Weekend Reading – Tips for millennial investors, early retiree primer, asset allocation ETFs and more #moneystuff
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.
While I enjoyed the time-tested advice in The Millionaire Next Door, I think this personal finance classic left out a major ingredient on the path to financial wealth.
Read what that missing element is here.
Canadian Financial Summit
Before we get to the Weekend Reads, just a quick reminder about my upcoming talk at the Canadian Financial Summit: How I’m preparing my portfolio to fund my early retirement.
You can get your free ticket to the summit here – taking place online from September 25-28, 2019.
With your free ticket, you’ll be able to watch my presentation along with some of the “who’s who” in the industry to learn about the following and much more:
- How to invest better, easier, and more efficiently
- How to earn more moneyby creatively advertising innovative side gigs
- How to see through financial jargon meant to confuse you (don’t fall for it)!
- How to get the most of out of your TFSAs, RRSPs, and RESPs!
- How to avoid crippling feesand terrible financial advice (beyond reading my blog…)
- How to legally avoid Canadian taxationwhen you move for work or retirement
- How to drawdown your nest eggin retirement & what a safe withdrawal rate is
- How to minimize costs and save cashwhen doing home renovations
- And MUCH MORE!
Enjoy these articles including my detailed answer that follows these links – and see you next week for new posts including a feature from a successful investor who invests both passively and actively. Those approaches can exist in retirement harmony.
Mark
Weekend Reading
I read an article about an early retiree believing that financial independence hinges on your spending.
Yes….
The less you spend or need to spend, the less you need to save.
So much so, I also wrote a post some time ago about this very subject but I included my own numbers for better details. I will be updating this post now that we’re into the condo and our numbers are starting to look at bit different…
I get annoyed when I read generalizations about dividend investors – such as those who believe – dividend stocks are being touted as the next bonds. This is, of course, is absolute nonsense: stocks are not bonds and bonds are not stocks. Who believes that? I would be curious.
The tipping point has arrived in the U.S. – passive money management now outpaces active money management.
How many income streams should you have? Canadian Budget Binder has your answer.
Want investing tips as a millennial investor? Here are a few:
- Read this post. I honestly believe many millennials can get wealthy eventually by doing these five things over the coming decades.
- Need some help getting started? Might as well save money doing so.
While you might think nobody wants to bother with you; to help you to invest (meaning investment firms would rather score the big fish than someone just starting out), there are ways to invest when you have only a few thousand bucks to your name. Here are some options based on my partnerships (never an obligation) on this standing page to check out.
Check out my Deals page here! In some cases, I can save you thousands of dollars!
You can also check out my Just Starting Out posts here.
For those investors who truly want to DIY invest, pro Justin Bender had some advice for choosing your ideal asset allocation ETF after you open your discount brokerage account.
I wrote about all-in-one asset allocation ETFs here.
Back to Justin, his advice was simple:
- “As a general rule of thumb, you shouldn’t invest in any of these ETFs if you require the cash back in less than 5 years.” (This advice wouldn’t apply to millennials – at least not from me – you have decades of returns on your side!)
- If you need the cash in 5–9 years: consider VCIP or VCNS.
- If you won’t need the cash for 10–14 years: consider VBAL.
- If you don’t need the cash for 15–19 years: consider VGRO.
- “If you’re investing for 20 years or more(and you are comfortable dialing up your portfolio risk to eleven), the All-Equity ETF Portfolio (VEQT) might be right up your alley.” I personally think this is one of the best ETFs for a millennial. You have decades of investing time ahead of you and you might as well take full advantage of stock gains (and falls – to buy your stocks cheap!) where you can.
My asset allocation ETF take:
If any stock setbacks (or market noise) freaks you out – consider investing in VGRO or XGRO or ZGRO as your asset allocation ETF. You’ll get long-term returns from stocks and some cushion via bonds when markets tank or correct. A “GRO” fund will also help support your investing behaviour. That’s critical. Whatever you avoid trading in and out of is likely a good fund for you. As a millennial investor or any investor, you make money by time in the market – not timing the market.
Reader question of the week!
Hello Mark,
I have a question regarding diversity. I have been following you for a while now and know you are a DGI (dividend growth investor), and have built up your dividends to a substantial amount. Impressive.
That being said, are your stocks mostly Canadian? (I am a new investor and have very few stocks of blue-chip Canadian companies.)
So, should I be concerned about diversifying my portfolio at the early stages of growing my dividends? Do you have U.S. and international stocks in your portfolio?
How important is it to diversify? Please let me know your thoughts.
Thanks for your question (and kind words).
For those of you who missed my latest, monthly dividend income update you can read it here.
Yes, many of my stocks are Canadian. I’ve listed a few of my favourite Canadian stocks in this post here – where I discussed my income strategy and plans for semi-retirement in the coming years.
That said, I also own a few U.S. stocks (and have done so for many years) for diversification beyond Canada’s borders. Further still, I also own U.S. listed ETFs like VYM so I take some of the stock selection process totally out of the equation. In doing so, I can ride the returns of the 400+ stocks that make up the FTSE® High Dividend Yield Index – for a dirt-low fee.
I don’t currently own an international ETF although I have owned VXUS in the past.
Should you be concerned about diversifying your portfolio at the early stages?
Tough question to answer since I don’t know your tolerance for portfolio risk, your other assets in the bank, or your investing goals.
Consider these questions and your answers to them as part of your financial plan. Answering these questions will definitely help you with your question above.
I know for me, I was not concerned about diversification out-of-the-gate. Probably because I was a bit naïve and immature as a DIY investor 10-years ago.
Fast forward to today, I know there are individual stock risks. I know Canada only makes up 3% of the world market. I know, sometimes, Canada and U.S. and international stocks do not move perfectly in lock-step. So, I’m slowly buying up more U.S.-listed ETFs to diversify away from Canada while DRIPping / reinvesting all Canadian and U.S. dividends paid as much as possible to earn more shares of the stocks I own commission-free.
You can find out much more about DRIPs on this dedicated page here.
For most investors, I think diversification across companies, sectors and geographic borders can work well long-term for this simple reason: you can reduce portfolio risk while maximizing potential return.
This is because different investment products or assets may react differently to the same event.
Diversification will help you because ultimately you may not react to any market event – instead, you’ll simply stick with your investment plan that you’ve designed all along.
Remember when it comes to investing, good investing behaviour when combined with low fees trumps all.
Happy Investing!
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Hi Mark,
What account do you hold your U.S ETF in? RRSP?
Thanks!
Yes, I only own U.S.-listed ETFs in my RRSP – mainly due to avoiding 15% loss on dividends/distributions.
U.S.-listed ETFs are charged 15% withholding taxes inside TFSA, for example.
All the best,
Mark
Good discussion guys. Interesting takes on two different stages of life. Those of us “in retirement” might have done things differently (or maybe not) had we known then what we know now. Of course family matters and other issues come into play but the ever present question of how much is enough and when will I have it is consistent for all even though the parameters one applies may be different thus resulting in different answers. Makes me ponder.
I think we’re on the same page Lloyd.
I’d probably do it a bit different (and I suspect everyone would) but I see hindsight as pretty useless. No one knows what will happen with markets, interest rates, economy, employment, family etc. Overall our plan has worked well. Some of it due to to us, some of it due to luck. We did the important things right, but certainly not everything. The people most likely to do well have a game plan (ideally the earlier the better) and reasonable thoughtful goals controlling the things they can: save, invest, spend carefully. Doing that is very likely to ensure success to be able to pull the plug within reason when it suits you.
Ya, hindsight is pretty well useless for oneself but it could have the potential to be a great textbook for others.
All too often I find myself reading these blogs, seeing advice being given and know that we don’t know all the parameters. That’s why I prefer the “this is what I do/did” stuff. But even then, a person has to be cognizant of that person’s situation in order to mostly grasp the whole picture. As just one example, if one didn’t know of a person’s pension situation (we have two moderate DB pensions with a 50% survivor payout) a 100% equity stake might seem a tad risky.
Indeed, that hindsight could be helpful for others which is a reason why I post my stuff and sometimes do the contrarian thing. Some may get something from it or others may not care, or disagree. Fine.
Agree on the pension part. That’s a consideration here too with me not having one and the survivor benefit being 60% with my wife’s (also likely non indexed).
I like case studies myself since you get more insight into various decisions and how things turned out – or not. Stay tuned for today’s post!
Ultimately we just don’t know what the future holds. Just try and be prudent financially and see where life takes you…
RE passive vs. active its only a short matter of time before that also happens here in Canada.
RE the bonds vs stocks & dividends piece I think part of the issue is the headline is misleading. I don’t think anyone said stocks are bonds. The credit suisse strategist said investors would move to more stocks instead of bonds due to dividend yields being better than treasuries at this time. Tom said with our lower rates here this has been happening in Canada for some time. I agree some income investors simply bypass bonds or substitute them as an income investment with dividend CDN stocks utilities, pipes, reits, banks etc. I think this is true and we read anectdotal evidence of it on this site. I have eased into this some myself raising my equity levels some, for the same reasons. Is this a substitute for bonds – DEFINITELY NO, but in an upside down world now more people are upping the ante and moving in this direction. Tom B. did a great job pointing out the realities of doing this.
I am also in the camp of determining how much is enough by looking carefully at spending to determine how much is enough. What I actually did before retiring was to pay a lot of attention to our fixed expense numbers, discretionary spending plans, major infrequent expenses (cars, major house repair), and developing a good buffer amout etc. My metric to be met was fixed expenses being able to be met from work pension, and investments to cover discretionary spending and larger infrequent expenses, plus buffer. However, we didn’t have a number we were aiming for.
Yes, some income investors do own CDN stocks utilities, pipes, reits, banks, etc. (like me!) but I don’t do it as a bonds replacement.
I have come to realize, as you know, that my pension/our pensions from work are really a BIG bond and so I feel we can go 100% on equities inside our personal portfolio.
As long as I have this growing pension of mine, I see no reason why I should own bonds in my TFSA or RRSP, and beyond a cash wedge of ~1-2 years of living expenses (at least 1 year is a must as we enter semi-retirement so I figure that’s $50k) then I won’t own bonds at all.
The how much is enough will always have a margin of error given there are so many factors about the future which is always unknown.
My math continues to tell me $1 M, no debt, etc. (without pensions (x2), without CPP x2, without OAS x2) should be enough based on spending estimates. I will post those again since I tend the run those numbers every few months. $1 M invested well (dividends + cap. gains) should last 30-40 years withdrawing anything in the range of $40-$50k assuming 5% return.
For most Canadians, $1 M in the bank at age 60 or so without any pension is a) very good and b) likely enough based on modest spending needs when CPP + OAS for them (assuming they have no debt) has been considered.
It will be interesting to see for us if the market keeps going like it is (?) if we reach our goals and simply keep working full-time because it will be far more enjoyable and less stressful once financial independence has arrived. Meaning, work could be very fun in some respects if you don’t have to work at all.
I think most Canadian investors own those stocks period. Whether owning bonds or investing for income or not. Same here.
Your approach and goals are well outlined here. Similar to mine in accumulation phase. With your willingness and desire to work PT for quite a few years you have a bridge and safety valve from earlier semi retirement to retirement when your “big bond” pension, perhaps OAS, CPP begins. My risk tolerance seems to be somewhat different and each of our ranges of experience with investing is also likely quite different. It has moved me to be more conservative and consider what I need to risk vs what our lifestyle needs are in retirement. However, as we move along further in retirement with assets luckily having done fine (so far), and govt benefits getting closer I get more comfortable with slowly introducing a rising equity path, which has been my plan for quite a few years. You seem to understand all the issues at this point so that’s very good.
We both know you’re in fine shape now and headed for a great retirement. I think your goals are excellent. Yes, $1M at 60 or so along with CPP/OAS & no debt would provide a modest retirement….and probably better what than many Canadians have. IIRC correctly the avg retired couple was something like 65k hh total? I never really had a true number, and we live now within the income only (not capital) range so far, which as you know isn’t my plan. Old habits die hard and I struggle with this. That will be very interesting to see what you choose.
That is a great point on what will happen and what you will choose to do if the markets don’t cooperate, or even if they do. I think it will make a huge difference to you once you’ve crossed over to FI, making it way less stressful and more enjoyable to work. It is empowering. However after about 5 years being in that phase for me in my first non management/ownership situation, I found my drive was waning just a touch. Even though my income was on track to nearly double that year and I hada good work situation. My personality tends towards all or nothing so I stopped working when I turned 55. Maybe crazy? My lady just did full stop @ 53. All good.
Talking about $1M when retired, I figured another way to measure if I have enough money to retire: My current annual expense X (65 – my current age) + $1M. That is, by age of 65, kids are out of home on their own, and we should be good enough to have $1M invested assets at that time with our modest lifestyle. Now I just need to have enough money to cover expenses before 65.
Completely agree that working without having to work is a new game. Ever since I explained to my husband that one of us or both of us can just stop working this moment and most likely we will still be OK financially, working became less stressful as we are now confident that no matter what happens with the jobs, a backup plan is already there.
You’re quite the calculator!
That’s great you’re in that position now May. Your husband must also be pleased. It’s a game changer.
Well I think I probably monopolized this thread enough.
“That is, by age of 65, kids are out of home on their own, and we should be good enough to have $1M invested assets at that time with our modest lifestyle.”
Sounds like a great plan May. Continued success to you and family on that journey!
I think you’re very smart to increase equities as you age. I say that for longevity risk and because you’ll have CPP and OAS coming in that are bond-like.
I wonder how many other retirees think this way? I think many investors should consider it. I’m not saying not to have bonds or a cash wedge, but rather, at least consider having more equities than bonds if they are in a position of collecting CPP + OAS in their 60s.
Thanks Mark. Probably counterintuitive and seemingly against traditional approaches, but my guess is very few do it or think this way. I was thinking about this maybe 6-7 years ago when I was moving some equities to FI before retiring. I read some extensive research by Wade Phau showing how this rising equity path is usually a winning strategy, and also helps mitigate sequence of returns risk in the critical early years of retirement especially for those with a plan to utilize some/all capital. As it happened markets remained strong (luck) during the first 5.5 years of my retirement to date, but hampered my returns somewhat with FI I didn’t have much before retiring. Fortunately we have done well over what I was expecting, and income has as well.
I’ll add – as with most things financial everyones situation and needs will be different and the right answer is – it depends. YMMV
I agree consider more equities than bonds, particularly when CPP and OAS make up a decent share of your cash flow.
Just jumped back to your piece about the “missing element” of wealth building. This is our whole philosophy – wealth means nothing to us without health. What’s the point of getting rich if you can’t enjoy it when you get there?
It can be easier to prioritize wealth as it offers some level of immediate gratification. You don’t spend, you put in overtime hours, you take time to invest properly : your bank account gets bigger. Physical wealth can be more elusive. The effects of poor health habits may not take effect for years to come (and, in some cases, are silent killers).
In many ways, physical and mental health also contribute to one’s own wealth building capacity. Thanks for pointing it out, Mark!
Good to hear from you Elise. I was on your site. Great stuff combining the fitness and FIRE. I will be going for a lengthy bike ride later today actually to get the heart and legs and body pumping…
Absolutely no point in having any money at all if you can’t be healthy enough to enjoy it.
You also have to enjoy the journey. Meaning, regardless if you reach your money goals (or not) you are striving to get better, be better and be a more well-rounded person for the better.
Seems like both of you are doing that – kudos.
Where is your next adventure/trip?
Thanks Mark! We love a good long bike ride too. If you’re ever down in LA, you’ve got to do our favorite ride along the PCH. We love taking it from Santa Monica 20 miles down the coast – stunning ocean views the whole way! Our next adventure is a 7 day summit attempt of Mt Kilimanjaro. Doing as much hiking and high altitude training as we can right now. Fingers crossed we can make it to the top! =)
Wow. Awesome. I know a few folks from my work that have climbed it. They said it was awesome.
Keep up the great work and hopefully I can make it to travel the PCH someday!
I think of course financial freedom depends on spending, but ultimately it depends on income first. Being a lawyer, it’s easy to control the budget and save more. It’s another story if you earn minimum wage. For myself, if we are not a double income family with two decent jobs, I don’t think we can get where we are.
Also as a measurement of FI, are we sure 25 X annual income good enough? I am using this as my target as I expect our expense will decrease a lot once kids out of the door. So I think we already have enough buffer. Otherwise, with equity market expecting lower return than historical data, FI cannot even beat inflation, I really suspect 25 is a safe measurement.
I would never use any 25x income rule myself. Rather, figure out what I spend, add some buffer and given all the unknowns that my future could hold – strive to have the income from my portfolio be > than spending needs.
Once that “Crossover Point” is reached I figure I will have “enough” saved and be ready for semi-retirement. Getting close 🙂
I guess there are two camps to measure how much is enough for retirement. One camp never touches principles, like cannew. Another camp is willing to do so and not plan to leave lots of money to the kids. I am on the later camp so I set a target on my total invested assets.
I will definitely spend our capital but I’ve considered our “Crossover Point” the place where we have enough May. We have no kids, so our estate planning is FAR easier than most.
I haven’t updated our “enough money” to cover expenses in the condo (on the blog yet) so I might do that this fall now that the condo is registered, we’re back to paying a small mortgage for a few years; we’re starting to get an idea of our utility rates, operational costs, etc.
Maybe interestingly enough, I’ve figured out when we’re not paying our mortgage let alone saving for retirement (those expenses will eventually go away…) that will be some $50,000 per year (after-tax dollars!!) we don’t need to make to live the lifestyle we want. Incredible.
that will be some $50,000 per year (after-tax dollars!!) we don’t need to make to live the lifestyle we want. Incredible.
Fantastic stuff.
The 25X rule is the inverse of the 4% rule, which was based on US market conditions comparing 30-year periods starting from 1926. It may be a helpful guideline, but for Canadians I wouldn’t call it a rule and would want to bolster it with other metrics before making any major life decisions. By that metric, I’m close but like many here I hope to have dividend income cover my annual expenses and by that metric I’ve still got a way to go (as a CCP, my portfolio is not optimized for dividend income generation). I realize that I can/should manufacture my own dividends by drawing down capital, but as naïve as it sounds, seeing the pile shrink will be emotionally very hard for me! It will be there for major, unexpected expenses if need be.
I’ve said this a few times but getting a clear handle on your annual living expenses is critical — at the end of each year I download my bank account and credit card transactions to see what we are spending and how much of it is “fixed” vs discretionary. It’s been stable over the last few years which gives me confidence in what I will need to generate on the dividend income side.
x25 income (after-tax measure of course) is not enough for us, I already know that and have run the math many times.
As an example, if a person needed $50,000 per year after tax to spend, that formula means ~ $1.25 M total. While very good for someone aged 65 or older today, I don’t think that’s enough for us to fully stop work and never work again in our 40s now.
This is why our goals include a 7-figure portfolio excluding our workplace pensions and future government benefits like CPP and OAS (x2) – and of course no debt. CPP and OAS combined at age 65 should be close to $1,000 each for us. That’s $12k per year each. To earn that, you’d need, safely, about $300k in the bank or almost $600k per couple in your 60s to start with alone.
With a personal portfolio and no government benefits, with $500k saved, couples can likely live off that for 20-25 years withdrawing $30,000 per year without fear.
https://www.myownadvisor.ca/retirement/
The challenge is, what do seniors do after those 25 years are up?
For folks that have modest spending needs ($50,000 per year after-tax) and no debt, retiring right now at age 60-65, having $1 M saved for retirement is very good and likely plenty. The calculations prove it including some worse-case scenarios.
https://www.myownadvisor.ca/they-want-to-spend-50000-per-year-in-retirement-did-they-save-enough/
If I factor in inflation, healthcare risks, crumbling infrastructure, etc. I believe we’ll more than that but our portfolio will be a VERY good start!
All the best May. By all accounts, your family is doing very well!
The 4% rule is based on the US market. But it would have worked in Canada too during the period studied (and Australia and New Zealand). It would have fallen apart in most other places in the world.
Good point. Depends where you live! I think with our opportunities in Canada (good land, clean water, etc.) this country should grow for decades to come as long as we don’t kill our planet first.
I’m not sure why it took so long for Passive Index funds to surpass Active Management funds. The fees alone should have made the difference, but I believe many of the Active funds were managed by banks or other institutions where the clients just let them handle their investments and ignored what was being invested in.
Dose that mean that everyone should automatically jump on Passive Index funds? Personally, I don’t think one should because I believe one can do much better by evaluating and selecting their own stocks. But its all personal, what you invest for and whether one wants to take the time to learn about the difference.
Lots of employees have RRSP/401K in their company accounts where the employer contributes a match to the employees’ contribution. The choice is normally limited for these accounts and they are all actively managed funds. I think that’s one big factor to keep actively managed funds alive.
“The fees alone should have made the difference, but I believe many of the Active funds were managed by banks or other institutions where the clients just let them handle their investments and ignored what was being invested in.”
I think that’s it. The U.S. has long since lead Canada in this regard. I just think Canadian investors are finally catching on…
As for indexed ETFs or bust, well, you know how I invest!
Cheers,
Mark
Fees are hidden, very few people understand the difference between 1.5 and 2.75 MERs or even what an MER is.
True enough. Those that care, know!