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 BRIAN5000 » 24 Mar 2012 20:40

How much can you save per year?
What kind of lifestyle are you living or want to live?
Are your TFSA's maxed?

If you choose a moderate lifestyle and save half your income it matters very little what you do as far as investing, 18% CAN or 20% won't make much difference, GIC's will get you where you want to go if its a moderate early retirement.

Wife's capital loss risk tolerance is lower than mine, although I'm slowly getting her to accept concepts such time mitigation of risk and to properly evaluate the effects of inflation adjusted returns on low yield vehicles.


Yeah yeah your wife should be convincing you to lower your risk tolerance. Your taking risk with money that can't be replaced inside your RRSP and you can't add it back in if you lose it because of your DB pension.

Why don't you start building a non-registered portfolio and take less risk in your RRSP ?
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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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Re: Newbie - RRSP asset allocation and general financial pic

Postby adrian2 » 24 Mar 2012 23:51

BRIAN5000 wrote:money that can't be replaced inside your RRSP and you can't add it back in if you lose it because of your DB pension.

One can easily argue the opposite: up to half the RRSP money belongs to the government, so if you lose a dollar, you were playing in part with the government's dough. Also, having a DB pension means that one needs less of an RRSP to start with.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 25 Mar 2012 12:05

pmj wrote: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.


Thanks, I would have sufficient in cdn MMF to cover the 3% temporary shorfall. I assume that that 3% would be converted using tdw's conversion rate, which is minor compared with subjecting the whole amount to the fx fees.

BRIAN5000 wrote:How much can you save per year?
What kind of lifestyle are you living or want to live?
Are your TFSA's maxed?

If you choose a moderate lifestyle and save half your income it matters very little what you do as far as investing, 18% CAN or 20% won't make much difference, GIC's will get you where you want to go if its a moderate early retirement.

Yeah yeah your wife should be convincing you to lower your risk tolerance. Your taking risk with money that can't be replaced inside your RRSP and you can't add it back in if you lose it because of your DB pension.

Why don't you start building a non-registered portfolio and take less risk in your RRSP ?


Save per year: we finished paying off the house last year. since we're saving about 20-25k/year. i'll finish paying off car next year (bought last year, but financed due to very low rates) and wife will return to work 5 days a week (she took 4 days this year as it was first year after mat leave) then we'll save about 40k-45k/year. that's about 20-25% of gross. this savings rate excludes monthly money we put aside to buy next cars cash (we expect to keep them about 7-8 years). It also excludes our DB plans.

Out TFSA are maxed and kept in bonds/gics as that's part of our emergency fund.

Thank you for the suggestion re: risk. My thinking is that DB acts as a bond allocation. If I include my DB present day value into my rrsp portfolio I have a roughly 50/50 split between bonds and equities and that is called to further grow in favour of bonds as future contributions will almost all be towards the DB. My wife is in a similar position (with even less exposure to equities). She also has parents with very high net worth (over 5M$) that keep everything in gics. I'm actually trying to offset the conservative portions of our portfolios (DB pensions, out of rrsp savings in F.I., our equity in the paid off house, her parents conservative investment, etc.) with a reasonable exposure to equities. We could probably put everything in gics and still retire at 55 with the DB plans, but I'm also thinking of my daughter. Our goal is to lead balanced lives (same level as we do now) and retire or semi-retire relatively early (around 50-55), but beyond that, and particluarly taking into account her parents assets, we are thinking of building for our daughter (and in that sense the investment horizon is very long -she's turning 2-) and hopefully turn her into a responsible money manager that will also preserve assets and grow them.

I realize that 18% vs 20% cdn exposure doesn't change much, neither do 600$ fx fees and so on, but I'm trying to build my investment knowledge to make reasoned decisions that are optimal based on underlying reasoning. What I learn today will serve me today and tomorrow, so I'm trying to increase my understanding.

I've seen a number of marginal effective tax rate curves (that take into account tax credits and other factors not included in straight tax brackets) that show that my effective marginal rate now and at retirement will be essentially the same. Therefore, the advantage of rrsps are that returns compound sheltered from tax. Since I think equities will likely return more than double (to account for tax treatment of cap gains) what fixed income will return in the long run, I figured it makes sense to keep equities in tax sheltered space over taxable accounts. Does this make sense? I mean in the end, there is only "how much money we have overall"...what to put in rrsp, tfsa, non registered is just a question of tax planning.

I appreciate all suggestions and thoughts. I'm learning lots and consider myself quite lucky to benefit from the knowledge of this forum.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby adrian2 » 25 Mar 2012 13:50

Rooster wrote:Thanks, I would have sufficient in cdn MMF to cover the 3% temporary shorfall. I assume that that 3% would be converted using tdw's conversion rate, which is minor compared with subjecting the whole amount to the fx fees.

3% is a temporary shortfall, auto-corrected later. This applies only in a registered account at TDW.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby gsp_ » 26 Mar 2012 11:20

Rooster wrote:
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?


Your original allocation was more representative of world market caps. Not a fan of this tinkering.

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

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


https://personal.vanguard.com/us/funds/ ... st=tab%3A2

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).


By world market caps VXUS should be about 25% larger than VTI now, was about 50% when launched 14 months ago.

Can you explain how you came up with 55 basis points difference? That seems really high.

With regards to VT, nothing wrong with the simplified approach. However with VTI/VXUS you get almost 3 times the number of stocks, more small cap exposure and a lower MER.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 26 Mar 2012 12:04

gsp,

thank you.

Point taken on mer and small cap exposure in VTI/VXUS vs VT.

I came to the .55 drag on VXUS vs VTI by considering a 15% non-recouperable witholding tax on 3% dividend + mer difference. 3*0.15= 0.45 + mer difference (0.11) = 0.56. Actually, rethinking, the witholding is probably covered by US tax treaty with most VXUS states, so it's probably significantly lower.

Thanks also on world market cap. A question I've been asking myself is why do pretty much all model portfolios overweight Canada? I can understand that it acts as an FX anchor, but is there another reason?
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Re: Newbie - RRSP asset allocation and general financial pic

Postby newguy » 26 Mar 2012 14:16

Rooster wrote:Thanks also on world market cap. A question I've been asking myself is why do pretty much all model portfolios overweight Canada? I can understand that it acts as an FX anchor, but is there another reason?

I think you should underweight Canada if you work here. If things go badly then foreign stocks will do better. If things go well then your job should be more secure and higher paying.

Reminds me - my dad when working at AC had a large stock position in it as well so he 'hedged' it with Canadian Airlines stock. :roll:

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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rooster » 26 Mar 2012 15:13

newguy wrote:
Rooster wrote:Thanks also on world market cap. A question I've been asking myself is why do pretty much all model portfolios overweight Canada? I can understand that it acts as an FX anchor, but is there another reason?

I think you should underweight Canada if you work here. If things go badly then foreign stocks will do better. If things go well then your job should be more secure and higher paying.

Reminds me - my dad when working at AC had a large stock position in it as well so he 'hedged' it with Canadian Airlines stock. :roll:

newguy


This would be my thinking too, or at least to give Canada it's world market cap weight. However, i've never seen a model portfolio with less than 20% canadian allocation and I figured there must be a reason for it. Just local bias? I do recognize that cdn equity is not subject to fx volatility, so that may be a reason to overweight some.

Would the following equity beakdown make sense:

VCE: 10%
VTI: 40%
VXUS: 50%

That's roughly 15/40/45 after accounting for VXUS canadian holding.
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Re: Newbie - RRSP asset allocation and general financial pic

Postby newguy » 26 Mar 2012 16:42

Rooster wrote:Would the following equity beakdown make sense:
I hope you're not asking me. I don't know and I'm not sure trying to figure out any kind of split makes sense. That would assume you know which region will outperform or that there is some benefit from regional diversification. The only thing I can think of is we have a war with some country and they steal all our stocks somehow.

I think the currency diversification is overrated because with freely floating currency the stock markets adjust to the currency. Bonds are a different story and those along with the DB pension are in CAD.

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Re: Newbie - RRSP asset allocation and general financial pic

Postby Rick_J- » 31 Mar 2012 15:18

Rooster wrote:Would the following equity beakdown make sense:

VCE: 10%
VTI: 40%
VXUS: 50%

That's roughly 15/40/45 after accounting for VXUS canadian holding.


Choosing something that is roughly the global market cap certainly is a reasonable strategy. Ultimately any reasonably diversified asset allocation should serve you well providing you actually stick with that asset allocation rather than switching it in the future to chase stronger performing assets.

Personally I chose:

VEA: 40%
VTI: 30%
XIC: 20%
VWO: 10%

No one can now going forward which portfolio will perform better, but they share alot of similarities. Personally I choose to reduce my US exposure by roughly the amount I increased my Canadian exposure because in the past our two stock markets have been quite highly corelated (IRC .81).

Again I think your proposed equity allocation sounds great and if you stick with it you should get you fair share of market returns at a low cost.
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