Finance

Why Simplify It All?

Someone always wants your time, attention or money.

Businesses build in complexity to distract you. Thus it is extremely important to simplify and eliminate the unnecessary.

All this distraction is meant for people to drown out their own thinking. Zoning out allows businesses to imprint what they want you to feel and then for you to buy without questioning.

More information and more choices does not necessarily help you make better decisions. In fact you will more likely make a bad decision due to utter confusion.

Everyone KNOWS what to do. The issue is why is it so hard to do the right thing?

That is why I keep writing about keeping things simple. Anything I need to waste bandwidth on must be something that only I can do. Otherwise I best leave it to automate without me.

The internet is a wonderful tool- for good and for bad. The internet answers almost any question one can imagine. The bigger problem is making sure that you are asking the right questions…for yourself.

The only way that I can get myself to do pretty much anything is to simplify it. That is just how I am built.

Your mileage may vary.

That’s another thing I write about, you have to know yourself. Many options become clearer once you know what you are looking for.

I will give an example of simplifying. I practice daily yoga at home. In the beginning, I read about hourly routines which required joining classes and more physical fitness than I possessed.

I realize that big sticking points for me is trying to attend classes. That’s one of the by products of being self employed and semi retired for so long. My ability to show up on time at places has plummeted dramatically.

Thus I finally settled on a home routine for thirty minutes. Even that was too much. I found myself not doing my daily practice.

So what worked? I found a fifteen minute routine at home was the best for now. And I know that this is optimal for me since increasing the routine by a mere five minutes will make me stop practicing.

I was often surprised how small a change I would need to make myself not want to do something. Simply adding five minutes to a routine could make me stop a daily practice.

That’s the takeaway for me. I needed to keep any new habits extremely simple and then add to it very slowly. Like very very slowly.

What is my point with finances?

I find people have these outsized plans for investing. But then I find that they are in debt and have barely anything to show after working for over a decade as a physician.

I have become brutally honest with some close friends. I have to tell them that investing in more of a high school stage. Unfortunately for them, they are in the kindergarten stage. They have not graduated from the basics of money management yet.

I repeat, everyone knows what to do but most can not do it.

Folks need to take it slow and focus on the small steps that one can control. They need to follow through consistently. Managing money is similar to building a muscle. These habits take time.

And you need to develop the foundational habits of earning and saving. Investing is high school. You do not gain admittance until you pass elementary school first.

But trust me, if you can not consistently save the money. An “emergency” will surely come along and FORCE you to be unable to hang onto to your perfectly planned investments.

You can not control financial markets or regulatory risks. But you can focus on building a strong foundation so no matter what happens, you will survive and perhaps thrive.

I notice it is the older folks who write me about keeping things simple. And many of these folks are very wealthy.

I am beginning to see a correlation.

There is a template with those who keep their wealth.

You will notice that they play plenty of defense at this point.

The end game is to keep the wealth. Staying wealthy is a very different animal than getting wealthy.

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Finance

Just One ETF

Thinking through VGRO. The Vanguard asset allocation ETF which is comprised of 80% global equities and 20% global bonds.

I prefer the Vanguard Asset Allocation ETFs since they are less active in their methodology. They tend to use global equity weights which are based on plain market capitalization.

I have been thinking about changing all my investments to one ETF. I have already been using this ETF in my TFSA. I am fine with this asset allocation since it is for a decades long investment. Truly an investment for my children.

However I have been thinking about using this for my CCPC as well. This is not as crazy as it sounds. There will be behavioural benefits for me if I can make this change.

Currently I am using a three fund model portfolio from Canadian Portfolio Manager. But with my last bout of tax loss selling, I can foresee behavioral errors on my part.

It was kind of annoying to have to rebalance amongst three ETFs. And this was even with an automatic excel spreadsheet.

Plus I am starting to realize that this might not be sustainable.

I have never been one to think that more work equals more benefit. I have never seen that played out consistently.

A good example was during school. I would study consistently but I never stressed about EVERY LAST DETAIL. Like so many of my classmates did. Instead I found exam time rather relaxing since by that point I knew that I had put in the work. It was time to exercise and sleep well. This never failed me.

Maybe investing is similar. Maybe if you have the general plan, all this shuffling in the background does not accomplish much of anything.

I listen to these fund managers/ advisors who sound really smart. But when the market tanks what do most of them say? They hold on for dear life. Gee isn’t that similar to what anyone who doesn’t have an advisor would do?

I believe that no one knows.

Which brings me back to using just one ETF. If no one knows and no one can mitigate the inherent risks. Then why pretend that holding 3 funds and inserting my likely errors would make things better?

What is the alternative? Use a roboadvisor who also charges 0.50% fees on top of my ETF fees?

Or I could just use VGRO.

It has a higher MER but it is also simpler. There may be an extra fee/ tax inefficiency of 0.3% compared to using my 3 ETF portfolio. I am still waiting for Justin Bender to write about this.

Or I could use an advisor who would likely charge us about 1% AUM. No thanks. I do not believe my finances are very complex. I am not sure that they can do all that much for me.

I will stick with my accountant. I definitely need him.

If I use VGRO as my sole ETF I accept that I will pay more. I also accept that it will not be the most efficient tax-wise or the lowest cost.

But I think that it will make things easier for me. That’s often what works best for me in the end.

So my portfolios may start looking like this.

RRSP Use laddered 5 year GICs
CCPC (60/ 40) 75% VGRO + 25% HISA/ GIC
TFSA (80/20) 100% VGRO

I would use 75% VGRO and 25% high interest savings accounts in my CCPC. This would essentially make my CCPC a 60/ 40 portfolio. But with less moving parts.

I would maintain liquidity since my savings account earns almost 2%.

The reason I do not bother worrying about the details is that I can not predict future effective tax rates. No one can. So I refuse to waste bandwidth worrying about it.

It is like anything in life. If you can do enough things right, you will get where you need to go.

The main reasons I have for choosing VGRO (80/ 20) over the new VEGT (100% equities) are as follows:

  1. I will pay more in MER but this ETF will balance automatically. And this is what I am paying for. I simply love automatic systems.
  2. Less tax loss selling. This is a good thing. I saw the difficulty with tax loss selling and getting caught in the whip saw during a trade. I can only see this being worse when I am dealing with a much larger portfolio value.
  3. Premium bonds issue. Well there is no free lunch. Apparently this is worse when interest rates were falling. But we have the reverse scenario now. Thus the premium bond issue is not a permanent issue.

All in all, I am certain that my entire investment plan will not fall apart because I lost a bit extra to foreign withholding taxes or to premium bonds taxation in 15% of my portfolio.

Wait till I tell my husband what I have decided….

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Finance

Financial Habits Are Simpler Than Health Habits

The main difference between finance and health is behaviorally the most important difference. That difference is automation. I have often written how health is very similar to finances. That is true but only to an extent.

Nowadays we have automation and computer algorithms which can keep your finances out of your view. Everything could be done for you without you even knowing it.

I believe that is the main reason why I have difficulty with health habits. No one else can eat for me. And no one else can exercise for me. This is something I need to bring to my attention three times a day at a minimum.

When it comes to finances your superpower is the fact that you can choose not to pay any attention to it. Now you could use this for self harm via unconscious spending.

But those who read personal finance blogs, we know that that’s not the case with many of us. The opposite is happening where everyone believes that somehow they’re going to find the “secret sauce”. There is no secret sauce.

And even if you think you found the sauce, it is probably not gonna stay that way forever. Which means you have destined yourself to perpetual vigilance which sounds kind of exhausting. Ask any helicopter parent how that all turned out.

Or you could recognize that you have no control over much of this. You can do the big things correctly. And just leave the rest alone. Like I keep repeating here, you can deep dive down the rabbit hole for hours on end. Or for years on end. And then in one fell swoop the government changes something and then it’s all for not.

Instead you can use this newfound time to enjoy your family, more time for yourself, to take better care of your health or with changing your career to something that you enjoy. You could take up new hobbies, the list goes on. This is your one and only life. Why waste it drilling down holes that you have zero control over.

I’m not sure if this is enlightenment or I’ve just gotten older. I have travelled down those roads before. I just seem to have less patience for BS nowadays.

Furthermore I’ve never seen my being “smart” actually enhancing my life aside outside of school. The crevasses that we fell upon in life came about because we believed we were smart. If we just kept things simple we would have avoided many of the mistakes.

But similar to my children this is something that many have to find out for themselves. I am at peace with that.

I think most people are the same. It is when they have lived their own mistakes is when the real learning begins. Anyone can read about mistakes and think that it only happens to “other people”.

When the mistakes occur, you can blame society, the government, your profession, or other people. Or you can start to look within yourself and recognize what triggered you to make such a silly decision. Until you can figure that out about yourself, it will just be another temptation which will bring you to the exact same decision point.

So back to automation. This being the biggest difference between health and wealth. I am working on my tripwires with health. But that’s why automating wealth practices makes it’s extremely simple.

Your income gets automatically deposit into your account. You can set up auto payments for all your bills. You can set up auto transfers to your investment accounts. You can set up dividend reinvestment plans for your investments. You now have access to asset allocation models which allow you to do nothing.

I can’t think of this being any easier for people. There are tracking program such as Mint which can tell you how much you spend. The world we live in nowadays has made it extremely simple.

Now you only have to be wise enough to use it.

And then to stop tinkering with it.

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Finance

My CCPC Options 2019

I am a fan of simple investing. I plan to use the Vanguard Asset Allocation ETFs in my portfolios.

My options for my 60/40 CPCC taxable portfolio includes:

  1. 75% VGRO + 25% Cash/ GIC
  2. 60% VEQT + 40% Cash/ GIC

My reasons for considering Option 2 are as follows:

  1. VEQT is 100% global equities and I may be able to use this for future tax loss selling. I hold VGRO in the other accounts which would limit my tax loss selling.
  2. Decreased MER to 0.15
  3. The average bond duration in VGRO is about 7 years with a yield of 3%. The 1 year GICs in my local credit union is offering 2.5% and are usually liquid if needed.
  4. My cash/ GICs are 100% guaranteed by either the CDIC or the provincial credit union insurance
  5. I do not have to think about premium bonds which seems to be a moving target.
  6. Either way, I have to balance two pots of money so buying VGRO with the added issues will not decrease my workload.

I am always interested in anything that makes my investments more efficient without adding further complexity. But I will not take more costs with no decrease in my work. I will pay more if there is a clear benefit.

I am still debating on which option to choose. But I thought I would write down my thought processes.

One rarely knows if they’ve made the right decision. But it will be instructive for me to see my thinking process behind my decisions when I review this in the future.

I am not looking to pay the lowest fees/tax. I am actually looking for the simplest option which encapsulates more of the good rather than the bad. And that is good enough for me.

Unfortunately one can spend so much effort worrying about foreign withholding taxes, etc while losing sight of bigger risks.

As I say time and again, this is not about paying the lowest prices. It is about paying for value. And the main value of money for me is to make my life simpler.

If there is no way for me to make these investments easier, I would just pay for an advisor. I don’t believe that I can do it better than anyone else.

But with the advent of these Vanguard asset allocation models, I have a chance to replicate what a portfolio manager would do. And for very little cost. That is too enticing to give up.

Folks now require financial advisors to help them with their overall plan. Portfolio management can be outsourced to Vanguard. Advisers are very useful to help those who would be a danger to themselves during market downturns.

I have been through two major downturns and have never sold any parts of my portfolio. I do not worry about that anymore.

I only alter my portfolio when another strategy is overwhelmingly better. I do not sell due to the price alone. And I certainly do not sell due to fear.

I tend to be a net buyer during downturns. I do not sell unless the other opportunity will give me a much greater return.

One has to be rather unemotional when it comes to these instances. If you find that you start rubbing your hands together in glee or you become too fearful, that is opposite sides of the same coin. I don’t think either of those are healthy.

If you do not feel confident that you will systematically rebalance, then it is best to use a financial advisor. Or buy one of these asset allocation portfolios and let the fees/ tax chips fall where they may.

These portfolio managers will do a much better job than I would. I am certain of this. There is a reason I have stuffed my tax-free accounts full of VGRO.

But taxes change everything. Taxes are the largest expense. So you best keep an eye on them. If you can do something that helps you reach your goal 80% of the way, it’s good enough. Trying to get 100% of the tax benefits will probably drive you mad. Furthermore this government has proven that they are adept in plugging up the holes that you think you’re so smart to avoid.

You will never fully escape taxes but it would be prudent to minimize where one can easily. I stress the easy part. Because if they reverse what you wasted so much time and money on, you won’t feel totally defeated.

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Finance

Invest Like Costco Shopping

I think I invest similar to how I shop at Costco.

I have noticed some similarities between how I choose my investments especially ETFs versus how I choose to shop at Costco.

I am the ultimate satisficer. Most everything is good enough for me. I am the opposite of a maximizer.

I don’t believe that I need the best. Most times I have zero desire to have the so- called “best”.

Based on this value system, it impacts the way I invest immeasurably. I no longer believe that there is the most tax efficient or the most fee efficient based way to invest.

Maybe it’s also because I have just gotten older. I have spent decades thinking it made a difference. Now I know it really doesn’t make a difference….for me.

Furthermore my belief is that having financial independence involves not worrying about such matters. I would never go out of my way to be inefficient. But when it comes to the mental juggling of “maximum” tax efficiency, I see it is kind of a waste of time.

When it comes to investments it’s based on ultimately what you get to keep at the end of the day. And these factors can move in multitude of ways that you’re not even aware of.

And these factors are impacted by so many other factors that it would be implausible to predict how it would end up. If one cares this much, it might be best to attain a good accountant who understands what you fret about most. Then he can review your entire tax situation and help you get the best result.

So called “tax efficiency” is net of expenses, net of taxes owed on dividend and interest income, net of taxes owed on capital gains distributions, and net of taxes owed upon the sale of the investment.

You need look at the entire picture.

What difference does movements of taxes which one has zero control have over someone who becomes greedy and has an asset allocation that is too risky? When the markets drop, they become petrified and they actually cash in their whole portfolio.

I really think more people need to think about their entire plan. It is so easy to go down the deep rabbit hole and believing that you have that much control of your taxes.

I have made a conscious choice to be a DIY investor. That is because we could pay a large amount of 1% or more of AUM. And these advisers cannot promise me that the market will not go down.

Nor can they protect me.

I am mitigating this expense by keeping my investments extremely simple. I don’t keep rethinking them. I know that I will not improve my chances.

Many of these advisers talk about financial concepts and they sound smart. But they can’t control the market. Their clients and their portfolios will go down just like everyone else.

I chose to pay approximately 8 basis points more to use the Vanguard asset allocation funds versus splitting them up into individual ETFs. This is a conscious decision.

This is where the similarity with Costco shopping comes into play. Items at Costco are not always cheaper than elsewhere. But it saves me energy to not have to drive all over town looking for the cheapest product. This is why I use these asset allocation funds.

You can always get a cheaper price if you work hard enough. I do not want to work that hard. There is a point of good enough when it comes to the cost savings for me.

Your mileage may vary.

It depends on the stage of life that you’re at. It depends on if the amount you’re putting into this portfolio is all that you have. There’s so many other questions that you need to think about. And it’s fundamental that you think about these.

Using your time deep diving down tax holes may take your focus off the bigger questions you need to ask yourself and your family.

Simplicity will often trump complexity for me.

But know thyself. Some folks can not stop themselves from manoeuvring to get every last point from any endeavor. If you are one of those people, it’s probably fun for you. Then I say knock yourself out baby!

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VEQT

Vanguard is amazing. Full stop. I had been wondering how to work VGRO into my CCPC portfolio. Apparently the premium bonds were taxed very inefficiently.

As I had been wondering about this, Vanguard has responded with VEQT, the Vanguard All- Equity ETF portfolio. Sweet.

I can now move my 3 fund model to a 2 fund model now.

I will likely hold ZDB which is a discount bond ETF and laddered GIC’s or HISA depending on the 5 year GIC rates. It is not always worthwhile locking the money up when the rates are so low.

Yes, the purists will say that it is cheaper to use VCN and XAW. It most certainly is. But less is often better for me behaviorally.

Now I can round out the use of these asset allocation ETFs for my taxable accounts. It had been the bond component which was holding me back for the past year. No one wants to be taxed inefficiently on purpose.

VEQT started trading yesterday on Chinese New Year. It is Year of the Pig.

I will see how others will structure this into their portfolios.

Anything that will allow me to manage my portfolio easier is a welcome addition. I foresee using VGRO for all the tax free and tax deferred accounts.

Then use VEQT for the taxable accounts.

Now if Blackrock responds with their own all equity ETF, it will be interesting to see if tax loss harvesting will be possible with these asset allocation ETFs.

Regardless this is a welcome addition. I am seriously looking forward to see how Justin Bender and Dan Bortolotti recommend folks use these. Their recommendations thus far have been spot on. They are such a massive resource.

I always appreciate how they tend to see the bigger picture and advise simplicity where they can.

As I often believe, the investing side is dead simple when it comes to paper investing. It will be how one designs their financial lives to mitigate one’s bad behaviours which will make the difference.

Things certainly seem to be moving in the right direction in Canada for DIY investors.

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2019 Retirement Plan- Table Form

It should be evident by now that I think in terms of numbers, tables and spreadsheets.

I have been this way for as long as I can remember.

I believe in income floors for guarantee and to use my CCPC for our discretionary expenses.

My usual expenses can be approximately 60K per year.

Retirement Plan

For me and hubs 65 years old 70 years old
CPP x 2 85% Max 1916/ mo 2721/ mo
OAS x 2 1202/ mo 1634/ mo
RRIF 35K/ year 40K/ year
Income Floor 72K/ year 92K/ year

The above is invested and planned for safety and guarantees. That is why I use 5 year laddered GICs in our RRSP.

I have projected what we could receive at 65 years old versus waiting to start our CPP and OAS at 70 years old.

Waiting to start our CPP and OAS would be cheaper and simpler than buying an annuity.

There are many ways to get where you need to in life. You can go where you need to go by slogging through a dirty swamp. Or you could take a boat. It is all up to you and what you consider fair trade offs.

And don’t forget, just because YOU think it’s so darn macho to wade through the swamp. Your dear wife may really really want to take the boat!

I prefer an element of guarantee for the amount of money needed to support our basic lifestyle. There can be no market risk, inflation risk or longevity risk with that amount. Thankfully my husband is in 100% agreement.

If our discretionary portfolio performs well, we can always increase our lifestyle if we want. But either way, I need to know that we will have a safe floor to support our basic lifestyle.

I realize that building the income floor is expensive. Especially in today’s low interest rate environment. Therefore, I do not need a large income floor.

I do not use our cash flow real estate in this calculation. I do not consider this risk free. Unfortunately, the risk is usually me but I digress.

I certainly do not use the equity market in this calculation. Stocks need to reside mainly in my discretionary portfolio.

If one has a defined benefit pension plan which covers their living expenses, then one could simply use that. Most self employed physicians do not have these.

Do not worry guys, you also do not need it.

I will review my retirement plan yearly. That is the point, this is a plan. It is meant to be reviewed.

The only certain thing in life is change. Learn to embrace it. It is not going away.

We could be so lucky as to get to these senior years. Thus I will do my best to make certain that we will not be worried about finances at that time.

So gentlemen, make sure to ask your wife if they want an income floor. You might enjoy retirement based on a safe withdrawal rate. But your wife may secretly be freaked out.

It takes time to build these structures into your financial plan. It starts with laying the foundation now.

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