Newbie - RRSP asset allocation and general financial picture

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor.

Re: Newbie - RRSP asset allocation and general financial pic

Postby adrian2 » 26 Feb 2012 22:47

Rooster wrote:I take this to mean they are not soliciting outside of where they filed their prospectus (presumably just in the US). Nothing prevents a non-resident investors from purchasing on secondary market, correct?

Correct.

Rooster wrote:Side question (just curious here): why would they not just file a prospectus to offer certain US funds in Canada instead of creating new Canadian domiciled funds?

Accounting / taxation rules are different.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Thorn » 20 Mar 2012 16:59

I probably should have thrown in the following a little earlier on - I have made similar comments in other threads:

Given the potential size of your estate over time, I think now is the time to take time and develop an over-all plan related to your finances, beginning with your passions and life goals (why are you and your wife doing all this anyway?) as it will direct your decisions in 5 key plans - (1) financial (review of income statement and balance sheet to identify additional savings, review of balance sheet, especially to keep your liabilities under control over time and to acquire assets that generate income as opposed to personal property which only generates expenses until sold), (2) investments of all types, including the financial investment detail comments above, (3) taxation - probably advice from a tax accountant is valuable in your case as trusts be a viable option, (4) risk - insurance coverage of all types and personal information security and finally (5) estate planning - power of attorney, will, medical directive and funeral plan. These don't all need to be done at once but you can develop them over time to ensure they relate to your goals and dovetail with each other.

A short note on the current Canadian corporate bond market - most prices are at quite high premiums at present, but some investors will continue to buy anyway, because the resulting capital loss at maturity can be carried forward indefinitely for tax purposes and matched to future equity gains as desired.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 22 Mar 2012 13:10

Thanks for the replies. I'm still reseraching and haven't quite finalised my AA. Wanted to post in the AA thread as to not needlessly bump this thread, but seeing that it was already bumped.... Please let me know if it's best to post in the AA thread in the future.

I'm thinking of going with the foolowing AA (all in RRSP):

15%-20% bonds and the rest in equities as follows:

20% XIC
40% VTI
25% VEA
10% VWO
5% REIT

Any thoughts on this? I'd be 75% unhedged, is this of concern?

For bonds, I still haven't decided. Tilting towards just getting a 15 month GIC @ 1.6%. For bond funds, I've considered xsb, cbo and xrb. I'm warry of effect on an eventual interest hike on bond fund prices and I don't fully understand the effect. I understand that expected fund price drops should be corrolated to duration, but for the price to return to purchase level does the interest rate have to return to level it was at time of purchase? If I buy xsb today, and rates rise by 3% I should expect a trading price drop of X. I assume prices would only rise again when/if rates drop relative to the then fund portfolio. Following, does this mean that rates must then drop by the same 3% for prices to return to my purchase price? I'm really unsure of how bund fund price movements work and would appreciate some clarification if possible.

Lastly, would some allocation to real return bonds also be wise and if so is xrb an effective proxy?

Thanks for all the input.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby newguy » 22 Mar 2012 15:05

Rooster wrote:Any thoughts on this? I'd be 75% unhedged, is this of concern?

I don't see any hedging. If you mean only 25% in CDN denominated equities then OK. You will also have around 20% in CDN bonds so a total of 45% exposure to the CDN dollar.

I'm not sure how much it matters anyway. Imagine a declining US dollar and the increased profits for the US companies from overseas earnings. Then imagine that the US has successfully lowered their dollar in order to be competitive worldwide. All a plus for the stock market so is it really bad to be unhedged.

I think if you're hedging you're essentially trading or market timing currencies.

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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 22 Mar 2012 16:43

newguy wrote:I think if you're hedging you're essentially trading or market timing currencies.


Thanks. Being sort of a newbie, my instinct is to hedge to take fx out of the equation. Reading threads here I've realised that both hedging and unhedging are plays on currency, except hedging costs something (and that something is actually substancial over time....say hedging+added tracking errors cost an additional 0.75 mer, that would be a compounded guaranteed loss of about 10% in 10 years -ie. a bad bet). So I decided not to hedge, but was asking myself if more than say 50% unhedged was prudent (I understand that I pay -with both mer and loss of upside- to cap downside with hedging, but wondered if that was a bad risk management strategy to, say, hedge so that foreign currency downside exposure is limited to 50%).

edit: actually, rethinking this, there is no "upside" or "downside" exposure....just lost returns either way. I mean, if I hedge and cdn depreciates relative to foreign currency, I lost returns and vice versa. Same if I unhedge. Both hedging and unhedging contain the same risk....hedging is just a tool, with implementation costs, to make a bet on currency. Unhedging is the same, but with no costs. So, unless someone has a bias towards cdn dollar appreciating enough to more than offset extra costs, it makes no sense to hedge. Basically, someone who doesn't know (ie. me) should not hedge rather than pay to make a bet he has no real basis to make. Correct?
Last edited by Rooster on 22 Mar 2012 18:12, edited 4 times in total.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby gsp_ » 22 Mar 2012 17:44

Why has VTI gone up from 20-25% to 40%?
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 22 Mar 2012 17:48

gsp_ wrote:Why has VTI gone up from 20-25% to 40%?


I figured I'd get the portfolio to reflect world capitalization more (while still being overponderated towards Canana). EAFE is underponderated, but I feel their sectors corrolate more with Canada -which is overponderated-than US. Makes sense?
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Re: Newbie - RRSP asset allocation and general financial pic

Postby BRIAN5000 » 22 Mar 2012 17:58

(while still being overponderated towards Canana).


I wish yoy guys would stop using such big words so I can figure out what your talking about.

Overponderated as opposed to being underponderated?
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 22 Mar 2012 18:10

BRIAN5000 wrote:
(while still being overponderated towards Canana).


I wish yoy guys would stop using such big words so I can figure out what your talking about.

Overponderated as opposed to being underponderated?


If I'm not mistaken, world equity capitalization is roughly this:

US: 45%
EAFE: 40%
EM: 10%
Canada: 3%

In my proposed AA, I say I "overponderate" Canada as I give it a weight of 20% vs it's actual 3% in the world. I do this because basically it's the only way to not take on currency risk and, well, because i live here. I'd be interested in hearing other's thoughts. Why does nearly every model canadian portfolio i encountered give 20%+ weight to Canada?

edit: sorry, the actual word is over/underweight. my primary language is french (quebec), so i sometimes make mistakes like that (in french it's "pondération"). sorry.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby newguy » 22 Mar 2012 18:29

Rooster wrote:edit: actually, rethinking this, there is no "upside" or "downside" exposure....just lost returns either way.
Exactly but you may also consider volatility. By hedging you increase returns up and down over the short term because of the correlation of the CAD to world equity. When the market goes up so does the CAD and vice versa. I've pointed out a few times on this board when stocks were down around the world but US stocks valued in CAD actually went up.

So, unless someone has a bias towards cdn dollar appreciating enough to more than offset extra costs, it makes no sense to hedge. Basically, someone who doesn't know (ie. me) should not hedge rather than pay to make a bet he has no real basis to make. Correct?

Exactly, well said.

overponderate
Whatever you guys are talking about, keep in mind that expenses are lower for VTI than for VEA or VWO mainly because of the lower withholding taxes in a RRSP. If expenses matter then you should maybe overweight cheaper funds.

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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 23 Mar 2012 10:15

Is it too late to change my username to "Ponderation"? That would fit. ;)

Thank you all for the input. The more I read, the more I learn and the more I realize how much I have to learn.

Regarding bond funds. Read a line in another thread that really illuminated it for me. Basically, in a rising interest rate environment, capital loss will be completely offset by rising yield after the fund's duration. Correct?

It can be thought of as buying an individual bond that has a yield and duration of the bond fund at time of purchase (ie. buying xsb today at 2.5year duration and 1.5% ytm is the same as buying a bond with the same duration and yield)? It only matters if I have to sell prior to the weighted average maturity. If you are holding passed maturity (from time of purchase), it's the same as a bond latter. Is this correct?

This being (assuming it is), is there any advantage to buying a bond fund today over a 1 year gic @ 1.6%?
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 23 Mar 2012 10:50

What do you guys think of a simple is beautiful approach to my AA:

XIC : 18%
VTI: 43%
VXUS: 39%

Canada stays at roughly 20% (when adjusted for VXUS canadian holdings), US vs rest is slightly overweight to US (about 8%) to reflect lower cost (mer+witholding which is about a .55beeps spread).

REITs I've been hesitating on and will pass for now. I believe RE prices are in for a correction.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Shakespeare » 23 Mar 2012 10:53

If you don't want to rebalance the US/XUS holdings, you can do it even more simply with VT-N (which is what I use).
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 23 Mar 2012 11:14

Shakespeare wrote:If you don't want to rebalance the US/XUS holdings, you can do it even more simply with VT-N (which is what I use).


It's amazing how i sometimes need to take the long road to get to the closest destination. Thanks. Will think on whether rebalancing us/xus is important to me.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Peculiar_Investor » 23 Mar 2012 11:14

Rooster wrote:What do you guys think of a simple is beautiful approach to my AA:

XIC : 18%
VTI: 43%
VXUS: 39%

Canada stays at roughly 20% (when adjusted for VXUS canadian holdings), US vs rest is slightly overweight to US (about 8%) to reflect lower cost (mer+witholding which is about a .55beeps spread).

REITs I've been hesitating on and will pass for now. I believe RE prices are in for a correction.

IMHO, your asset allocation should be determined independently of current market conditions and valuations. It is the policy that guides your decisions. In addition to specifying target allocations, you might want to consider acceptable ranges for those allocations. For example, target REIT at 5%, with acceptable range +/- 5%. If you set asset allocations too rigidly, then market movements may indicate re-balancing back to target too often, driving up costs.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 23 Mar 2012 11:22

Peculiar_Investor wrote:IMHO, your asset allocation should be determined independently of current market conditions and valuations. It is the policy that guides your decisions. In addition to specifying target allocations, you might want to consider acceptable ranges for those allocations. For example, target REIT at 5%, with acceptable range +/- 5%. If you set asset allocations too rigidly, then market movements may indicate re-balancing back to target too often, driving up costs.


Thanks. I thought of going with current market cap (with the overweight for Canada as an fx anchor) as I understood that to be the basis of indexing -ie. i don't know where things are going, so i buy everything by market cap.

On what else should I base AA?

I do intend to only rebalance periodically, maybe 1-2 times a year if it exceeds a certain range (i think your 5% is good).
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Shakespeare » 23 Mar 2012 11:23

“Never appeal to a man's better nature. He may not have one. Invoking his self-interest gives you more leverage.” -- R.A. Heinlein, Time Enough for Love.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby newguy » 23 Mar 2012 11:28

Shakespeare wrote:XIC holds REITS.

XIC Holdings - iShares ETFs

And VCE doesn't but has a lower mer.

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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 23 Mar 2012 11:32

newguy wrote:
Shakespeare wrote:XIC holds REITS.

XIC Holdings - iShares ETFs

And VCE doesn't but has a lower mer.

newguy


VCE looks better to me on every aspect but the fact that it's new and has lower volume. That made me stay clear. Do you think it more risky than XIC?
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Shakespeare » 23 Mar 2012 11:37

newguy wrote:
Shakespeare wrote:XIC holds REITS.

XIC Holdings - iShares ETFs

And VCE doesn't but has a lower mer.

newguy

VCE holds some REITs (RioCan, H&R page 3) - about 0.4%.

https://www.vanguardcanada.ca/documents ... ld_VCE.pdf

Looks like the REITs are eligible but don't make the size except for those two.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby newguy » 23 Mar 2012 11:37

Rooster wrote:VCE looks better to me on every aspect but the fact that it's new and has lower volume. That made me stay clear. Do you think it more risky than XIC?

No. The volume doesn't matter, it's the spread that matters. Right now it's actually lower at 1¢ percentage wise because of the higher price.

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Re: Newbie - RRSP asset allocation and general financial pic

Postby newguy » 23 Mar 2012 11:38

Shakespeare wrote:VCE holds some REITs (RioCan, H&R page 3) - about 0.4%.

https://www.vanguardcanada.ca/documents ... ld_VCE.pdf

Looks like the REITs are eligible but don't make the size except for those two.

Ah, thanks. I just looked at the sectors and it's not there - too small I guess.

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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 23 Mar 2012 11:50

newguy wrote:
Rooster wrote:VCE looks better to me on every aspect but the fact that it's new and has lower volume. That made me stay clear. Do you think it more risky than XIC?

No. The volume doesn't matter, it's the spread that matters. Right now it's actually lower at 1¢ percentage wise because of the higher price.

newguy


Got it. Volume would only matter if I buy over the liquidity provider's ask volume, which won't be the case.

Is there a chance that the liquidity provider is keeping a tight spead regardless of low volume now but will not in the future if volume on this fund stays low (ie. it never catches on)? Basically, is there a "new issue" risk involved? Am I overthinking this?

Side question re: nortbert's gambit. I'll be converting about $55k into US at tdw. My understanding is that I buy an interlisted stock (ie. RY) and sell immediately and request that proceeds be washed to USD money market account. Two questions: (a) do i need to wait 3 days for the sale to settle into my account to buy US ETF (I'm selling e-series to buy efts, so that would mean i'd be out of the market for a few days) and (b) do i need to call to sell RY-N immediately (I talked to a tdw representative that said i did and would incur a 43$ fee)?

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Re: Newbie - RRSP asset allocation and general financial pic

Postby newguy » 23 Mar 2012 12:12

Rooster wrote:Got it. Volume would only matter if I buy over the liquidity provider's ask volume, which won't be the case.

Is there a chance that the liquidity provider is keeping a tight spead regardless of low volume now but will not in the future if volume on this fund stays low (ie. it never catches on)? Basically, is there a "new issue" risk involved? Am I overthinking this?
Isn't this a RRSP? If so and one fund goes away then you buy another for some commissions and spread. Not exactly a huge risk even if it wasn't the biggest fund company on earth.

I never did the gambit but at TD you shouldn't have to call if you set up your account for automatic wash trades. Maybe search the threads here for that.

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Re: Newbie - RRSP asset allocation and general financial pic

Postby pmj » 24 Mar 2012 04:32

One of the minor complications of NG at TDW (my experience is in an RRSP) is that the sale on the US side is recorded in C$ at TDW's rate after vig - and this is corrected later when the wash is applied. The effect of this is that if you sell, say US$10k of RY-N you won't appear to have US$10k available - you'll only have about 98.5% of that (assuming 1.5% vig) - and that would notionally be in C$ - so if you were trying to buy a US stock the system would be reserving itself another 1.5% - so the system will only let you have about 97% of the funds. So although you should immediately be able to buy US$10k, you won't be able to until after 3 days. Except - if you have some cash or MM funds (either CA or US) sufficient to cover the difference, you would get away with a US$10k purhase immediately.
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