Portfolio creation [with some US taxation considerations]

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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Solo
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Portfolio creation [with some US taxation considerations]

Post by Solo » 16 Jun 2017 19:32

A friend (65 and planning to work for at least another 3 years) has asked me for advice re her investment portfolio. She is single, owns an apartment worth 400K and has no debt.

Although incorporated, there is essentially no money in the corporation and all her investments are in an RRSP. Since much of her income is earned in the US, she has been advised not to put any monies into her TFSA.

Currently she has a total of 223K invested in her RRSP (2017 deduction limit is 16K). The RRSP currently consists of:

(1) 125K in TD Comfort Balance Portfolio (MER 1.91%) which is 52% bonds/cash, 22% CDN equity, 14% US equity, and 12% International equity

(2) 98K in a 4 year ladder of TD GIC Plus RSP (including Security, Financials and Canadian Banking and Utilities)

Her plan is to delay CPP and OAS until age 70 when she anticipates receiving a combined income from those sources of 24K per year.

During the next 3 to 5 years, she anticipates having at least 35K per year available for investing.

Looking at her current investments, IMHO the 1.91% MER for TD Comfort Balance Portfolio is too high. Also, if it was my money, I think I would be replacing the market growth GICs (as they mature) with a standard GIC 5 year ladder or VAB.

Although my friend has no experience with DIY investing, I think she would have no problem learning the basics required to manage a typical Couch Potato ETF portfolio.

However, I also think that a mutual fund like Mawer 104 (MER 0.94%) - as recommended by AltaRed in an earlier post - makes a lot of sense given how busy she is. If she did go that route, Mawer 104 is currently about 33% bonds, 18% CDN equity, 20% US equity, 25% International equity, and 4% Cash so she could alway use something like VAB to raise the Fixed Income portion if desired - maybe 50:50?

Any thoughts and/or advice would be very much appreciated!

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AltaRed
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Re: Portfolio creation

Post by AltaRed » 16 Jun 2017 20:03

I would agree the TD Comfort Balanced Portfolio MER is too high. Morningstar gives this fund a 2 star rating. A shame how retail bank branches pedal this stuff.

I think the KISS principle applies to someone your friend's age. Assuming an ability to DIY, that could be 2-3 ETFs in a DIY portfolio, or 1 ETF plus Mawer104. I assume her banking relationship is with TD so it would be most appropriate for her to be with TDDI. And if so, you (or someone on this forum) should phone TDDI to see if they sell Mawer mutual funds. Some do...some don't, e.g. RBC DI does not due to competition with their own PH&N organization and probably their D series funds.

Another option is simply to go to a TD e-series account with 4 index mutual funds for the full amount of her RRSP. That is DIY too of course but might (should?) perform better than what she has.

I think the first thing to do is to discuss with your friend IF she is prepared to consider a simple DIY portfolio. She will need someone to help her learn and probably talk her through her trades by phone, or sitting beside her. Whether she can then go solo after it is set up...depends on her confidence. She may well feel vulnerable to being left 'high and dry' if you, for example, bid her adios with no 'lifeline'. It is no easy feat to go solo and we 'experienced' types tend to forget our initial experiences.

I would suggest part of her going DIY might be for her to be prepared to have a fee-for-service planner advise her once a year if she is on track and whether her asset allocation is right. Is she alright paying $1-2k each year for that service? These are all questions she needs to address.

IF she is not ready to go DIY, then she should consider engaging Mawer directly and/or Steadyhand and/or Leith Wheeler or similar who will all manage her portfolio on a % of AUM basis. OR she stays where she is. It is not the end of the world to pay 1.91% (she will likely pay at least 1% with Mawer, Steadyhand, etc.)
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BRIAN5000
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Re: Portfolio creation

Post by BRIAN5000 » 16 Jun 2017 21:27

IF she is not ready to go DIY, then she should consider engaging Mawer directly and/or Steadyhand and/or Leith Wheeler or similar who will all manage her portfolio on a % of AUM basis. OR she stays where she is. It is not the end of the world to pay 1.91% (she will likely pay at least 1% with Mawer, Steadyhand, etc.)
What's wrong with this one, same location, not bad Mer (50 % less), 50/50 split?

TD Balanced Index Fund - I
Key Reasons To Own
One-step exposure to a diversified portfolio of low cost index funds.
Ideal for new investors or those with small amounts to invest.
Low MER.
https://www.tdassetmanagement.com/fundD ... undId=2099

Can Mawer 104 keep its returns above market average for much longer?
“Sometimes you are going to sell early and wish you would’ve held on, other times you will hold on a
little bit longer and wish you would’ve sold early - this is just part of the game.” - Frank Zorilla via Abnormal Returns

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ghariton
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Re: Portfolio creation

Post by ghariton » 16 Jun 2017 22:37

Solo wrote:
16 Jun 2017 19:32
Since much of her income is earned in the US, she has been advised not to put any monies into her TFSA.
Why not?

As I recall, the issues with income earned in the U.S., if any, come at tax time. TFSA contributions are after tax.

As for holding U.S. based securities in a TFSA, there is the problem that the U.S. withholding tax on any distribution cannot be recovered from CRA. But U.S. income (after tax) can be invested in Canadian securities within a TFSA. There would be a loss of the Canadian dividend tax credit for equities, but that is true of equities held in a RRSP as well.
Currently she has a total of 223K invested in her RRSP (2017 deduction limit is 16K). The RRSP currently consists of:

(1) 125K in TD Comfort Balance Portfolio (MER 1.91%) which is 52% bonds/cash, 22% CDN equity, 14% US equity, and 12% International equity

(2) 98K in a 4 year ladder of TD GIC Plus RSP (including Security, Financials and Canadian Banking and Utilities)
A very simple solution is to invest into VT and VAB (or a GIC ladder), with the proportions reflecting attitudes to risk, and especially volatility. Rebalance once a year, or when external factors change. Otherwise, touch the portfolio only to withdraw money as needed, according to a plan set in advance. Read account statements once a year, in preparation for rebalancing. Apart from that, stay away from all financial news and commentary (excepting this forum, of course :wink:)

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The plural of anecdote is NOT data.

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AltaRed
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Re: Portfolio creation

Post by AltaRed » 17 Jun 2017 00:10

BRIAN5000 wrote:
16 Jun 2017 21:27
IF she is not ready to go DIY, then she should consider engaging Mawer directly and/or Steadyhand and/or Leith Wheeler or similar who will all manage her portfolio on a % of AUM basis. OR she stays where she is. It is not the end of the world to pay 1.91% (she will likely pay at least 1% with Mawer, Steadyhand, etc.)
What's wrong with this one, same location, not bad Mer (50 % less), 50/50 split?

TD Balanced Index Fund - I
That does look like a better choice and has better performance returns too.
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Re: Portfolio creation

Post by OhGreatGuru » 17 Jun 2017 21:16

Although my friend has no experience with DIY investing, I think she would have no problem learning the basics required to manage a typical Couch Potato ETF portfolio.
The easiest ( and lowest MER) way to do a self-managed couch potato is with TD e-fund index funds.

Alternatively, there are a few places that sell funds that are essentially portfolio funds that match the composition of varying couch potato portfolios. TANGERINE I think started it (when they were called ING Streetwise funds). Brian5000 mentions a TD Balanced Index Fund, but it's not clear to me if you need a TDDI account for this.

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AltaRed
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Re: Portfolio creation

Post by AltaRed » 17 Jun 2017 22:09

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Last edited by AltaRed on 17 Jun 2017 23:11, edited 1 time in total.
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twa2w
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Re: Portfolio creation

Post by twa2w » 17 Jun 2017 22:57

Does this friend file taxes in the USA?

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Re: Portfolio creation

Post by Solo » 18 Jun 2017 09:32

My friend's response to TFSA and tax question:
"in terms of the TFSA story - I was advised 3 years ago that the US doesn't recognize the tax free part.... so perhaps they are a safe vehicle if I don't plan to with draw anything until I no longer have to file US taxes. Now I have to do a dual income tax filing every year: first the Canadian one and then they take those numbers and file the US one. Because of the agreement between Canada and the US, I pay whichever is the greater amount. Up to date that is the Canadian tax. The only variation was when I lived in NY, and NY State Tax of 18% was also applied to my Canadian income.

In terms of where my income comes from.. my personal income is from a Canadian Company.. so virtually all my income is actually Canadian. The Canadian Company is in a joint venture with another Canadian company and we have a good proportion of our contracted work with American entities,,, but that is all taken care of inside Canadian reporting requirements for the companies and does not impact my personal income - which is still from a Canadian entity,
Clear as mud???"

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Re: Portfolio creation [with some US taxation considerations]

Post by kcowan » 18 Jun 2017 12:20

Because the TFSA is treated like a regular account, she will need to include any interest, dividends or capital gains as they occur, not just when she withdraws the money. This creates an added complexity in reporting to the IRS.
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Re: Portfolio creation

Post by Quebec » 18 Jun 2017 15:21

OhGreatGuru wrote:
17 Jun 2017 21:16
The easiest (and lowest MER) way to do a self-managed couch potato is with TD e-fund index funds.
Indeed. Here is why:
- efunds can be held in a TD mutual funds account, which is a lot simpler to manage for inexperienced investors than a discount brokerage account
- transactions can be entered online at any time of the day or night
- distributions are automatically reinvested if desired (no idle cash)
- no brokerage fees upon buying or selling units
- automated monthly (or weekly, or whatever) contributions

If I was coaching someone with no DIY experience, I would go with efunds. That way you can focus on important things like:
- selecting a reasonable asset allocation (controlling risk)
- automated contributions
- rebalancing

And you don't worry about things like:
- Limit versus market orders?
- Which bond ETF is currently the cheapest, taking into account MER, bid-ask spreads, ...
- Which index is the best for US stocks, the S&P500 or a total market index?
- Should I buy emerging market stocks?
- What should I do with cash distributions?
- Should I buy ETFs traded in the US, and if so how do I convert my CAD TO USD?
- etc.
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Re: Portfolio creation [with some US taxation considerations]

Post by AltaRed » 18 Jun 2017 15:41

If the person gets snagged with a US tax return, Cdn domiciled mutual funds are considered PFICs by Uncle Sam, are they not? And if so, a bag of paperwork to file Other than that, I agree with Quebec and others that TD e-series funds are the simplest form of DIY investing.
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Re: Portfolio creation [with some US taxation considerations]

Post by Solo » 20 Jun 2017 08:54

Thanks to all for the very helpful comments and advice - much appreciated!

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