame.

With a market correction, lets say from a normal/unprecedented interest rate rise, I wouldn't want to be selling either stocks or bonds. I think you should have a better secondary EF past the $2000. Maybe VSB in the TFSA?

Your IPS may be a good place to outline what constitutes an emergency IMHO a wedding does not. (just used as an example maybe)
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by longinvest »

BRIAN5000 wrote: With the above-posted example and a contribution rate of $1000 a month OP could be back in balance in a little over 2 months. No reason to sell the 2.5 VAB and buy 2.5K of VXC if you can direct new investment to rebalance in a "reasonable (?)" time frame.
Yes, of course that's true as long as contributions are big enough relative to portfolio size.
BRIAN5000 wrote:With a market correction, lets say from a normal/unprecedented interest rate rise, I wouldn't want to be selling either stocks or bonds. I think you should have a better secondary EF past the $2000. Maybe VSB in the TFSA?
The mini EF is only justified with a high allocation to bonds (like my 50% bonds example). With a smaller bond allocation, like 25%, one could keep bonds in the TFSA, but should also consider the total size of the non-stock holding to see if it's big enough. In our example 25% bonds would mean: 2K savings + 7.5K bonds, which is too low. That would mandate a bigger savings account, or maybe a higher allocation to bonds. :wink:
BRIAN5000 wrote:Your IPS may be a good place to outline what constitutes an emergency IMHO a wedding does not. (just used as an example maybe)
I used the wedding not because it's a real emergency, but because it's a typical use of money that is way sooner than retirement. I just don't subscribe to the idea that the investment horizon of a 20+ year old investor is near infinite so that he should put all his money into stocks. I actually think that few 20 year old investors have a long horizon for their money. Most of them might need it for wedding, house downpayment, etc.

Now, many people use mental buckets for their money, as if money was not fungible. So, they have distinct asset allocations for each bucket. I prefer to keep things simple with a single pot with a balanced allocation. Life, specially of a 20 year old, is just too unpredictable; needs and goals change quickly sometimes.
Last edited by longinvest on 28 Sep 2016 14:06, edited 1 time in total.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by longinvest »

Brian,

About:
BRIAN5000 wrote:With a market correction, lets say from a normal/unprecedented interest rate rise, I wouldn't want to be selling either stocks or bonds.
A total-market bond investment is not subject to high volatility. Its worst 1-year total return according to the The Stingy Investor Asset Mixer, in the last 55 years, was -4.3% in 1994. Why should I care if bonds lost even 10%?

We're not talking of using long-term bonds, here. That would mandate a different approach.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

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firebraj wrote:The reason I lean towards a five fund is tax efficiency, I don't know how much of a difference I can make but holding VTI as my US equity in USD in an RRSP is one benefit. Although the conversion costs, currency fluctuations, and additional steps may affect the real life situation. Other than this, I am not sure of any other tax advantages, I will have to read through Dan & Justins white paper "Foreign Withholding Taxes" one more time thoroughly.
Given the size of your portfolio, you're talking of maybe saving maybe $10 per month, in tax efficiency, but you might be losing more in transaction fees, spreads, conversion, and maybe even errors while doing a Norbert Gambit (NG). You would also have to do USD/CAD conversions to properly calculate your asset allocation, and be subject to US tax laws. I don't know about you, but me, I'm ready to pay a few basis points in returns and avoid the head aches. Other people think that it matters a lot. You decide for yourself.

Personally, I can't imagine how I would explain NG to my wife so that she could maintain her own portfolio. Luckily, she is able to maintain her portfolio of 3 Canadian ETFs. :)
firebraj wrote: In your opinion, would this be a reasonable substitute?;
VCN - 30%
XAW - 45%
VAB - 25%
It's a fine portfolio.

Note that if your intention is to use the mini EF idea along with it, I would increase the bonds percentage a little. Otherwise, I would just keep a normal EF along with that 75/25 portfolio.
firebraj wrote: I was aiming for a slightly higher % in Emerging Markets, do you know approx what % it would be in this case? I'm guessing around 2-3% max. I guess I could always buy a few more shares of XEF if necessary.
What do you know about emerging markets that the rest of the market doesn't know? Why do you think that this segment of the market will outperform?

Yes, one could apply the same argument about Canada vs international, but my view (not universal) is that there's a big difference: investments into the Canadian stock market are not subject to currency fluctuations. That's why I consider domestic separate from international. I don't try to bet on which will outperform.
Last edited by longinvest on 28 Sep 2016 15:37, edited 7 times in total.
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Re: Early Start, Early Retirement? Critique my initial portfolio.

Post by AltaRed »

Me thinks this is being overworked for a 25 yr old. I would use the KISS principle with a minimum of ETFs (VTI in RRSP is a good reason to deviate if/when necessary) and a minimum of transactions, perhaps one every few months to keep transaction costs down. Nothing magical about keeping the AA within a percentage point or two of one's chosen mix. Even if it gets out of whack by 5 percentage points, it is easy to bring it back in a few months of contributions to the underperformer.

My view is that one should be able to manage their AA without even using a calculator, never mind a spreadsheet. Okay, maybe that is a bit extreme, but quite frankly I think about my AA in numbers that I can do in my head.

As to the OP's query about Emerging Markets, I maintain that what one gets in VXC or XAW is plenty good enough. EM is as miniscule as it is because it deserves to be. I've said elsewhere that EM capital markets in any given EM country are often out of whack with their GDP because of various factors, some nefarious, some simply due to sloppy regulation AND that much of an EM country's GDP is siphoned off with capital flight (both legal and illegal) and/or the presence of multi-nationals HQ'd in developed countries. There isn't a lot of 'warm fuzzys' in any of the markets in the list here https://en.wikipedia.org/wiki/Emerging_markets (as described by FTSE, MSCI or S&P). YMMV
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