Weekend Reading – Afraid of a bear market, 4% rules, embracing slow FI and more #moneystuff

Weekend Reading – Afraid of a bear market, 4% rules, embracing slow FI and more #moneystuff

Hey Everyone,

Welcome to my latest Weekend Reading edition where I share some of my favourite articles from the week that was across the personal finance and investing blogosphere.

Earlier this week, I published these articles:

This was our update to financial freedom update. Getting closer to realizing a major milestone!

Thanks to reader questions and follow-ups on various ETF posts over the last few months, I decided to update previous content on my site and share what I believe are the top dividend ETFs from Canada, U.S. and to hold international stocks from. Based on the distributions from these ETFs, I believe if you own a few of these products you can essentially earn cash for life. Spending the distributions (only) is like having a part-time job from your portfolio – forever!

On that note, GenX, what are your income stream plans for semi-retirement or retirement? 

As a millennial just starting out with investing how are you going to invest to earn money from your portfolio?

As always, if you have questions about my approach or other investing questions please leave me a comment or drop me a line via my Contact page. I will try and get to your email as soon as I can and in some cases, I will consider publishing your question (and my answer) on this site!

Weekend Reads

Kyle Prevost wrote a monster post about the 4% rule on Million Dollar Journey. I personally think this rule is “safe” (3% is very, very safe in fact) as long as 1) you’re close to 100% equities and 2) you intend to own a  basket of mostly dividend paying equities or dividend ETFs. I have plans to talk to a Certified Financial Planner about what he thinks about the 4% rule and other matters soon.

Reverse the Crush is embracing a slow path to financial independence. This is something I can relate to since if my wife and I really, really wanted to be financially independent, we could have made the leap already by not owning a condo and just renting a small apartment here in Ottawa. That said, home ownership was important to us; a place to call home and therefore more years of work are required to vanquish the debt dragon.

We did downsize and that’s been a huge enabler to simplifying our life and home – which is why you should at least consider downsizing at some point to weigh through your own pros and cons of doing so…

The slower path to financial freedom is also an approach that aligns to what The Fioneers write about and are passionate about, they embrace Slow FI.

Great to see Abbvie (ABBV) increase their dividend by >10% recently. Thanks very much. I’m very bullish on healthcare stocks long-term. I own a few of them and want to own more…Thoughts on this sector? I’m DRIPping ABBV each quarter to buy more shares commission-free and I’d like to do the same for another U.S. healthcare stock:  Medtronic (MDT:US). Thoughts?

The BIG ERN (Early Retirement Now) site pondered who is afraid of a bear market? After meeting him at FinCon this year, I doubt he’s afraid of any market. He invests rather wisely and rather well. Maybe I can have him on the site in the coming months…

Tawcan interviewed some fellow Vancouverites who retired early.

Early retiree Tanja Hester wrote about blogging less and embracing some new life rhythms as she and her husband continue to adjust to a new routine. In reading this article, I suspect this is something that many couples are going to grapple with when it comes to any retirement. The emotional and psychological preparedness that needs to go into retirement at any age is probably more important than the financial part…and it’s not talked about very much by financial pros at all.

Nice to see Telus increase their dividend this week. We own a few hundred shares and all that dividend income remains tax-free!

Reader question of the week (adapted for site):

Hey Mark,

I relocated to Toronto, Canada a couple of years ago and I’m trying to be tax efficient with my investments as I learn more.  Specifically, what are your thoughts to put U.S. equity ETF IVV (you have this in your top U.S. ETF list on this page I know….) in a TFSA or taxable account, if my RRSP is already maxed out (with VYM or SCHD)?

I would just like your point of view on such U.S. ETFs inside the TFSA or taxable account.

Thanks so much and keep up the great work.

Wow, great, detailed tax-efficient question. Savvy investor…

First up, congrats on the maxed out RRSP.  That is a significant accomplishment for any investor. I think VYM or SCHD are great funds for both income and growth.

When it comes to tax efficiency, I’ve learned and try to practice the following when it comes to asset location:

  • Non-registered account:  Canadian dividend paying stocks.
  • TFSAs:  Canadian dividend paying stocks and Canadian REITs.
  • RRSPs:  U.S. dividend paying stocks and U.S.-listed ETFs.

Check out this article about taxable investing and what to hold where for tax-efficiency.

In that article, you’ll see that if you hold IVV in a taxable account, that is, a U.S. ETF that pays low-distributions that is rather tax-efficient. Ideally, the most efficient way to hold U.S. assets in a taxable account would be to own U.S. stocks or an ETF that pays no dividends or distributions.

When you hold U.S. stocks (or ETFs) in a non-registered account:

  • There is 15% U.S. withholding tax off the top AND
  • because U.S. dividends don’t qualify for the Canadian dividend tax credit, you’ll pay tax at your marginal rate on the full amount of the dividend. S. dividends held in a non-registered account are taxed like interest income.  So, if you’re going to hold any U.S. assets in a taxable account – hold stocks that pay no dividend and very little dividends or distributions.  Thankfully, for U.S. stocks in non-registered accounts, you get a credit for the amount withheld when you file your tax return.  This credit can be applied against Canadian income taxes so in most cases that leaves you square—providing your Canadian tax rate is at least 15%.

So, should you own IVV inside your TFSA or taxable account?

I can’t tell you but what you’ll have to decide is if you want to forgo the 15% U.S. withholding taxes inside your TFSA to own IVV (likely lower than your tax rate right now?) or apply for the foreign tax credit every year you own IVV in a taxable account, since it is efficient there in the first place.

All the best and thanks for being a fan of the site.  I encourage you to tell others about it!

Happy investing,

Mark

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9 Responses to "Weekend Reading – Afraid of a bear market, 4% rules, embracing slow FI and more #moneystuff"

  1. Thanks a lot for the BIG ERN blog reference. After reading it, I AM really scared. Feel like I am nowhere near ready to retire yet while a bear is around the corner.

    As cannew already proved by his own experience, I do assume dividend growth strategy and being able to live off dividends makes people less afraid of bear market? Still, I think I will not be brave enough to hold 100% equity. Most likely I will go a glide path like what RBull is doing.

    Reply
    1. The Big ERN is not wrong. Some troughs have been up to ~ 6 years. That’s a long time. And it could happen again.
      “But it takes another 4 years to just get back to the old peak! That means your portfolio was underwater for more than 6 years.”

      But I wouldn’t fear everything…

      “In other words, just to keep up with the withdrawals from the cash bucket, my equity portfolio has to work much harder than 0% for 7 years. You need about a 5% return after CPI inflation!”

      Although 5% after inflation might seem like a challenge, it is significantly enabled by living with more stocks/higher % of equities as you get older.

      So, the key solutions based on my understanding of riding out an extensive bear market:
      1. Go with higher % of equities as you age (i.e., start retirement with at least 60% if not 70% equities), with
      2. A cash wedge or buffer of 1 or better still 2 years of living expenses/fixed income to draw from whereby you wouldn’t need to touch equities at all if absolutely needed, with
      3. Go with a lower SWR than 4%, go with 3% if you can (i.e., cut back living expenses and discretionary spending), with
      4. Diversification into income-producing assets (e.g., real estate, REITs) so you can spend the dividends/distributions only if needed.

      The reality is, there is no real solution to the sequence of return risk problem. At least that I know of!

      Thoughts May?

      Reply
      1. Hi, Mark, I have always thought your plan for retirement is too conservative, after reading through BIG ERN’s series on safe withdrawal rate, I think your plan is recession-proof. You don’t need to be afraid as I am sure you can survive the worst scenario.

        I actually didn’t have a solid plan yet, just thinking about all the possibilities and get myself ready. I think I might need to change my definition of ready now being scared of a bear market.

        As you know I was late to become aware of how important to invest properly. I began my journal at the end of the year 2017. At that time my plan is to retire in five years and I have a magic number. While I am approaching that number, I am thinking maybe retire earlier than the original five plan. The reason for that is not only financially, but also because both of us are quite tiring due to taking care of young kids while doing fulltime demanding work.

        My own job has the part I enjoy and the part stresses me. I recently negotiated with my boss to make my job less stressful. So I think at the least we could stick to my original plan for both of us working another three years. At that time, my withdrawal rate should be in the range of 3.25%~3.5% which is much safer than 4% if things go as it does now.

        What about the bear market comes in next three years? Well, I actually would welcome that. Being afraid of a bear market is basically being afraid of sequence risk. I will base my assessment of readiness at the time of retirement. If that time is a time where the market is down 40% from the current point and I still have the number correct, I will be more confident.

        And I will practice all the tips you mentioned too: glide path, cash wedge, flexible with expenses and try to live off investment income only when time is bad. If things get really really bad, one thing I am also considering to do is borrowing from my heloc for living expenses instead of selling shares at the bottom of the market. I am pretty sure if that happens, the return from the market will be much higher than the interest on my heloc. At the bottom of a bear market, normally interest rate would be on the bottom too.

        Reply
  2. Like you home ownership is important to us. We could have been a lot closer to our FI goal had we cut everything and not moved, but we would not have been happy. We decided to move into a better home for our growing family and are much happier. For us it’s not about a race to FI it’s about making smart choices and enjoying the journey. LOVE the idea of SlowFI.

    Reply
  3. Great article Mark ,
    as for FI or a slow FI to be honest personally i don’t have a set date or year for that although with two rental properties and a good size portfolio of stocks and bonds and the wife with a db pension i know we can achieve it but there’s no way that we will cut down on things that we enjoy now and not 10 or 15 years from now like travel for example , i just got the ” Millionaire teacher” book last week ( i know maybe I’m late for reading this book ) what an amazing book and Author but to be honest to go through what he did experience of extreme frugality when he was single in order to save and invest that’s something not for everyone for sure , at the end of the day our tomorrow is not guaranteed and YES we want to retire comfortably and happy but we also want to enjoy life as well now and not in 15 years .
    I think everything in our life should be balanced not only my portfolio 🙂 so yeah i believe we shouldn’t be to stressed about it just enjoy the ride till we get there .

    Reply
  4. Same here. Definitely slow FI for me. We have bought two brand new cars this year due to different reasons. And I am planning an Italy trip for next spring break. I am not sure if I could still call myself frugal? But we really don’t buy any luxury things and try to spend money for good value.

    I think ultimately we want to have an enjoyable life. FI is just a path to be there, not the ultimate target by itself.

    Reply
    1. May ,
      my wife had breast cancer in 2014 at age of 38 thank God she’s a survival but you know that was a wakeup call for me that the people who you cherish the most can leave at any moment so all the frugality and money in the world won’t replace my family , yeah like you said and i believe balance in everything is the way to go .

      Reply

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