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Since our last reader case, we’ve gotten more e-mail from readers asking us to analyze their situations. I have no idea why but this made me happy. Okay fine. I know exactly why. It’s because I’m a weirdo who gets a high from digging into other people’s finances. Call it financial voyeurism, a secret obsession…or just plain creepy, but that’s just me. My therapist says I’m not allowed to hover over people when they read their bank statements anymore. *Sigh*.
Anyhoo…so although we can’t use everyone’s situation as a reader case, this one caught my eye:
“My wife and I appreciate your blog, thank you for sharing all those very useful and usable stories.
Thanks to reading Garth’s and your blog we have cemented our commitment to go to index investing.
So we would like to go down the 50:50 route. The question is how to do it technically? What bank do we use to open a TFSA account? How to manage day-to-day trading? What’s the cheapest way to rebalance (in terms of trader fees etc.)
What do you guys use (what software, what brokerage company)? We would like to fill both our TFSAs and my RRSP first (we would fill RRSP with bonds and then place rest of bonds and all equity on TFSA until we hit our limit, and the rest to a taxable investment account).
My wife can use her bank, which offers a “world bond” fund, which seems pretty stable and NASDAQ index in Canadian Dollars, which has awesome track record in the past 10 years (they do not offer S&P 500). Should we even consider this? My intuition tells me there are much cheaper options. You mentioned TD e-series was good.”
What do you guys recommend?
We are in late thirties with one child. We are earning $135k (plus some OT). Current net worth that we would like to invest: ~$90k. Zero debt.
QuestionLover is asking a LOT of questions (go figure). And I don’t know about you, but when I get a barrage of questions, my eyes glaze over, I pull out my phone and start binge watching John Oliver. But in this case, I realized these are really GOOD questions, and answering them would really help our readers. So I forced myself to slowly put away my phone, grab a cup of coffee, and get to work:
The question is how to do it technically?
- Since it’s slightly below what you would need for a good advisor (usually 100K or up), I would suggest opening up a TD Waterhouse account and buying index ETFs (see “Investment Vehicle” section below for details)
- (Update – April 21/2017: We’ve now been using Questrade for close to 6 months now throughout the Millennial Revolution Investment Workshop. Click here to follow along).
- (Update – July 11/2016: One of our readers mentioned Questrade, which offers free purchases for ETFs and $4.5-5 for sells. However, since we haven’t used Questrade ourselves and would never recommend products we don’t use, we don’t have enough information on it yet. That being said, we are currently researching into Questrade and WealthSimple (a robo-advisor) for readers with less than 100K, and will report back on the results. Stay tuned!)
What bank do we use to open a TFSA account?
- TD Waterhouse (That’s the one we used, back when our portfolio was less than 100K. However, feel free to check out this list of Globe and Mail’s brokerage rankings posted by one of our readers. Thanks, Xerglacia! )
- NOTE: this is NOT to be confused with a TD Investment account, which has similar funds but with higher fees.
How to manage day-to-day trading?
- Great question but too complicated to answer in a bullet point. We answer below.
What’s the cheapest way to rebalance (in terms of trader fees etc.).
- With TD Waterhouse, if you have more than 50K in the account, the annual fee is waived, and the trading fees are $10/trade for ETFs. Not sure if it’s the cheapest in the country, but that’s what we used.
What do you guys use (what software, what brokerage company)?
- In the earlier accumulation years, we used TD Waterhouse. Once we crossed half a million, we started using Garth as our advisor and his brokerage company is Raymond James.
My wife can use her bank which offers a “world bond” fund… Should we even consider this? My intuition tells me there are much cheaper options.
- What is the MER on this fund? What are its underlying holdings?
- Make sure you research all the fees and underlying assets before jumping in. Just because it’s “performed well in the past 10 years” doesn’t mean it’s a good choice. Banks have been known to show favorable results by cherry picking the time period and neglecting to show hidden fees.
*Phew* That was A LOT of questions. And now to zone out and watch me some sweet sweet John Oliver…
Just kidding. John Oliver is great, but math is WAY better (and yes, I am a lot of fun at parties. Why do you ask?).
50/50 is overly conservative, considering you’re still in your late 30s and have a long investment horizon. If you look at our Asset Allocation article, with a 10+ years horizon you should have 70% or more weighting in equities. That being said, if the goal is to just dip your toe into the investing waters before jumping in, your 50/50 allocation makes perfect sense. As you get more comfortable, and more used to rebalancing to a fixed asset allocation amid market crashes, you will gradually discover that investing isn’t that scary.
When you choose index investing, you have the choice of going with mutual funds or ETFs (Exchange Traded Funds).
Most people have heard of mutual funds, but ETFs are a new investment vehicle that has only been around for the last 2 decades.
Let’s go over the differences between them.
- A pool of funds collected from many investors, managed by the fund manager.
- In return for this service, the fund manager charges a MER (Management Expense Ratio) fee.
- If this fee is greater than 1%, run for the hills because it will gobble up your returns.
- Since we advocate indexing, the mutual funds we’ll be referring to are index funds, mutual funds constructed to track an index (like S&P 500, or TSX)
- A basket of assets that trades like a common stock.
- Unlike a mutual fund, ETF do not have its value calculated once at the end of every day. It experiences price changes through the day, since it’s bought and sold like a stock.
- And since ETFs are traded like a stock and does not have a fund manager, it has MUCH lower fees.
- For example (disclaimer: for illustrative purposes only, and not to be taken as investment advice)
- BMO S&P/TSX Capped Composite Index ETF has MER of only 0.06%, plus $10/trade via TD Waterhouse for portfolios >50K
- In contrast, TD e-series Canadian Index fund has an MER of 0.33% (but all trade fees are included).
Once your portfolio grows to 100K, it makes sense to use ETFs since they have MUCH lower fees.
Back when we had less than 100K, we invested in the TD e-series mutual funds, which had lowest MERs of any mutual fund we looked at.
So why didn’t we just buy ETFs?
Well, because of trading fees. For example, if you only have 10K to invest, and you get charged $9.99 per transaction, and set aside a portion of your paycheck to buy every 2 weeks, that’s $259/year, or 2.95% of your portfolio! Whereas if you have 100K invested, the same transaction fee is only 0.295% of your portfolio.
Not only that, but for TD Waterhouse, if you have less than 50K, you get charged $29/trade instead of $9.99.
The bigger your portfolio, the smaller percentage the transaction costs. (We will discuss how to get your investment fees to be as low as possible in a future post.)
In the case of our reader, his portfolio is close enough to 100K, I would advise using ETFs instead of mutual funds.
Portfolio Tax Efficiency
Okay, so with 90K to invest, using a 50/50 allocation and indexing, your portfolio could look like this
- 45K in CAD/US/international equities (15K in each)
- 45k in fixed income
To structure the portfolio for tax efficiency:
Since they’ve never had a TFSA, they should have 82K room (41K each) built up since inception. And with their salaries at 135K, they should have enough RRSP room accumulated over the years.
TTR (“Time To Retirement”)
Now, with a salary of $135K, 90K savings by late 30s and zero debt, how long will it take them to become FI?
That really depends on their yearly expenses, but for a family of 3, if they were to be able to get their expenses down to 40K/year (totally doable since other FIers like MMM is doing it for 25K, and Justin is doing it for 40K with 3 kids), then after tax (assuming they max out their RRSP) they would have a take home income of $103,651.91. So with a savings rate of 61%, they should be able to retire in 14 years.
Cool huh? (Yup, I think charts are cool. Don’t judge)
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