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It’s Friday, and you know what that means…Reader Study Time!
Today’s reader has a few questions for us, but the main one is one that’s been asked a lot lately: When is a good time to enter the market? So without further ado, onto their email!
I am single and in late twenties in Canada. I am wondering how I best allocate the $95k (and growing monthly) I have sitting in the chequing account & any additional suggestions.
- Based on what I have had read the stock market seems highly valuated (higher average PE ratio, with lower future projected returns)
- Hence I am a bit sceptical of going all in into my td e-series mutual funds by increasing it’s monthly allocation and maybe waiting for a more favourable PE valuation
- But have read that market timing should be avoided
- At some point I did like to get financially independent (have passive income cover my expenses), maybe an annual income of $40k or so but am flexible.
- Currently not interested in buying a house/car and am renting with roommate and taking the transit.
Below is my current financial snapshot:
Gross/net annual income
- Annual salary: $54400 (+ covered with good health benefits)
- Annual performance bonus: $2000
- Dividends (from 2 Canadian stocks): $1200
- Totals: 57600
Monthly family spending:
- Rent ($450)+Food ($200-300, cook home)+Transportation ($100, bus pass) +Cell Phone ($17) = $867 (max 900)
No Debts/Fixed Assets
Investments:
- Stocks
- Stock 1: $2,665.26 (previous employer)
- Stock 2: $24,360.23 (current employer, employee share purchase plan – I contribute 10% of my paycheque and company matches %25 of my contribution)
- Total:$27025.49
- TD E-series mutual funds:$6424.74 (target allocation of 25% each across Canadian Index Fund, US Index Fund, International Index Fund & Canadian Bond Index Fund)
- Adds $100/month across the 4 index funds ($25 each, started initially just to get used to investing)
Chequing account: $95000
Registered Pension Plan (RPP): $21000
- I contribute 6% of my paycheque and company contributes 5.7%
- Target allocation of 25% each across Canadian Index Fund, US Index Fund, International Index Fund & Canadian Bond Index Fund
-AA
Ok so where do we start? First, let’s address AA’s burning question: What should they do with the money they have sitting in a checking account?
DCA, DCA, DCA
This question has been quite popular in our inbox lately, and it’s been a pretty funny given what’s been happening in the stock market over the last couple of months:
- Pre-October 2018: Stock markets are unattractive because of high P/E ratios/Fed policy/a roaring economy. Now’s not a good time to buy.
- October 2018: Stock markets are finally correcting! It might be a good time to buy, but not yet. It still has more room to fall.
- December 2018: Stock markets have entered a bear market! We might be going into a recession! Shit shit shit! The economy’s crashing because of the Fed/Trump/Trade War! Hoard your cash!
- January 2018: This is just a dead cat bounce. The REAL trouble’s just around the corner. Don’t buy yet.
- February 2018: Stock markets just had the best January in decades. I’ve missed my chance and now stocks are over-valued again. Don’t buy.
See how that went? The funny thing is that if you were to pull up a chart of the S&P 500’s recent sharp drop and subsequent recovery, you’d be able to point at the lowest point in the trough and go “Well, OBVIOUSLY that was the best time to buy. Duh.”
And yet at no point during that period did it ever “feel” like a good time to buy. That’s the underlying fallacy of trying to time the market. You have no idea when the right time to buy is, and anybody who says they know is just guessing.
We actually had some blog/book advance earnings that we shovelled into Portfolio B that we needed to invest. You know how we did it?
We divided it up into 3 equal piles, and are planning to do a buy on January 15, February 15, and March 15. Easy peasy, lemon squeezy.
That’s what I always recommend. Don’t try to time the market. At best, you’ll stress yourself silly trying to hit the optimal inflection point. And at worst, you’ll get paralyzed and leave it all in your checking account forever, like AA seemingly has.
For smaller amounts (less than $50k), split it into 3 piles and invest it over the next 3 months. For bigger amounts, do it over 6 months. That’s Dollar Cost Averaging (DCA).
Investing In Your Own Company
Another thing we noticed is that AA has quite a bit of money invested in their own company. This is because AA’s company has a stock purchase plan, which allows you to buy shares of your company’s own stock at a discount, in this case 25%. This is great since it’s free money, but over time you end up with a substantial holdings in your own company’s stock, which puts you in danger in case something happens to said company.
In our Investment Workshop, we advocate against owning individual stocks since individual companies can and do go bankrupt, so if you own a substantial amount of one company that could have an outsized negative effect on your portfolio. The jeopardy goes even higher if you also work at that company, because you could lose your job on top of it!
I actually had one of these programs at my old company too, and my director actually gave me a pretty useful thought exercise. Instead of being given $5000 of company stock, pretend they gave you a $5000 cash bonus. Would you take that money and buy the company stock? If yes, keep the stock units. If no, immediately sell it and pocket the money.
And since I’m a firm believer in Passive Indexing, every time my company shares vesting period rolled around, I would get the stock at a 25% discount, immediately sell it at market value (and capture the 25% gain), then turn around and plough it into my Index funds. Worked out great for me!
ETFs for the Win!
And finally, a third point of note: AA is investing in TD e-series funds. Now to my non-Canadian readers, the e-series funds are mutual funds that track the various indexes that we use in our workshop portfolio, and in terms of mutual funds they ain’t bad. We used them way back in the day because of their relatively low MER’s (0.33% to maybe 0.5%) and the fact that you don’t have to pay commissions to buy or sell.
However, these days better options have become available. Like Questrade (full disclosure, that’s an affiliate link), who charge nothing to buy ETFs, and a commission of $5 to $10 to sell. And given that the ETFs we use to track those same indexes have MER’s of around 0.05%, there really is no reason to use the e-series funds anymore.
Time to Math Shit Up!
So now we get to my favourite part, the numbers.
To recap, here’s AA’s summary.
| Summary | Amount |
|---|---|
| Income | $54,400 (we'll just count base salary since the other income types fluctuate) |
| Expenses | $900 a month, $10,800 a year |
| Debt | $0 |
| Net Worth | $27025.49 (stocks) + $6424.74 (mutual funds) + $95,000 (cash) + $21,000 (pension) = $149,450.23 |
OK so right off the bat here, we notice that his expenses are crazy low. If he were to stay at this spending level, it would only take $10,800 x 25 = $270,000 to finance that lifestyle forever. And given his already impressive $149,450 net worth, he’ll get there in…
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $149,450.23 | $43,600.00 | $8,967.01 | $202,017.24 |
| 2 | $202,017.24 | $43,600.00 | $12,121.03 | $257,738.28 |
| 3 | $257,738.28 | $43,600.00 | $15,464.30 | $316,802.58 |
Juuuust a little over 3 years.
Now, that being said, he’s doing this by living with a roommate, cooking, and seemingly never going out. That’s fine for now, but will AA be wanting to do that for the rest of his life? Probably not. He’s asked for passive income at the $40k level, which would require a portfolio of $1M, so let’s see how long he takes to get there.
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $149,450.23 | $43,600.00 | $8,967.01 | $202,017.24 |
| 2 | $202,017.24 | $43,600.00 | $12,121.03 | $257,738.28 |
| 3 | $257,738.28 | $43,600.00 | $15,464.30 | $316,802.58 |
| 4 | $316,802.58 | $43,600.00 | $19,008.15 | $379,410.73 |
| 5 | $379,410.73 | $43,600.00 | $22,764.64 | $445,775.37 |
| 6 | $445,775.37 | $43,600.00 | $26,746.52 | $516,121.90 |
| 7 | $516,121.90 | $43,600.00 | $30,967.31 | $590,689.21 |
| 8 | $590,689.21 | $43,600.00 | $35,441.35 | $669,730.56 |
| 9 | $669,730.56 | $43,600.00 | $40,183.83 | $753,514.40 |
| 10 | $753,514.40 | $43,600.00 | $45,210.86 | $842,325.26 |
| 11 | $842,325.26 | $43,600.00 | $50,539.52 | $936,464.78 |
| 12 | $936,464.78 | $43,600.00 | $56,187.89 | $1,036,252.66 |
13 years.
Now, AA’s still early on his career, so lots of stuff could change. A promotion or two would really have a big impact on his time-to-retirement, not to mention if he gets married, etc. But so far a combination of simple living, good earning power, and a complete disinterest in buying an overpriced house (high-five!) means he’s headed for a retirement in his early 40’s, which is pretty damned good.
Now all he needs to do is get his cash off the sidelines and making that 6% ROI he needs to make this work.
What do you think? Let’s hear it in the comments below!
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Posts like this are always a great read for me, as I am living in a suburb of Vancouver and am fairly new to this whole FIRE concept (maybe two years into it). My savings are pathetically low at the moment but are gradually picking up steam. I started out with the Couch Potato method last year and have nearly $10,000 in my TD e-series RRSP accounts. I also contribute to a teachers’ pension plan, and can factor that into my retirement plans.
Even if my e-series funds are so small, is it still a good idea to switch over to an option like Questrade? Or should I wait until I have more money available and send in a lump sum? I’ve been wrestling with this for a few months and feel like I’m just looking for excuses to not switch yet (I’m not sure why, but it’s most likely fear of change and/or laziness!).
Thank you for your blog, I check it daily to see if anything new is up!
Your small funds will eventually get bigger – probably faster than you expect. Switching to Questrade is the same difficulty whether you do it now or later, and if you do it now you reap the rewards sooner. Once you have it set up, adding additional funds to your account is exactly like paying bills with your internet banking – it’s very simple. You’re probably right about just making excuses! I went through the same thing, dragging my feet before finally setting it up. I should have done it sooner.
Especially with already having a stable pension, you might want to consider putting your equities position in a TFSA. The way I see it is that deferring tax on capital gains and dividends is good; eliminating it altogether is better.
If it helps you take the plunge, Questrade is offering to refund the transfer fee up to $150 even if you don’t have $25k (their usual minimum for a free transfer). The deals ends March 31. Here are the terms and conditions (not a Questrade employee, I just took advantage of this deal last week to do the exact same switch from TD e-series to Questrade). https://my.questrade.com/clients/en/terms_conditions/terms_conditions.aspx?OfferCode=FREE2Q&_ga=2.115075470.828399399.1550261825-48987991.1547067704&_gac=1.18055499.1550261836.CjwKCAiA45njBRBwEiwASnZT5yEBXBriH-T9XnALbge_MnjRKri3DGipQldfixzAfzUgKJywurhNWhoCmi0QAvD_BwE
The big advantage of the TD-e series that is not immediately apparent is that you can automate contributions to your rrsp or tfsa when you work. This removes a lot of second guessing or temptation to time the market. Go to your Investments area and select Pre-authorized Purchase plan, then set it say to $100 bi-monthly. Then forget it exists, and you have no stress when the markets go up or down. If you get to a higher amount and stop working and the automatic contribution, then you probably want to move the money to their ETF equivalent with a lower fee of say 0.08% instead of 0.35%. I found the automation is a big convenience and it’s dollar cost averaging at its best.
Unless Questrade offers it at no cost.
There’s no harm in switching now, but you really start to get the advantage once you account approaches $100k. Right now, a 0.25% savings in fees equals $25 a year. But at $100k, that becomes $250.
What a great reminder that we should not only avoid timing the market, but also be more introspective about how our personality impacts our decision-making. It feels counter-intuitive sometimes, doesn’t it? We have all this data about the market–interest rates, P/E ratios, etc.–so we think we can make a rational prediction about where the market is heading. But as you pointed out:
“And yet at no point during that period did it ever ‘feel’ like a good time to buy. That’s the underlying fallacy of trying to time the market. You have no idea when the right time to buy is, and anybody who says they know is just guessing.”
I always remind myself that there are people whose entire careers are spent analyzing the stock market, so who am I to try to “time” the market? I agree with you–much easier to just follow the principle of DCA!
I hope AA makes a decision soon! That’s a huge pile of money in a chequing account that seems to be earning 0% interest?! I’d imagine that at minimum, AA could move most of that amount to a high-yield savings account (most are at 2.2% – 2.3%), and then set up an automatic investment plan from there.
Yeah I don’t bother trying to time the markets anymore. If the stuffy suits on Bay/Wall Street can’t do it, what hope do I have?
Thinking back, I feel that analysis paralysis prevented the cash to be deployed. Thank you for the suggestion.
I agree, it’s better to deploy the cash. Thank you for the suggestion.
I like the idea of splitting the money up into three parts and DCA’ing over three months. It’s a popular idea (I think started by JL Collins?) that since the market goes up far more often than it goes down, you should just lump sum things immediately, but I think there is enough up and down over the course of three months that it makes sense to DCA just a little bit, and this curbs your risk but still puts that money in the market quickly.
What’s also valuable about that is you might even get lucky and happen upon a large drop and can potentially put the rest in at that time. I don’t believe in market timing (so I say…), and I think calling the bottom is impossible, but I do like having some loose cash around for those obvious discounts. I did this with the first big drop in October, where I borrowed some loose savings from myself in order to finish maxing out my Roth IRA. Sure, I was sad seeing the December 24th drop and not having any more contribution space, but there was no guarantee of that, and I still got an excellent discount.
But the lines do get blurry at times. I think three months is enough to prevent people from getting super depressed if the numbers happen to drop right after 🙂
Yeah Jim and I respectfully disagree on that point, but in the end DCA-ing over 3 months is not that different from just lump-suming it in all at once. Can’t go too wrong either way.
There is an interesting article in the link below contradicting yield shield strategy. what are your thoughts?
(Link Removed)
The article you referred to is a smaller blogger trying to gain clicks by attacking bigger blogs. I removed the link because I don’t want to give them any traffic, but many of their concerns have already been addressed in our Yield Shield series.
https://www.millennial-revolution.com/yield-shield/
There’s also another article coming in the next few weeks that will talk about the Yield Shield strategy some more, so stay tuned!
That’s why you have to have a plan to invest. I did a schedule of buying levels for the dow jones etf all the way down 50% and I bought it twice in December even though I thought it would go lower. That was the plan and I executed. That’s why I got in otherwise I probably wouldn’t have in December.
Really? Great job! What were the buying levels you came up with and how did you come up with them?
Math is wrong, sadly we pay quite a bit of taxes in Canada when you make 57k a year.
I assumed they reported net income. They’re free to redo the numbers if it was gross.
Thank you for picking my case study, appreciated.
I should have had clarified that the income I reported was gross, that’s my bad.
Highly value your & the community’s insights. Keep up the great work.
Even getting close to retirement, I am still 60/40, but I DCA my balancing, and tend to “let the dogs run” if the market is a distinct Bull.
I usually only look at the balance every 3 months, and only move if its 5-10$% out of wack.
I do however have several investments that are shorter term, (RESP etc) they are much more conservative because of the short time horizon, mostly in t-bills, cash and some in short and long bonds. This is my short term “cash cushion”.
this market is long in the tooth, but who knows where it will be in a year? I predicted a resssesion 2 years ago… never ever listen to my predictions…
Stay balanced, have a cash cushion, use low cost index etf’s.
cheers
I predicted a recession the moment Trump got elected, and I was SO surprised to be wrong. Who the Hell knows when these things happen?
If I may suggest, just put these $95K in a CD ladder instead of keeping it in a checking acct. A one-year ladder will give you periodically money to deploy in stocks using DCA approach while still earning some bucks via CD investing.
Check these out: https://www.fidelity.com/fixed-income-bonds/cd-ladders
I dunno. The 1 year CD ladder was paying 1.62%, but you can get an online savings account with Ally for 2.2% right now. Doesn’t make much sense to me.
It does if you’re not an American-most of the world. Like me we cannot have a savings acct at ally but can open a brokerage ans buy CDs. If you are then you’re right.
Keep things in perspective Wanderer you’re not talking only to Americans and Canadians here anymore and you should be proud of that since FC and probably you are Chinese.
Actually you just gave me an idea for a future article. Where to put your cash if you’re not American and therefore can’t open up an online savings account…
I had to figure that one out myself recently…
For Canadians, EQ Bank’s 2.3% no-teaser interest rate is not a bad place to park a little cash.
Thank you Wanderer for the suggestion.
Thank you AA40 for the suggestion, appreciated.
His expenses are oddly low. A $17 cell phone bill? There are zero expenditures aside from rent, food and bus passes?
His expenses do seem suspiciously low, but I can only work with what he’s provided.
Frugal living + minimalism helps me keep the expenses low.
Working at a telecommunications company, I get a good employee cell phone plan.
Where did you get savings of $43,600 per year?
It seems to me the numbers must be wrong. He can’t possibly be saving $43,600 per year on a $54,400 salary. He’s probably paying somewhere around 20-30% in taxes and has at least $10,800 in expenses after tax.
Savings would probably be closer to $30,000 per year which changes the math quite a bit.
He indicated those earnings numbers were net. If they were gross, you’re right that would change the math but hey he’s free to rerun the calculations on his own.
I’m kinda new to all this and like AA, I have some money in TD e-series based on the Couch Potato Portfolio.
How does this transfer from TD to Questrade work given it would be mutual funds to ETFs which are apples and oranges? Also is it actually worth it to move the money given possible transfer fees or should I just start a Questrade account and then any new savings will be invested there in ETFs going forward?
Most brokerages refund any transfer fees you pay because they want your business, and Questrade is no different.
Also, you’re right, you can’t generally transfer mutual funds in-kind. He’d have to sell, transfer the cash, and then re-buy.
You only make money when you are in the market. If you’re in cash and dollar cost average a big wad you are way under invested for all those months. If you’re making zero and have the potential to make 6% farting around with several months of trying to sneak up on the 6% is a waste of time and potential return. Just put the friggin money in the market and expose it to return. DCA is all about monthly investing but once again it’s about getting your money in the market ASAP to become exposed to growth. GROWTH IS WHAT MAKES YOU WEALTHY.
Expose it to return. OK so if it tanks you’ll pay me back? People think the market is always giving 6% clean and assured. In what world do you live?
if cash is payin maybe 2% in the best internet banks or .25% at your chases and big banks. and inflation is at 3% , are you saying you rather have your money at a guaranteed loss , rather than an investment that has been shown on average to be about 10% a year but has a possibility of a loss (as opposed to a guaranteed loss due to iinflation?
The market is going to crash, and it is going to crash big time sooner than you think. It was obvious the recent dump was just a basic correction. But when it hits the fan, and it will, the world will be a different place this time around. Mark it.
Also, if you actually learn technical analysis, while you can’t predict the market 100% – you can sure as hell save yourself a lot of grief. But like anything it takes time and the “market will always go up” logic is basically just buying into this whole ponzi scheme with a little bit too simplistic of a logic. Be smart folks, because the ones running this show are a hell of a lot smarter than you and nothing will or can go up forever. The stock market is NOT that old and it is a terribly flawed mechanism built on BS if you get how it works on the fundamental level.
The stock market is 200 years old, and has survived 2 world wars, a cold war, countless recessions and it’s still ticking. I think that’s pretty solid.
I’m looking at entering the real estate market soon. 🙂
*sigh*
*slams head on desk*
This is a question of asset allocation. Pick a comfortable stock vs fixed allocation and stay the course. Maybe 60/40 or 75/25. Then you don’t have to always debate within yourself on what you should do.
If the market is up, and your 75/25 asset allocation is now 80/20, then you sell stocks to get back down to 75/25. If the market is down, and your 75/25 asset allocation is now 70/30, then you can comfortably know that you should be buying stocks to get it back up.
Your asset allocation guides your decision on when to buy (invest). If you are 100% fixed, which you are now, you have no ability to assess what you should do with your money. DCA some into the market to your desired allocation and start following a plan.
If you’ve chose (75/25) and you’re (0/ less than 100) since cash pay’s essentially nothing and looses money due to inflation, while bonds at least pay something, why would you DCA? Your goal is 75/25 and can be obtained immediately. Sneaking up on 75/25 merely means you’re willing to leave money on the table while sneaking. Dollar cost averaging is about a monthly investment let’s say 2000/mo and the point of it is a mechanical technique to get the money into the portfolio ASAP in a 75/25 ratio. You make $2000 in Jan to invest, buy $1500 stocks and $500 bonds IN JANUARY. Studies have shown DIY investors leave 4% of their returns on the table because they do not follow their trading rules because they piddle around with this DCA nonsense, while the market eat’s their return.
The key thing is to just enter the market. Even if you invest at peak and hit a big downturn, the market usually comes back after a couple years. See my discussion here https://littleseedsofwealth.com/why-we-are-investing-our-down-payment/. As long as you leave yourself a big enough cushion and have some diversification (the stock market may have a big selloff in the next 1-2 years like many others said), you should be fine. Are you saving for a house/grad school in the near future? If so adjust your allocation to fit your horizon accordingly.
Haha I just had to deal with this rolling over some 403b and IRAs into Vanguard. At first I was like, I’m gonna DCA this shit by doing fixed buys every 2 weeks until the lump sums were invested but then a few days later I was like NOPE I’M PUTTING IT ALL IN. I’m glad I did. I’m always reminded by JL Collins little anecdote where at a conference he met someone and he said why he doesn’t fear the market falling. They told him, you do fear. But you fear that you’ll lose gains, which is why you aren’t scared to be so aggressive.
That’s kinda how I felt, I don’t want to miss any of the single days that have large boosts. “Time in the market is greater than timing the market.”
That’s actually a phrase Jim uses. He fears losing out on future gains more than temporary losses. I guess that’s what allows him to just dump everything in at once.
Wow the expenses are really low. I’m curious where the reader lives in Canada, I’m guessing it’s not Toronto or Vancouver. Nonetheless that is a pretty amazing saving rate!
Wanderer is there an alternative to Questrade you recommend that automatically buys ETFs? I find when I login to buy manually each time I’m tempted to time the market
I guess robo-advisors do automatic buys but I haven’t used any myself so I can’t recommend any.
A frugal + minimalistic lifestyle helps me keep the expenses low. I reside in Alberta.
Currently moving my kids’ RESPs from TD e-funds (the last of our mutual funds) over to Questrade. The process has been fairly straightforward and Questrade is currently reimbursing transfer fees regardless of the account size (through the end of March 2019, I think). Not a bad deal if you’ve got a few smaller accounts that you’ve been holding onto because of crazy bank transfer fees.
My question for the poster is how is mobile phone bill is only$17 a month. Please do share. I have unlimited Canada wide talk and text + 1GB for 40$ a month. That is the lowest I could find for the GTA area.
I work at a telecommunications company & get an employee discount on the cell phone plan.
Interested to hear your take on this: Lump Sum Investing vs Dollar Cost Averaging… Lots of math 🙂 https://personal.vanguard.com/pdf/ISGDCA.pdf
Hi, just a quick question about Questrade. It’s for Canadians right.
So, what’s the difference between VUN.TO (Vanguard US Total Market) and VTI ?
They look the same, they have the same number of holdings (3514 stocks), but different MERs
VTI = 0.04%
VUN.TO = 0.16%
Can I buy VTI through Questrade using Canadian dollars? Or something happens? (it converts?) Because there’s a 4x difference in the MER.
In the same way, the I see the following too:
BND = 0.05%
VBU.TO = 0.22%
But same 8463 bonds, although VBU.TO is CAD currency hedged. And the MER is almost 5x difference.
Thanks!
Yes, Questrade is for Canadians. VUN and VTI both track the same index, but VUN is denoted in Canadian dollars and VTI is denoted in USD. Don’t just focus on the MER, if you buy VTI with Canadian dollars, you will be hit with a conversion fee from Questrade (greater than the difference of the MER). Ditto with the bond funds.
Okay, thanks, follow up question then:
At what point is it a better idea to get USD (using the gambit of norbert) in order to buy VTI?
Probably not that much worth it at $1000 (one thousand) since you’ll save an average of $6~7 only. I read somewhere else at $10,000 CAD, you’d save $130 on the conversion.
Let’s say we have an equal or equivalent amount of CAD and USD (in value, not the actual quantity, according to the exchange rate), wouldn’t it be better to get VTI because of the MER? At least if you are looking at the long term, 5 to 10 to 20 years.
Or put another way, if I’m never going to touch it until 20 years later (which probably means I don’t rebalance much or at all), even if I get hit with the conversion fee, wouldn’t the MER, over time, compound and be better to hold VTI than VUN?
I guess, for simplicity, just get VUN and keep adding more VUN every month and every year. Or VFV (SP 500).
Interestingly, the concept of Norbert’s Gambit would apply to certain exchanges that deal with both USD and CAD and crypto (bitcoin specifically), however the biggest one in Canada just died … (quadrigacx died last month, I lost $7k … everyone else lost $190 million.)
Thank you!