I can’t be accused of being impulsive when it comes to investing. It took me about 7 years to slowly shift from stock picking to just this week fully embracing index investing. We’ve finally sold off the last of our Berkshire-Hathaway stock.
We held on to the last shares for tax reasons, but we’ve finally now realized the last of my wife’s capital gain on Berkshire. Our portfolio now looks as I described it a couple of years ago.
We now own only 4 different ETFs, and I have a spreadsheet that alerts me if I ever need to rebalance or invest new money. It feels good to have a simple plan that eliminates almost all aspects of my own day-to-day decision-making. I still have to make some final decision about investing during retirement, but that’s a long, slow process.
The total costs for my portfolio come to a little less than 0.2% per year. This includes ETF MERs, ETF internal trading costs, trading commissions, bid-ask spreads on trades, and foreign withholding taxes. Over the next 40 years, this compounds out to 7.7%. If this sounds high to you, typical costs are far worse. Paying 2.5% for 40 years compounds to over 63%. This consumes nearly two-thirds of each dollar that stays in your portfolio that long!
One nice side effect of this approach to investing is the sense of calm I feel when an article or talking head tells me that the market is about to crash or that I’m missing out on some great stocks. Deciding in advance to do nothing in the face of this “news” has improved my life.
Good for you Michael!
ReplyDeleteI am also in a few Vanguard (and two BMO ETF's) and rest a lot easier not having to second guess myself.
@Marko: I'm glad you're getting some peace of mind.
DeleteAny chance you could share your spreadsheet?
ReplyDeleteI enjoy reading this blog regardless.
@Anonymous: My spreadsheet isn't is a form suitable for sharing. I've been tidying it up a bit at a time for quite a while now. When I finally finish, I plan to share it.
DeleteThe following exchange is reproduced to remove broken links.
ReplyDelete----- BHCh October 8, 2016 at 7:37 PM
You put US ETFs into RRSPs to the extent possible, right? What about TFSA? Do you put VCN into TFSA? International and the balance of US into non-reg account?
----- BHCh October 8, 2016 at 9:54 PM
Also, is there a significant benefit in using VXUS in preference to CAD ETFs such as XEF and XEC when held in non-registered accounts? You save about 10 basis points on MER. Also the trading volume is higher. On the other hand you have to convert every time you contribute, and presumably you have to accumulate at least a few thousand before contributing. Also, filling tax forms for over 100k held in US and claiming US withholding must be a pain.
----- Michael James October 8, 2016 at 10:18 PM
@BHCh: I've never written much about these matters mainly because few people have enough assets to encounter these issues and Canadian Couch Potato has addressed them very well.
My TFSAs only have VCN in them. The RRSPs, LIRAs, and spousal RRSP are for U.S. ETFs. The balance goes into non-registered accounts. I do use VXUS instead of Canadian ETFs to save on MERs and to recapture U.S. withholding taxes on dividends. The costs of this are having to do some currency exchanges and some work at tax time, but the savings are worth it. Currency conversions don't have to be done on each contribution; my rebalancing threshold between investments in Canadian and U.S. dollars is much higher than the rebalancing threshold within a currency. The trading volume on ETFs is less important than the trading volume of the stocks the ETF holds.
----- BHCh October 9, 2016 at 12:10 AM
Thanks. The allocations between accounts makes sense, I can follow the logic.
I have a large amount to invest in a non reg, which is why I am trying to figure out if a US traded ETF gives advantage for markets outside North America. My calculations seem to indicate that savings on MER are more than offset by withholding taxes. Like you can claim the US portion of the tax but not those from the country where actual holdings are domiciled, so you lose over 10 percent on dividends which at 3 percent distributions comes out at 30 basis points. With Canadian traded ETFs which hold foreign stocks directly, you can claim the tax back, so you don't lose 30 basis points. What am I missing?
----- Michael James October 9, 2016 at 12:49 AM
@BHCh: There are a number of trade-offs, including MER differences and different levels of withholding taxes on dividends that may or may not be recoverable. I'd recommend reading the white paper mentioned in the following article:
http://canadiancouchpotato.com/2016/07/18/how-foreign-withholding-taxes-affect-returns/
----- BHCh October 9, 2016 at 11:26 AM
Thanks - I saw that. Which makes me think that in a non-registered account MER advantages for US-traded ETFs such as VXUS are offset by withholding tax losses.
So it really comes down to losses due to currency exchange vs slightly higher spreads on Canadian-traded ETFs, such as XEF.
----- Michael James October 10, 2016 at 3:31 PM
@BHCh: There is one other complication that can enter into this. Suppose you're deciding between two strategies that are the same, except for two things:
1. Some VCN in a non-registered account, and some VXUS in an RRSP.
2. The same amount of VCN in an RRSP, and some XEF (whose total value is the same as the VXUS) in a non-registered account.
Then another consideration on top of the ones you've mentioned is the Canadian dividend tax credit. The value of this tax break is income-dependent.
For my own situation, I found the best way to compare strategies was to lay them out completely and add up all the costs and benefits.
----- BHCh October 12, 2016 at 8:03 AM
Yes, good point. It's not designed to be simple...