Question On Implementing Asset Allocation

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Question On Implementing Asset Allocation

Post by ostrich »

I've got a question about implementing my target asset allocation (CIBC Investor's Edge, both registered RRSP and TFSA accounts). I've sold off all of my high MER CIBC mutual funds, liquidated a significant amount of stock holding that I had and made a corresponding RRSP and TFSA contribution for this year and have a target asset allocation worked out for each account based on the corresponding (now cash) holdings (among 4 ETFs).

One thing I'm wondering about is what the best way to put in the orders to accomplish this deployment of assets would be - for example, let's say I had $100K of cash I'm going to deploy and I've decided my asset mix is going to comprise 30% of, say, VCN. In the Investor's Edge client at least, I can get a current unit price and then put in a market order for the number of units that would correspond to $30K at that price, but presumably depending on what price the order gets filled at, I might not end up deploying the amount I intend. There doesn't seem to be a way to specify "buy X amount of a given ETF at whatever market price the order if filled at" directly - at least if there is, I'm not aware of it.

Putting in a limit order is another option, but it's not clear to me that's particularly useful for this purpose. Is there a better method for doing this than simply putting in a market order and estimating the right number of units? From reading a couple of other threads, it seems specifying a whole number of units may have an influence on how quickly the order is processed, is that correct? Or since getting the exact percentage distribution is probably not so critical as long as it's fairly close, is this probably not a factor one needs to be overly concerned with?
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Re: Question On Implementing Asset Allocation

Post by adrian2 »

ostrich wrote: Or since getting the exact percentage distribution is probably not so critical as long as it's fairly close, is this probably not a factor one needs to be overly concerned with?
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Re: Question On Implementing Asset Allocation

Post by AltaRed »

Agreed. Don't sweat being overly precise. Allowing a 30% allocation in VCN for example getting to 25% or 35% is not a big deal. The next time you invest a lump sum, you can correct it with a smaller (or bigger) purchase. You can easily get 5 percentage points out of whack just by differences in market performance on an annual basis. Over-balancing costs money and doesn't gain much, if anything in portfolio performance.
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Re: Question On Implementing Asset Allocation

Post by DenisD »

I wouldn't use a market order for something like VCN.
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Re: Question On Implementing Asset Allocation

Post by ostrich »

DenisD wrote:I wouldn't use a market order for something like VCN.
Can you elaborate on what the reason would be? Are you advocating putting these in as a stop-limit and/or limit order of some kind (say based on what the current quoted market price is when you put in the order)?
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Re: Question On Implementing Asset Allocation

Post by like_to_retire »

ostrich wrote:
DenisD wrote:I wouldn't use a market order for something like VCN.
Can you elaborate on what the reason would be? Are you advocating putting these in as a stop-limit and/or limit order of some kind (say based on what the current quoted market price is when you put in the order)?
I wouldn't use a market order for anything - ever, ever, ever!

Who would do that considering that it costs nothing to set a limit order and costs everything to not. A market order says, "I'm willing to pay anything you ask for your product."

I've heard all the explanations that it should not be a problem if there's lots of liquidity, but I respond with the question, "why would you not protect yourself when there's no downside?"

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Re: Question On Implementing Asset Allocation

Post by AltaRed »

I don't have quite the same aversion DenisD does when it comes to market orders on some ETFs but there *IS* a risk of a high Ask coming in after you have looked at your last Level 2 quote (worse if you don't have real time Level 2). Generally speaking, if one wants to do the 'equivalent' of a market order, place a limit order at the Ask price. You have a high liklihood of getting at least some shares at that Ask price and if it doesn't get all filled at that Ask price, you will then see the next Ask price and can revise your 'remaining' bid price to the next Ask.

That is what I would do, especially in a rising trading day. Some people try to split the difference between Bid and Ask, but there is a good chance you will not get your order filled, and more importantly, what difference does a few cents make on a long term investment? People do lose sight of the forest for the trees.
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Re: Question On Implementing Asset Allocation

Post by like_to_retire »

AltaRed wrote:I don't have quite the same aversion DenisD does when it comes to market orders on some ETFs
If the market doubles the ASK after your market order, them that's what you'll pay. Spikes in price have happened in the past.

If you want to ensure you'll get your fill, then set the limit to $10 (or whatever) above the present ASK. Giving the market carte-blanche to charge you whatever it pleases is insane.

There's no downside to a Limit order.

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Re: Question On Implementing Asset Allocation

Post by CROCKD »

Following this discussion with some interest. I used to use Market Orders but recently have only placed limit orders.

Last week I entered a trade to buy a large number of ETF shares in my registered fund. I entered the trading fairly late in the trading day as I was otherwise occupied. There were a large number of shares being traded. It was a limit order at the price I was willing to pay which I revised upward as the difference was small. The result was that I got a partial fill for about half my order and the trading day finished. I have had partial fills before but usually several until my order was filled. So consequently I paid a trading fee (under $10) for about half the no. of shares that I wanted.

The bright side was that I was able to complete my order a couple of days later (earlier in the trading day) at a lower price - with another trading fee.

This resulted in me reading the terms and conditions for the trading fee. You pay the same fee for a partial fill as a completed order. This would suck if you got a partial fill say of 100 shares on an order for 1000 shares.
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Re: Question On Implementing Asset Allocation

Post by like_to_retire »

CROCKD wrote:This resulted in me reading the terms and conditions for the trading fee. You pay the same fee for a partial fill as a completed order. This would suck if you got a partial fill say of 100 shares on an order for 1000 shares.
So a $9.99 trading fee, opposed to paying thousands on a market order trade if the market had taken off just as you entered your ill advised market order?

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Re: Question On Implementing Asset Allocation

Post by AltaRed »

CROCKD wrote:This resulted in me reading the terms and conditions for the trading fee. You pay the same fee for a partial fill as a completed order. This would suck if you got a partial fill say of 100 shares on an order for 1000 shares.
I agree with LTR that another trading fee is a lot better than hundreds of dollars potentially paid via an open market order. The key to filling a limit order on the same trading day (if that is important to you) is to start earlier in the trading day, e.g. 10-11am EDT or even Noon, giving you plenty of time to adjust price if you need too to fill the order, albeit how much more are you willing to pay to fill the order vs another trading fee another day (and an unknown market price another day)? At least starting earlier in the day gives you time to watch the market and adjust.

Re: LTR, Yes, I agree the current Ask one sees in a standard equity order entry may be an aberration. There may be only 1 lot with an Ask at say $10 and the next Ask is 5 lots at $13. In the absence of anyone else coming into the market at that instant, a buyer without Level 2 quotes might assume the market is at $10. However, if one was then buying 6 lots with a market order, it would be filled 100 shares @ $10 and 500 shares @ $13. That could be a rude awakening.

I would not use a market order without seeing real time Level 2 quotes and even then, as you say, there is no real penalty in using limit orders.
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Re: Question On Implementing Asset Allocation

Post by gsp_ »

Why does everything have to be so complicated on here?

For widely traded ETFs simply place a limit buy order a cent or two ABOVE the current ask. Your order will get filled immediately and very likely at the ask(unless the market moved up). You are not giving up that cent or two as they have to give you the best available price. Done. Back to living your life.
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Re: Question On Implementing Asset Allocation

Post by adrian2 »

gsp_ wrote:For widely traded ETFs simply place a limit buy order a cent or two ABOVE the current ask. Your order will get filled immediately and very likely at the ask(unless the market moved up). You are not giving up that cent or two as they have to give you the best available price. Done. Back to living your life.
+1.

Remember, even if you have access to level II quotes, there may be iceberg orders, especially for ETF's.
So even if you see, say, 1000 shares offered for sale @ $30.30, putting a buy order for 2000 shares @ $30.31 will most likely get a complete fill @ $30.30.
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Re: Question On Implementing Asset Allocation

Post by ockham »

adrian2 wrote:
gsp_ wrote:For widely traded ETFs simply place a limit buy order a cent or two ABOVE the current ask. Your order will get filled immediately and very likely at the ask(unless the market moved up). You are not giving up that cent or two as they have to give you the best available price. Done. Back to living your life.
+1.
+2.
It's called a "marketable limit order". Works great, as gsp says.
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Re: Question On Implementing Asset Allocation

Post by Bylo Selhi »

ockham wrote:
adrian2 wrote:
gsp_ wrote:For widely traded ETFs simply place a limit buy order a cent or two ABOVE the current ask. Your order will get filled immediately and very likely at the ask(unless the market moved up). You are not giving up that cent or two as they have to give you the best available price. Done. Back to living your life.
+1.
+2.
It's called a "marketable limit order". Works great, as gsp says.
+3

Also consider that even if you do give up a 1¢ or 2¢ that's only $1 or $2 per 100 shares. You'd have to be trading at least 500 shares (say ~$15k for a typical equity ETF at 2¢/share = $10 brokerage) before the next day's brokerage charge from ending the day unfullfilled are less than this. And that's only if you don't get what you want at the original market price you saw when you pulled the trigger.
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Re: Question On Implementing Asset Allocation

Post by always_learning »

If I want to buy a large position in an ETF, I place a limit buy order a penny or two below the ask price at 10 am EDT. Then, later in the day, if it's not filled or only partially filled, I cancel that limit buy order and place a new limit buy order a few cents above the ask.

At my broker (BMOIL), I pay only one trading commission, even if the first order was partially filled.

Of course, this would be too nit-picky for some.

a_l

p.s. If you try this, be sure and cancel the first buy order before placing the second!
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Re: Question On Implementing Asset Allocation

Post by like_to_retire »

always_learning wrote:If you try this, be sure and cancel the first buy order before placing the second!
TDDI allows you to change the price on an order at any time until completely filled or until it's closed. No need for multiple orders.
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Re: Question On Implementing Asset Allocation

Post by AltaRed »

like_to_retire wrote:
always_learning wrote:If you try this, be sure and cancel the first buy order before placing the second!
TDDI allows you to change the price on an order at any time until completely filled or until it's closed. No need for multiple orders.
Agree. I never cancel a partially filled order at either of BMO IL or Scotia iTrade. Just change the price. But as others alluded too, a few pennies here and there are irrelevant to start with for investments (as compared to trading).
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Re: Question On Implementing Asset Allocation

Post by SQRT »

AltaRed wrote: and more importantly, what difference does a few cents make on a long term investment? People do lose sight of the forest for the trees.
This would be my view. Only buy very liquid individual common stock and don't want to take too long to effect the trade,ie I have better things to do. Also, trade very infrequently. Would be maybe 1-2 cents at most. Have used limit orders from time to time but generally don't bother any more.
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Re: Question On Implementing Asset Allocation

Post by ostrich »

One question regarding placing orders for US ETFs (in my case such as VTI and VXUS) - I'm wondering how I properly account for currency conversion when I calculate how many units I need. After I liquidated all of my previous CIBC mutual funds I basically have a bunch of cash in both TFSA and RRSP accounts (Investor's Edge). So based on the planned asset allocation I'd worked out, for the CAN traded ETFs I basically just calculated what amount of the available cash each was corresponding to X% allocation. Then as others had suggested above, I just looked at the current ask price at opening of trading, and set a limit order price slightly off that, and worked out how many units I needed to buy accordingly. That worked quite straightforwardly.

Now if I put in a US traded ETF such as VTI or VXUS in, it warns me that I'm going to be making a transasction on a foreign exchange - I'm assuming I would need to also make an appropriate calculation to factor in the exchange rate, as well as the unit price (say if I've determined I need to deploy $50,000 CAN) to figure out how many units to place an order for? I'm presuming that the real time quotes displayed on the trading page for securities on US exchanges are quoted in US dollars (although there's nothing that really clearly says that). I'm also wondering if there would be any currency conversion charges that I might have to factor in to calculate this properly?
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Re: Question On Implementing Asset Allocation

Post by AltaRed »

If you are not going to use Norbert's Gambit to convert currency, then phone up your broker and ask for their best conversion rate for changing CAD to USD. Then if you accept, you then have USD in your account and can then buy your USD ETFs.

Brokerages charge to convert currencies. Perhaps 1.5%, perhaps 2% OR if you are changing a lot, e.g. $100-250k, the broker may give you the same rate their currency exchange desk gets (no profit).
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Re: Question On Implementing Asset Allocation

Post by DenisD »

Just in case ostrich doesn't know, I thought I'd mention that, normally, you will buy US securities in the US subaccount of your TFSA or RRSP. I'm assuming Investors Edge has US subaccounts in registered accounts. Not sure what happens if you buy USD denominated securities in the Canadian subaccount. But I think the broker will do the currency conversion automatically when the trade settles?
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Re: Question On Implementing Asset Allocation

Post by AltaRed »

I think the issue is Ostrich doesn't know how many USD he will end up with in the conversion from CAD and thus cannot reliably pick the number of ETF units he wishes to purchase. Hence my recommendation to convert the currency first to USD. It will not make a difference in forex commission.

That said, I agree it is best to buy USD assets on the USD side of the account.
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Re: Question On Implementing Asset Allocation

Post by gsp_ »

Highly unlikely you'd want US listed ETFs in your TFSA. They are not recognized as retirement accounts by the IRS and therefore do not benefit from dividend withholding immunity. There are many good tsx listed ETF options for your TFSA. If you mention the asset class you are planning to hold, posters can offer appropriate suggestions.

US listed ETFs make sense in RRSPs as mentioned in your previous thread.
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Re: Question On Implementing Asset Allocation

Post by ostrich »

gsp_ wrote:Highly unlikely you'd want US listed ETFs in your TFSA. They are not recognized as retirement accounts by the IRS and therefore do not benefit from dividend withholding immunity. There are many good tsx listed ETF options for your TFSA. If you mention the asset class you are planning to hold, posters can offer appropriate suggestions.

US listed ETFs make sense in RRSPs as mentioned in your previous thread.
For RRSP, I was intending to set up an allocation of

VCN (CAN equity) - 20%
VAB (CAN fixed income/bond) - 30%
VTI (US equity) - 25%
VXUS (non-CAN equity) - 25%

VCN and VAB I presume are fine in TFSA. I guess the question is are there TSX listed ETFs that would work to fill out the rest of the TFSA.
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