Basic Investing Advice

[brownstein]

In the last year, I have really been cracking down on my finances and am looking to significantly increase the amount I save or invest. The last item on the list below (Managed Growth Portfolio) is the only RRSP I currently hold and put a monthly contribution into. The other items on the list are ones that I figure have done or are doing well.

http://img402.imageshack.us/img402/6044/cibcmutualfundsnz5.jpg

The situation: When I first started contributing to RRSPs, I went into the bank without a clue and basically had the guy at CIBC tell me what to invest in, I said it was for long term (probably 30 yrs). I am risk tolerant but my wife is not and wants something stable so I was hoping to develop a nicely compromised portfolio that we would both be happy with. I am 30 yrs old and I will receive a government pension in approx 10 - 20 yrs depending on how long I want to work and am probably looking at approx $1500/month to invest.

I realize that most of the items in the list above are from CIBC's higher risk growth funds and that the fund I currently hold (Managed Growth Portfolio) is a collection of different growth funds combined.

1. What else should I be doing to diversify in order to balance out the higher risk funds?

2. Should I scrap the Managed fund and piece together my own portfolio out of the others that I have pointed out in the list above?

3. Is it really stupid to invest solely in different CIBC "growth" funds?

4. I don't necessarily want to have everything that I invest to be in an RRSP, what are some other strategies I should be considering?

5. I have read from a lot of sources lately that Index funds are the way to go, is that the same as me picking, for example, CIBC European Index RRSP from the list above? Or is it not the same thing?

6. Is it safe to keep everything within CIBC, which I only do for simplicity's sake?

7. Can anyone offer up some good "rules of thumb" such as percentages of what to invest in? ie. XX% to RRSP, XX% to Non registered (and what exactly), and XX% to XYZ.

I intend on going to see a financial planner but just want to learn a few more things and do some more research on my own before going so that I have a better idea of what I want done. I can get a good deal through work with SISIP Financial (http://www.sisip.ca/en/index.asp)($5/month w/ free tax returns), they don't work on commission. Does anyone have any thoughts on if it is a good or bad idea to use them?

[asdfvcx]

1. What else should I be doing to diversify in order to balance out the higher risk funds?
The standard method to balance risk is to hold some fixed income. (Bonds, bond funds, GICs, etc.) Although, I would also suggest your main equity holdings should be well diversified, and not specialty funds such as real estate or metals.


2. Should I scrap the Managed fund and piece together my own portfolio out of the others that I have pointed out in the list above?
Maybe. But you need to have a decent level of investment knowledge to be able to this. And it would help if you have a plan (preferably in writing) indicating how much you want to have in each fund and when you want to rebalance, etc.

I get the impression from your questions, that your investment knowledge may not be up to this level yet.


3. Is it really stupid to invest solely in different CIBC "growth" funds?
It's probably not a good idea to invest in all growth funds if you don't understand the risk. As for CIBC, it's reasonably for someone starting out. You could do better and you could do worse.


4. I don't necessarily want to have everything that I invest to be in an RRSP, what are some other strategies I should be considering?
Can you explain why you might not want everything in a RRSP? Is it because you're out of room or some of your investments aren't meant for retirement?

The question can't be answered with the amount of detail you are giving.


5. I have read from a lot of sources lately that Index funds are the way to go, is that the same as me picking, for example, CIBC European Index RRSP from the list above? Or is it not the same thing?

Index funds are a good choice for investors who want to go out on their own and who have the understanding to do so. I not sure you have the level of education to be investing on your own.


6. Is it safe to keep everything within CIBC, which I only do for simplicity's sake?
It should be. Anything you invest in mutual funds is held in trust, so even if there was massive fraud going on, your investments would still be safe.


7. Can anyone offer up some good "rules of thumb" such as percentages of what to invest in? ie. XX% to RRSP, XX% to Non registered (and what exactly), and XX% to XYZ.
The standard rule of thumb is to fill up your RRSP and then if you want to invest more, use non-registered. Of course this can change if not all of your investment goals deal with retirement. And your government pension may also change things depending on your investment style (but I wouldn't count on it).

Sticking with filling up the RRSPs first will usually be best for most people.


I intend on going to see a financial planner but just want to learn a few more things and do some more research on my own before going so that I have a better idea of what I want done.
That's always a good idea. It'll also give you a better chance to figure out whether the advisor is a good one or not.


I can get a good deal through work with SISIP Financial (http://www.sisip.ca/en/index.asp)($5/month w/ free tax returns), they don't work on commission. Does anyone have any thoughts on if it is a good or bad idea to use them?
I have no idea who they are, and I didn't look at the link, but... I assure there is no advisor that works for $5/month and doesn't work on commission. Hopefully you can understand why that's ridiculous. They most likely are getting paid a commission on every fund they sell and/or are working for trailer fees.

Edit: I just looked at the link. I noticed SISIP is run by Great Western Life. Which are the same people who run my Group RRSP at work. So you're correct, they people you talk to probably aren't working on commission (although they may be getting large bonuses depending on how much money they bring in.)

The fees charged by Great Western Life for their funds are quite high. If you talk to the advisor, and are comfortable with them, if may be worth staying. But I wouldn't be surprised in they sound more like a salesperson and the quality of advice is rather mediocre.

[Blunt]

You're holding too many different funds.
Narrow your list to three or four funds max.

There is no point to buying a 'mutual fund' of mutual funds.

[ali1800]

You're holding too many different funds.
Narrow your list to three or four funds max.

There is no point to buying a 'mutual fund' of mutual funds.

Sure there is!!! More money for the bank. Banks are a Pillar of this country and healthy profits for them equate to a flourishing and free society, dontchaknow?

[brownstein]

Thanks asdfvcx, that is exactly the type of response I am fishing for.

Can you explain why you might not want everything in a RRSP? Is it because you're out of room or some of your investments aren't meant for retirement?

The question can't be answered with the amount of detail you are giving.

I was under the assumption that maxing out my RRSP was not the best for me if I will be collecting a pension and was under the impression that it was "the norm" to have other investments outside of RRSPs. You are right though, my knowledge on this subject is very limited at this point. I also have very little invested in my RRSP so there is a ton of room in there.

Let's say, hypothetically, that I kept my current RRSP. Would it be better to dollar cost average it like I am now with monthly payments, or should I collect that money throughout the year in something like a high interest savings account while watching the fund and making a lump sum investment when it seems to be in a dip?

As for SISIP, I think I will try to beef up my knowledge a lot more and then just go to them for advice or to compare what they come up with to what I will plan.

I kickstarted this whole campaign with deciding to create a household budget and have taken a real proactive interest in everything financial in our lives. I can't believe that I didn't pay attention to this stuff before, seems like yesterday I was 20 and just starting out, retirement seemed so far away that I just thought everything would work itself out. A decade later and I realize that I am potentially half way there (not likely, but my contract is for 20 yrs).

[xlfe]

I really dislike portfolios so i think it's a good idea to ditch it and invest in things yourself.

you should also take MER into consideration.
and it goes without saying, past performance doesn't indicate future performance.

how to turn that list into something with lower risk...good luck. you need to add more fixed income that's for sure.

[asdfvcx]

I was under the assumption that maxing out my RRSP was not the best for me if I will be collecting a pension and was under the impression that it was "the norm" to have other investments outside of RRSPs. You are right though, my knowledge on this subject is very limited at this point. I also have very little invested in my RRSP so there is a ton of room in there.
Without a pension in the mix, the normal advice if that if you invest near perfectly outside an RRSP, it might be slightly better than investment inside a RRSP, but there's a lot higher chance of screwing stuff up. So the standard advice is to go the RRSP route first.

With the pension it can get a bit more complicated because of the concern you might have saved up too much money for retirement. (Yeah I know, big worry for most people.) If you are planning or hoping to retire early, I would go the RRSP route. Because you don't have to worry about having too much money, since you retire once you have enough.

If you plan to work until your 65 or 70 no matter what, then the calculations get a lot more complicated, and it may make sense to make sure your RRSP doesn't grow too large due to tax considerations. But you'll have to decide whether this is a big concern of yours.


Let's say, hypothetically, that I kept my current RRSP. Would it be better to dollar cost average it like I am now with monthly payments, or should I collect that money throughout the year in something like a high interest savings account while watching the fund and making a lump sum investment when it seems to be in a dip?

Just dollar cost average. It's simpler and you don't have to worry about your emotions and deciding if this is the right time to invest.


I kickstarted this whole campaign with deciding to create a household budget and have taken a real proactive interest in everything financial in our lives. I can't believe that I didn't pay attention to this stuff before, seems like yesterday I was 20 and just starting out, retirement seemed so far away that I just thought everything would work itself out. A decade later and I realize that I am potentially half way there (not likely, but my contract is for 20 yrs).
The good thing is that you're in pretty good shape. Given the military pension you get after 20 years, you have been doing quite a bit of retirement saving over the past decade. That's the good thing about a pension plan, it forces you to save for retirement no matter what.

[DanielCarrera]

The other items on the list are ones that I figure have done or are doing well.

Never based your decision on which funds have been doing well lately. Never try to predict which funds will do well in the future. Funds go up and down and in fact, if they have done well lately that could well mean that now they are overpriced and there is less profit left to be made.


I am risk tolerant but my wife is not and wants something stable so I was hoping to develop a nicely compromised portfolio that we would both be happy with.

How risk tolerant? Are you ok seeing your stocks drop 30% some of the time? Or will you get scared and pull out at the worst time?

I do recommend you become informed. A very good book on the subject is "The Intelligent Asset Allocator". I highly recommend it. Another great one is "A Random Walk down Wall Street".


1. What else should I be doing to diversify in order to balance out the higher risk funds?

Divide your money between Canada stocks, US stocks, EAFE stocks ("International") and some bonds. That's all the diversification you can really get.


3. Is it really stupid to invest solely in different CIBC "growth" funds?

I think it's a bad idea. There is nothing good about "growth". It does not mean "these funds will grow more". It actually means that the companies they buy are on the expensive side. I think it's better to invest in a broad market index fund.


4. I don't necessarily want to have everything that I invest to be in an RRSP, what are some other strategies I should be considering?

If you have anything outside RRSP, it should be your Canadian stocks, as those are taxed leniently. The best things to have in RRSP are bonds and US stocks.


5. I have read from a lot of sources lately that Index funds are the way to go, is that the same as me picking, for example, CIBC European Index RRSP from the list above? Or is it not the same thing?

Index funds are definitely the way to go. You will beat 80% of money managers in equivalent asset classes (e.g. "Europe") if you choose an index fund. The reason is that they give you the market average and minimize the very significant cost of the Management Expense Ratio (MER).

The MER is critically important. A typical fund has an MER of 2.5%. If stocks grow at 9% in average, you are only left with 6.5%. This HUGE: Imagine that you invest $1,000 at 9%. After 30 years your money has grown to $13,267. But if you pay a 2.5% MER then after 30 years you will only have $6,614. The situation is worse when you include inflation. Inflation stands at roughly 2%. So in 30 years, $13,267 will buy you what $7,612 buys you today, and $6,614 will buy you what $3,745 buys today.

In other words, that 2.5% MER has robbed you of 51% of your real wealth after the 30 years.

Index funds have much smaller MERs. Altamira has MERs of 0.54% for all funds, and if you use ETFs you can go even lower. This is why index funds make sense.


6. Is it safe to keep everything within CIBC, which I only do for simplicity's sake?

Perfectly safe. But you might get a lower MER if you go elsewhere.


7. Can anyone offer up some good "rules of thumb" such as percentages of what to invest in? ie. XX% to RRSP, XX% to Non registered (and what exactly), and XX% to XYZ.

1. Everything you can in RRSP. Max out your RRSP. Start with your bonds and then US stocks.
2. Use index funds only (or ETFs). Go for the lowest MER.
3. Make the percentage of bonds equal to your age. You are 30, so put 30% of your money in bonds. As you get older you shift towards bonds.
4. Diversify globally. Include Canada, US and EAFE stocks.
5. Read one of the books I recommended.

[DanielCarrera]

Let's say, hypothetically, that I kept my current RRSP. Would it be better to dollar cost average it like I am now with monthly payments, or should I collect that money throughout the year in something like a high interest savings account while watching the fund and making a lump sum investment when it seems to be in a dip?

The best time to get into the market is when you have the money. Holding it up in cash will only deprive you of growth. DCA every month is a sound strategy (in my case I'll be doing something more complicated, but it doesn't belong in a "basic advice" post).

[DanielCarrera]

I really dislike portfolios so i think it's a good idea to ditch it and invest in things yourself.

Uhm... everyone who invests has a portfolio. Portfolio is just a word that means "where you put your investments".

[brownstein]

Thanks Daniel,

DCA it is then. So is Altamira one of the better companies to go through? Is there a good site that you know of that will compare MERs of the various companies and banks?

Risk Tolerance: I believe that I could stomach a 30% drop but my wife definitely couldn't so we would lie in the mid range I suppose. I will read up more on risk assessment and try to determine where I really lie and what I am comfortable with.

Divide your money between Canada stocks, US stocks, EAFE stocks ("International") and some bonds. That's all the diversification you can really get.

This is where my inner rookie really shines through, is this all done through mutual funds? Do I just go to CIBC (and these are just for example's sake) and pick "Canadian Resources Fund", "US Index RRSP", "International Index RRSP", and "Canadian Bond". Obviously more research would go into which ones I would pick.

One thing that I am a little confused on, are index funds the same as mutual funds, or are there index funds and mutual funds that mimic index funds? Just trying to wrap my brain around if I need to look at anything other than mutual funds in any of the examples you stated above?

I think it would help is someone posted an example portfolio, just some random investments that fall under that categories you stated above, not for me to actually act on, it will just help me sort things out in my head a little better.

Thanks for taking the time to answer these questions guys, I know the best thing to do is to go see a professional but, like I said before, I am trying to research as much as I can beforehand and am just in a little rut. Getting some basic help like this motivates me and stops me from getting discouraged and throwing this all on the back burner again.

[DanielCarrera]

DCA it is then. So is Altamira one of the better companies to go through? Is there a good site that you know of that will compare MERs of the various companies and banks?

I know of no such website (sadly). I saw one once, but it only included the major banks, so it didn't have Altamira which is a shame because they have a good offering. But I can say that in my own search, the lowest MER funds I've seen have been Altamira and TD bank "e-Funds". The "e-Funds" from TD bank are even lower MER than Altamira, but I am under the impression that you have to get them directly from them and if you get TD funds from a broker you won't get the "e-Funds".

Anyways, investigate Altamira and TD. One thing nice about CIBC is that they offer a greater *number* of inex funds, while TD and Altamira offer fewer index funds with *lower MER*. Since I think 3 funds are enough, and everyone offers those three (Canada, US, Intl), I prefer the lower MER guys.



This is where my inner rookie really shines through, is this all done through mutual funds? Do I just go to CIBC (and these are just for example's sake) and pick "Canadian Resources Fund", "US Index RRSP", "International Index RRSP", and "Canadian Bond". Obviously more research would go into which ones I would pick.

Yes, through mutual funds. A mutual fund pools together the money from many people to invest it. This is good for you because then you don't have the trouble of putting your money in a few dozen companies all by yourself. For this service, the mutual funds charges a fee called MER.


One thing that I am a little confused on, are index funds the same as mutual funds, or are there index funds and mutual funds that mimic index funds?

Index funds are one type of mutual fund. Traditionally the mutual fund company would pay an expensive manager to try to decide which companies would do better than others, or when the market would go up or down. Performance of mutual funds is compared against the index which is nothing more than the average of all companies in the market. It is a weighted average in the sense that if company A is twice the size as company B then it has twice the weight in the average. The basic idea is that if the manager is not able to do better than average, then what are you paying him for?

After a while people began to realize that most managers were *not* beating the average. Things looked even worse when they realized that paying them 2.5% MER meant that only about 20% of mutual funds actually beat the index and that you can't predict which funds will be in that 20%.

At this point someone had a brilliant idea: If the manager can't beat the average (index) why don't we just fire him, hold exactly the same stocks as the index, and save ourselves some money? By removing the manager, you get to save not only his salary, but all his staff including all the hundreds of researchers getting information about thousands of companies. This removes most of the 2.5% MER. Index funds do have costs, because they do have to pay some staff to actually buy the stocks, talk to you on the phone, etc. But for an index fund you can expect an MER closer to 0.5% for that service.

I hope this makes things clearer. If you have any questions, don't hesitate to ask.


I think it would help is someone posted an example portfolio, just some random investments that fall under that categories you stated above, not for me to actually act on, it will just help me sort things out in my head a little better.

Ok. Here is a portfolio that I would like if I decided I was risk-adverse. I do not recommend it, but here it is:

10% Canada stocks (TD or Altamira Canada index fund).
20% USA stocks (TD or Altamira US index fund).
20% EAFE stocks (TD or Altamira "International" index fund).
50% Bonds (whichever has the lowest MER).

A few comments:
- Moderately safe. Lots of bonds.
- I choose the 1/2/2 ratio for Canada/US/EAFE because it's simple and puts more money in bigger markets, and it's very diversified.
- There is an overweight in Canada. Canada's market is 1/10th the size of the US, but in the above portfolio the US has only 2x the portfolio chunk. I justify this because there is a tax advantage for Canadian stocks compared to US stocks.


Thanks for taking the time to answer these questions guys, I know the best thing to do is to go see a professional but,

Actually, I don't believe that. I believe that the most important thing is to learn yourself by reading a good book. A professional could give you a biased opinion. A CIBC professional will not tell you to get Altamira funds. An "independent" professional will get kickbacks from some fund companies for recommending them, and those will *never* be index funds. Index funds, don't have the money to advertise or to give advisers kickbacks for recommending them because they are too busy saving you money. Remember that funds that advertise or give kickbacks are spending their participants money to fund those activities.

So I highly recommend reading a good book (I mentioned two really great ones) before talking to a professional. You will also feel more confident in your decision and you will worry less and you'll make better choices.

Cheers.

[brownstein]

Great information, thanks again Daniel.

[asdfvcx]

I know of no such website (sadly). I saw one once, but it only included the major banks, so it didn't have Altamira which is a shame because they have a good offering.
Bylo maintains a list of the major index funds offered in Canada at: http://bylo.org/idxfunds.html

And Globefund (http://globefund.com/) allows you to do a lot of research of Canadian mutual funds. Click on the Fund Filter link under Research Tools on the left-hand side.

So for example using Fund Filter:

Select Canadian Equity under Asset Class
Set Index Funds to yes
Click: Get Results
Click on the Key facts column
And click on MER to sort.


Which should get you a list of all Canadian index funds sorted by MER. It's a pretty powerful tool to use. And it's data is usually quite accurate, although occasionally something looks a bit off, so it can probably be ignored.

[brownstein]

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20060405_152254_1452&page=1

Daniel: This looks a lot like what you are describing and seems to suit my tastes as well. What are your thoughts on monthly vs. yearly contributions for this strategy as far as cutting costs?

One thing for sure, is that at this point, keeping it simple works for me.

Edit: One thought I had, was to make monthly contributions to take advantage of DCA and then, once I receive the return from my RRSP, I use that money to top up the accounts to their original allotments, rather then having to buy/sell to even them off. Is this a preferred method for this kind of setup?

[DanielCarrera]

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20060405_152254_1452&page=1

Daniel: This looks a lot like what you are describing and seems to suit my tastes as well.

The Couch Potato portfolio is very popular, and it is broadly along the same lines as what I've said to you. I think that it's a very good portfolio. Are you looking at their index-fund portfolio or the ETF version? I think it's better to use the index fund one (http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20060405_150734_3924&page=2) until you have experience.

If you are looking at their ETF portfolio (http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20060405_150734_3924) I would replace XSP and XIN from iShares by VTI and VEA from Vanguard (https://personal.vanguard.com/us/funds/etf/bytype) because they have lower MER.

What are your thoughts on monthly vs. yearly contributions for this strategy as far as cutting costs?

If you are going for index funds (e.g. TD, Altamira) there is no cost and you should go monthly. If you are going to ETFs the answer is more complicated.


Edit: One thought I had, was to make monthly contributions to take advantage of DCA and then, once I receive the return from my RRSP, I use that money to top up the accounts to their original allotments, rather then having to buy/sell to even them off. Is this a preferred method for this kind of setup?

I think that is an excellent idea. I am hesitant to sell because when you do you create a taxable event, so it is better to rebalance without selling if you can manage that.

[brownstein]

Yes, it is the index fund one that I was looking at until I get more experience. Do you recommend the classic couch potato or the global one?

[DanielCarrera]

Yes, it is the index fund one that I was looking at until I get more experience. Do you recommend the classic couch potato or the global one?

Help me out here, I didn't realize there were too. The one I know is:

20% Canada.
20% USA.
20% Intl.
40% Bonds.

Is there another one? Which one is classical and which one is global? The one above looks fine. I'm sure they are both fine. Remember that nobody can predict where the market is going. All we can do is spread out our money so that no matter what happens we will be "alright" in the end.

[brownstein]

Here are the various Potato plans from Canadian Business (http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20060405_151546_5196)

Classic Couch Potato

The original and the simplest. You split your money into three equal parts and invest as outlined below. Once a year, you rebalance to get back to your original asset allocation:

1)Canadian equity(33.3%)
2)U.S. equity(33.3%)
3)Canadian bond(33.3%)

Global Couch Potato

This portfolio is more diversified than the Classic, and thus should have less risk. It spans the world by splitting your money into five equal piles. Two of those piles go into Canadian bonds; the remainder are invested in Canadian, U.S. and international stocks:

1)Canadian equity(20%)
2)U.S. equity(20%)
3)International equity(20%)
4)+ 5)Canadian bond(40%)

High-Yield Couch Potato

If you want a portfolio that delivers steady income and allows you to take advantage of the government's tax break on dividends, this might be the portfolio for you:

1)Canadian dividend(25%)
2)Income trusts(25%)
3)U.S. dividend(25%)
4)Canadian bond(25%)

High-Growth Couch Potato

This portfolio has a higher exposure to stocks. It's more volatile than other Couch Potatoes, but may produce higher returns over time:

1)Canadian equity(25%)
2)U.S. equity(25%)
3)International equity(25%)
4)Canadian bond(25%)

[nobody1234]

Correct me if I'm wrong, but with the Vanguard funds you'd be losing the protection against (Canadian) currency fluctuations the iShares provides right?

[DanielCarrera]

Here are the various Potato plans from Canadian Business (http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20060405_151546_5196)

From that list, I would pick "global" for myself. I believe in diversification.

[DanielCarrera]

Correct me if I'm wrong, but with the Vanguard funds you'd be losing the protection against (Canadian) currency fluctuations the iShares provides right?

I didn't realize that the iShares ones were currency-hedged. Are you sure? Anyways, I'm not the biggest fan of currency hedge for the following reasons:

- Global diversification already provides some hedging. For example, in recent times the fall of the dollar would have been compensated by the rise of the Eur.
- Rebalancing and DCA also provide some additional hedging in that you buy more US stocks when the US dollar is down.
- Hedging costs money. Not only through the higher MER but also, by spending some of the money in hedging activities (e.g. buying a futures contract on the USD) you are not spending it on stocks.

But this is all just a personal preference. I'm sure that there are many people for whom hedging is the best option.

[asdfvcx]

I didn't realize that the iShares ones were currency-hedged. Are you sure?
Yes, the Canadian iShares are currency hedged. The only stocks the US and EAFE Canadian iShares hold are the corresponding US-based iShares. And of course whatever they are using for the hedging.

(And for anyone who didn't understand the last paragraph, just pay attention to the first sentence. :))

[asdfvcx]

Yes, it is the index fund one that I was looking at until I get more experience. Do you recommend the classic couch potato or the global one?
I'd also suggest you hold international equity as well, not just US and Canadian.

But if you decide to go on your own, you're going to have to decide the exact allocation you want. The most important factor being the amount of fixed income (ie: bonds or GICs). And when you make this decision you are going to have to consider your whole portfolio. And your pension is part of your portfolio which does complicate things.

[brownstein]

I'd also suggest you hold international equity as well, not just US and Canadian.

But if you decide to go on your own, you're going to have to decide the exact allocation you want. The most important factor being the amount of fixed income (ie: bonds or GICs). And when you make this decision you are going to have to consider your whole portfolio. And your pension is part of your portfolio which does complicate things.

This is the one that looks the most appealing to me
Global Couch Potato

This portfolio is more diversified than the Classic, and thus should have less risk. It spans the world by splitting your money into five equal piles. Two of those piles go into Canadian bonds; the remainder are invested in Canadian, U.S. and international stocks:

1)Canadian equity(20%)
2)U.S. equity(20%)
3)International equity(20%)
4)+ 5)Canadian bond(40%)

It has the international equity in it. Would it not be wise to just follow this plan? How will pension complicate things?

[asdfvcx]

It has the international equity in it. Would it not be wise to just follow this plan? How will pension complicate things?
The pension complicates things, because when you are decided on the percentage of fixed income you want in your portfolio, you should be including the pension in your portfolio.

While the pension is an annuity, is can sort of be considered fixed income. So if you implement the allocation above for your non-pension investments, you basically have more than 40% of your total portfolio in fixed income.

You can if you want to treat you portfolio as two separate halves (one the pension, and one the rest.) It's simpler this way, but not really accurate.

[DanielCarrera]

It has the international equity in it. Would it not be wise to just follow this plan? How will pension complicate things?

Just following the plan is a perfectly reasonable option. What he means is that in reality your pension is part of your portfolio. Your pension is really very much like bonds (it is guaranteed, low-risk) and ideally you should include it in your calculation somehow. Otherwise you will end up with a portfolio that is more conservative than you had intended. But figuring out how to factor in pension might be difficult.

[brownstein]

ahh, ok I understand what you guys are saying. My pension should be at least 40% of my best 5 years salary (could be more if I do more than 10 more years, which is likely). Right now, I bring in about $60K.

What would you guys do given this information?

Edit: I should add that I can start collecting my pension as soon as I retire, I do not have to wait until a certain age.

[SmartBoy]

ahh, ok I understand what you guys are saying. My pension should be at least 40% of my best 5 years salary (could be more if I do more than 10 more years, which is likely). Right now, I bring in about $60K.

What would you guys do given this information?

Edit: I should add that I can start collecting my pension as soon as I retire, I do not have to wait until a certain age.

Hi,

I've not read through your entire thread but I think that you've been fortunate to receive some sound advice from a couple of knowledgeable and helpful posters on this forum. However, if you want to become a DIYer I think that you should probably think about reading some of the material previously suggested. An even simpler and more digestable read (IMO) is Shake's primer, which can be found at this link:

http://www.shakesprimer.com/

Based on my own personal experience, what matters in the end is not which allocation you choose (e.g. 40% fixed 60% equity vs. 20% fixed 80% equity) or how you divvy up your equity between various markets, but how well you stick to your strategy once it is in place and what tools you use to implement your strategy (i.e. high-fee tools vs. low-fee tools). If you have a 30 year timeline and you're able to put aside 10-15% of your yearly net income in the allocation that you've chosen utilizing low-fee tools such as EFunds or ETFs, you'll be fine. The hard part, which has been alluded to above, is whether you panic when things get bad and change things around. Easiest thing to do is set your plan, write your goals on paper, and put everything on autopilot so that you never have to even think about it.

In terms of your pension, assuming that you're able to pay off all of your debt (including your mortgage) and don't have children to support, your income requirements when you're retired will be far less than your working years. Between your pension and CPP and OAS, you'll be able to bring in a large portion of that income without having to draw off your retirement nest egg. Just take that into account when you're trying to decide "how much is enough". Obviously it never hurts to have too much saved, but there's certainly value as well in taking some of that hard-earned money and enjoying life when you and your partner are both healthy and able/inclined to do so.

A financial planner can help you understand these concepts better, but at best their agenda will be somewhat skewed as they balance your interests with theirs. If you really want to take control, do your homework, crunch the numbers, and get started!

Good luck,
Smarty.

[asdfvcx]

ahh, ok I understand what you guys are saying. My pension should be at least 40% of my best 5 years salary (could be more if I do more than 10 more years, which is likely). Right now, I bring in about $60K.

What would you guys do given this information?
It's hard to say. You could make an estimate of how much your pension will be and then estimate how much in bonds you would need for the interest in one year to be equal to the pension for one year.

This would give you some approximation of what the pension might be worth in terms of fixed income, but I expect there are a lot of problems with this method (most of which I don't probably don't understand.)

So, I'm not sure how useful this number would be, but it might give you at least a start. But I expect you'd have to see a expert in this area to get a more accurate number.

[brownstein]

I read through that shakesprimer site, a lot of good information in there. I think I am getting a good idea of the direction I want to take now. It will still be a couple of months before I can implement anything but that just allows me more time to research. My conservative estimate for my pension is roughly $40K/yr before taxes and in todays dollars, and that is if I work for 20 more years instead of 10. I plan to pick up a couple of the books that were suggested as well. Thanks again for all the informative posts everybody.

[brownstein]

I have another question for you guys:

My wife and I are the same age (30), I make ~$60K/yr and she makes ~$30K, what is the recommended strategy for RRSPs? Do I open a spousal account and use my income to contribute to both? Or should she be making contributions in her name as well? We both have lots of room and I will be working with anywhere from $1200 - $1500/month.

[Thalo]

I have another question for you guys:

My wife and I are the same age (30), I make ~$60K/yr and she makes ~$30K, what is the recommended strategy for RRSPs? Do I open a spousal account and use my income to contribute to both? Or should she be making contributions in her name as well? We both have lots of room and I will be working with anywhere from $1200 - $1500/month.

RRIF income splitting has actually made this a much more complicated question than it used to be. 2 questions:

1) have you purchased your first home yet? If not, you might want to consider doing spousal contributions into her RRSP so that both you and her can withdraw up to the $20,000 max.

2) Do you foresee an uneven split of income when you're retired/semi-retired/about to retire? Let's say she retires at 60 but you keep working for a few more years: she could draw income from the spousal and have it taxed entirely in her own name. There's a limitless number of possibilities.

[XQQSME]

4. I don't necessarily want to have everything that I invest to be in an RRSP, what are some other strategies I should be considering?


Some other strategies that you may also want to think about are using life insurance as another way to diversify your investments and or Segregated funds. Universal life policies offer you the ability to over fund the policy, with those excess contributions being allocated to an investment fund that you choose when taking out the policy. These funds are much like mutual fund in which you can allocate your money as you see fit, cash, bonds, equities, etc...(as an eg I have one fund that has had an avg rate of 17%/yr since 1989). There are a few neat things with investing this way. Money is Tax sheltered (deferred) unit you withdraw much like an RRSP, however, insurance policies pay out 100% tax free to the beneficiary. Both the face value of the insurance policy and all money plus gains in the investment fund should the unfortunate happen before you start to enjoy your golden years. But if you don’t die, and you have accumulated significant growth in these investment funds, there are a couple of ways to withdraw from the fund TAX FREE, so you totally avoid capital gains and income tax and use the money invested before you die. There are costs associated with this but they are far less then income tax and capital gains.

Segfunds are creditor proof, have a maturity guarantee(75%, 100%, etc), have a death benefit guarantee and have a rest option. Which means, if your fund does well you have locked in guaranteed gains. So with out getting into details, if you were to invest $10k each yr for 5 years for a terms of 10 yrs for a total of $50K in the first 5ys, and you saw positive returns in the those yrs, so that 50k has grown to 75K. Now let’s say you think that the fund will under perform in the next few yrs because the economy is turning, you can reset the guarantee maturity to $75k for the next 10yrs so you don’t loose that 25K gain. Now when the maturity date comes around and the fund has severely underperformed where your initial $50k is now worth $30k (a loss of $20k of initial investment and $25k of gains) you don’t sweat cuz you reset the guarantied maturity to $75k. So in essence the insurance company just lost $55k and you made $25k. Now this is an over simplified analogy but I hope you catch the drift.

These strategies can be a complicated but if you are keen on investing, have time to do the research and get a good agent that knows the ins and outs you can really take care of your family incase of the unfortunate and invest wisely (tax free in some cases) at the same time.

Typically segfunds are a bit more costly on the administration side than mutual funds so you have to weigh the pros and cons, and there is a yearly administration cost associate with the UL policies.

Hope this helps to answer of your alternative strategies question. There’s a lot more detail to what I wrote here so please take this as a high level over view and starting point.

Thanks,
Adam