Rebalancing my investment portfolio
Now that I’ve had a few days to go over the recommendations put forth by the financial advisor, I can share with you what he has told me about my investment portfolio. Please read my previous post, “Financial advisors: do you have one?” or my two posts on Moneyville about my experience with my financial advisor: “Why I decided I needed a financial advisor” and “How I heading for Freedom 55.”
First, here’s a background of what I’m invested in:
Holdings in TD Mutual Funds (mostly e-series): CDN Money Market, Canadian Index-e, U.S. Index-e, European Index-e, Japanese Index-e, CDN Bond Index-e, International Index-e, TD Dividend Growth.
- Asset allocation
- 91.7% stocks
- 2.7% bonds
- 5.6% cash
- Geographic allocation
- 51.6% Canada
- 24% U.S.
- 24.4% International
I learned that while my geographic allocation is good, my asset allocation is too risky. The financial advisor recommended rebalancing to 70% stocks and 30% bond funds, and advised that my portfolio is over-diversified. For example, the allocations contained in both the European and Japanese index-e funds are contained within the International index-e fund.
He also called me out on investing in the Dividend Growth fund, which is boasting a lame 2.03% MER. :) I always meant to take care of that, but you know. Things happen. That was the original fund I held when I first opened up my mutual funds and hadn’t yet invested in the e-series funds. And as for the CDN Money Market fund, that was a left-over “placeholder” fund for when I was taking out my money for the Home Buyer’s Plan. I meant to re-distribute back into the e-series funds, but had problems because my investor profile wasn’t in sync with what I wanted to invest in. Then I got frustrated, and just left it.
The financial advisor told me that I should simply my portfolio from 8 mutual funds down to just 4, and suggested this allocation:
- 20% Canadian Index-e
- 25% U.S. Index-e
- 25% International Index-e
- 30% CDN Bond Index-e
Based on my $80,000 projected income this year, I’m saving 13% of my gross annual income into my Retirement Portfolio (which is around $400 bi-weekly broken down into $300 RRSP/$100 TFSA). The financial advisor told me that if I really want to retire by the age of 55, I will probably need to start saving more aggressively. He suggested I might need to go higher than 20% of my gross annual income. I already knew I wasn’t saving enough, but hearing it from somebody else is still a little disheartening. I’m already almost 30 (maybe), and my goal retirement age is only 25 years away.
As soon as I max out my Emergency Fund at $10,000 (I’m at around $7,000 right now), I will funnel that cash ($100 bi-weekly) into my Retirement Portfolio. That will bring me to around 16%, which isn’t ideal, but it’s a good first step. Once I’m there, I’ll figure out my next move.
33 Responses to “Rebalancing my investment portfolio”
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I think you’re doing great! If there’s any chance of retiring at 55 I think you’re doing better than most, who have trouble getting their portfolios together to retire at 65. It sounds like the adviser was really helpful, too, and gave you good advice based on your current situation. Will you be meeting with them again, or was it just a one time thing?
(Also, I’m having trouble reading the list of what you’re invested in without zooming in the page several times.)
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Thanks – yeah I fixed that font glitch. I’m not sure why it turned out that way. :)
I think I will speak with him again in 3-6 months, but I don’t think I need constant monitoring after that, as I’m fairly confident in my ability to re-balance my portfolio every year, and keep on track with my savings goals. All I really needed was someone to give me a plan that I could execute.
A good article about re-balancing one’s portfolio. I think I better start talking to my financial adviser about this.
The allocation your financial advisor recommended sounds really close to the Money Sense couch potato fund. Straight from their website: http://canadiancouchpotato.com/model-portfolios/ Their general recommendation is the % breakdown below at 40 but if you read their articles they say to keep the bond fund essentially in line with your age. So at 28:
Canadian equity 24% TD Canadian Index – e (TDB900)
US equity 24% TD US Index – e (TDB902)
Intl equity 24% TD International Index – e (TDB911)
Canadian bonds 28% TD Canadian Bond Index – e (TDB909)
and at 40:
Canadian equity 20% TD Canadian Index – e (TDB900)
US equity 20% TD US Index – e (TDB902)
Intl equity 20% TD International Index – e (TDB911)
Canadian bonds 40% TD Canadian Bond Index – e (TDB909)
I should mention that’s not the only portfolio they mention, just that’s the one that looks the closest! (Different styles for different investors…and whether someone wants to purchase once a year in lump sums or continuously off each pay check which I find easier)
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Hi AMD,
I’m the advisor who helped out Krystal.
You’re absolutely right! The portfolio does contain funds that are reflective of one of the Couch Potato portfolios and it follows a similar asset and geographic allocation strategy. It’s a low-cost strategy that makes sense for many people.
I would caution though that every person’s scenario is different. Although the “age = bonds %” is a good rule of thumb, there are other considerations including stability of income and other investments that would play in to the portfolio make-up.
I should also add that this is not necessarily an endorsement of the e-series funds either. In a comment on Krystal’s previous blog post, I mentioned example scenarios where this exact portfolio may not make sense: http://www.givemebackmyfivebucks.com/2011/11/21/financial-advisors-do-you-have-one/
Hi,
I’m curious as what was the return (%) on your investments/portfolio in 2010 or for this year so far.
To retire at age 55 you must expect a certain return on average each year. What % are you expecting?
Thanks,
JF
I was wondering the same thing.
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Up until now, I haven’t been concerned with my return on investments. I’m young enough that as long as I am contributing regularly, I will be okay. For this year, I am down – but actually not by much. I’m not hoping for huge numbers, and can’t even really say what I’m expecting as a %. Perhaps once I do more research and learn more about investing, I can figure out exactly what I’m aiming for.
Shouldn’t this have been part of your financial plan that you came up with through your advisor?
i am interested in the same question as JF.
Also, have you been saving appx 800.mth towards retirement for a few years now? or did it just start a year ago?
I’m asking because last year and the year before that you didn’t earn such a high income, it was just this year that your earnings increased, so i think you can absolutely save 20% this year.
Did he talk about investing in actual gold/silver? because the way the world economy / papermoney is looking- i feel it’s due for a collapse.. real value in metals may be a good side plan.. just to have a few bars of silver or some coins..
anyways thanks for sharing!
I only invest in RRSPS to offset my taxes- because I will otherwise have to pay tax man, but i don’t really look at them as helping me quit working sooner because i dont really need them for that purpose as i have 2 jobs and both have good pensions… (1 ft and 1 pt)
But i so want my house paid OFF!
I just started saving $800/month this year. Previously, when my salary was lower (around $55-60k), I was saving $600/month. I’m trying to keep my retirement savings in line with my income, but as Mike Holman pointed out in a comment here, perhaps I’m actually saving more than 13% if you count the prepaying I’m contributing to my mortgage debt.
Also, no, my adviser did not talk about investing in gold/silver. I’ve never really thought about it and doubt I’d ever go that route.
I don’t recommend investing in precious metals directly. The volatility, for example, in gold and silver is substantially higher than other investments. Unless you just want something shiny to look at! :)
I think the advisor’s investment advice was very good.
Regarding savings rate – it’s not enough to just consider your investment contributions, you should also count any extra debt payments you make.
Technically speaking, any debt reduction is considered part of your saving.
The way I look at it, any extra money you put into your mortgage should be part of your savings rate.
If you agree, then your savings rate is definitely higher than 13%.
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Thanks, Mike. I’ve never thought about it like that – mortgage debt reduction being part of savings. It does make sense for sure, but at the same time, I do think I should be increasing my contributions into RRSP. Gotta save while I can, because I doubt I’ll be able to work this hard and earn this kind of money over the long run. :)
Hopefully, the FA knew what you were doing with your mortgage and when you will be mortgage free – and after that, how much of the money previously going toward the mortgage will be redirected to retirement.
As a side note, my small experiment with investing (my TFSA) is comprised of exactly what your FA recommended… like someone mentioned earlier, I’m going with the generic ‘couch potato’ portfolio from Canadian Couch Potato.
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Yes indeed, Mike is right. Debt payment is an investment in itself. The returns are in the savings you make by reducing the overall interest. You are working very hard, I would be surprised if your overall savings are below 15%. I wish I were that wise that early.
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Fair point, Mike. Mortgage repayment is a means of forced savings.
I would just caution against considering a home as part of an investment portfolio. I’m one of those contrarians who believes that a home is not an investment. (One point of view: http://www.canadianbusiness.com/article/32186–long-craved-goal-of-home-ownership-not-for-everyone-says-financial-consultant)
Incidentally, there’s a neat article in today’s Moneyville about home ownership as an investment!
Hmm maybe I can just avoid going to the financial planner myself and just read his advice on your blog :)
Glad to hear you got some useful insights, and it seems like it was worthwhile. It’s kinda crazy slash disheartening to hear what it takes to retire by 55, though!
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Sounds like the investment advisor was super helpful :) The four-fund portfolio is quite similar to what I employ and I love having very few funds!
How have you weighed off pre-paying your mortgage versus investing for retirement? You might be able to get closer to investing 20% if you were pre-paying less.
One comment that I would make is that it could be easier to have specific funds in each of (taxable, TFSA, RRSP) rather than replicating your desired asset allocation in each. So say you have:
- $30,000 in RRSP
- $10,000 in TFSA
Especially when you take into account tax-efficient location ideas into account (example: http://www.finiki.org/index.php?title=Tax-Efficient_Investing):
“Under the Canada-US tax treaty, dividends and interest paid into an RRSP or RRIF from a US source are exempt from US withholding. Note that this exemption does not extend to RESPs or TFSAs[6], thus high-yielding US stocks or US-based ETFs are better held elsewhere than in RESPs or TFSAs.”
Given the above information, I would keep your US index fund entirely in your RRSP and not in your TFSA.
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Leigh, a quick comment on “tax-efficient location.” This is an important tax consideration and the strategy would depend on your own individual overall portfolio in my opinion.
US dividends earned within a TFSA are subject to the 15% withholding tax. However, if you were to hold that US investment in an RRSP, whenever you do make the withdrawal, you’ll be paying tax on those dividends (and, presumably, earnings) at your marginal tax rate, which will most likely be higher than 15%.
I should also add that if you’re going in to your e-series TFSA account looking for the withholding tax, you won’t find it. You own the mutual fund not the individual stocks within that fund. So you’ll see occasional distributions in your account but no withholding. I believe (don’t quote me!) that mutual fund companies pass along these withholding taxes as embedded within the MER that you pay.
Thanks for replying, Neil! I know very little about investing in Canada, but I know that in the US, certain things are better put in taxable accounts and certain things in tax-deferred accounts. RRSPs and TFSAs seem to have funky distinct rules, so I was concerned about the tax situation between the two.
I would doubt though that mutual fund companies would pass along these withholding taxes as embedded within the MER that you pay – how does that make any sense? They don’t know whether you have the funds in a taxable account, a TFSA, or a RRSP – tax withholding is different for each individual’s tax situation.
Leigh´s latest post —> What to do with discretionary savings?
Correction to my above two posts.
I wanted to get a more definitive answer, so I asked Jamie Golombek, tax expert with CIBC. Here’s the answer:
“Foreign taxes are withheld from dividends before paid to the Fund. The Fund therefore only has the net amount of cash to distribute to unitholders. It reports the full amount as Foreign Income of the T3 slip issued to unitholder and separately reports the foreign taxes paid in a different Box, allowing non-registered unitholder to claim a foreign tax credit. With Reg Plans, withholding is same and it’s an absolute cost to unitholder as no foreign tax credit.”
Therefore, regardless of whether you hold a Canadian-domiciled mutual fund (that owns U.S./foreign investments) in an RRSP, TFSA or RESP, distributions will be net of any withholding taxes already paid by the fund.
In the scenario described about directly holding U.S. shares in an RRSP, however, these dividends would not be subject to withholding tax because of the Canada-U.S. tax treaty.
Bottom line: The original recommendation to mimic the portfolio across RRSP and TFSA is still accurate. Strategy becomes a factor for mutual funds if you’re investing in both non-registered and registered accounts.
Thanks for the clarification, Neil! :)
I have been using a fee only financial advisor for several years. They recommended that I save at least 15%, preferably more to retire in my 50′s.
I have been fortunate to get a pay raise every year since graduating college. I take the amount of my raise, and automatically put 50% of it into my retirement. IE if I got a 4% raise, I increase my 401k by 2%. Now I max it out, so I put the difference in my Roth IRA.
Wow Neil sounds like he was very helpful!
I’m glad he agrees that the TD eseries is the way to go :)
I’m surprised that he said you weren’t aggressively saving enough though! You seem to be saving like a madwoman! Is the 13% savings JUST your RRSP or is it your RRSP and TFSA combined? Are you maxing out on your RRSP contributions?
What about your TFSA’s? Are you not using those towards your retirement? You are saving a lot of money in your TFSAs as well, I think.
I personally don’t consider a home an investment either (unless you downsize or move further away). But more often than not, people upgrade in their 30′s because they have children, they need to buy a bigger space etc. Then the mortgage keeps growing, does it not?
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The 13% is my RRSP and TFSA combined ($300 RRSP/$100 TFSA bi-weekly). I’m not maxing out on my RRSP contributions because I think I have like $21k in contribution room, hahaha. I think if I didn’t pre-pay my mortgage I could probably try … but it’s really one or the other. I don’t have enough flex room as a single person to pre-pay my mortgage AND max out on RRSP/TFSA contributions.
@Krystal Yee: I know what you mean- it’s impossible to max out on everything- I worry about if/when I get the opportunity to contribute to the RESP! It’s hard to decide between the mortgage or the RRSP’s. Many people pay off their mortgage debt first and then start funding their RRSPs. You seem to have a nice balance of both :)
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Do you think it is a good idea to purchase stocks in North America? I try to do some research, but I can’t find much useful information on the web.
I have some savings. (putting up $40 bi-weekly)
What advice do you give for a investor beginner?
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