Saturday, 15 April 2017

Financial Basics 14 - Simple Investing

This post is about describing, in the most simple terms, how to get started doing your own investing.

When I looked back at my financial basics series, I realized that there were 4 posts (#7 through #10) dedicated to the subject of simply how to invest and what to invest in. Even though I tried to simplify the guidance, it still ends up being long and a bit complicated. This may deter people from trying to invest on their own, which goes against my reason for writing this series.  This post is to simplify the process of investing even further than those 4 posts. Hopefully this post will give you enough information to get started and as you get more experience and confidence you will read posts #7 through #10 and many of the other resources available.

As I say in post #7, I want you to save fees on your investments, by investing in low fee, Index ETFs inside a self-directed account that includes an RRSP, TFSA and possibly a taxable account.

Let's get started. These are the steps to follow:
  • Pick a portfolio of ETFs. 
    • The simplest is XBB, XIC and XAW. 
      • XBB - Bond ETF.
      • XIC - Canadian Equity ETF.
      • XAW - US and International Equity ETF.
    • The Couch Potato ETF portfolio (ZAG, VCN and XAW) is also fine.
  • Decide on your risk tolerance and decide what percentage of your portfolio is a Bond ETF (vs Equity).
    • For young folks or high risk tolerance Bond percentage should be close to 0.
    • For older folks or low risk tolerance, Bond percentage could be as high as 40%.
  • Calculate the ETF percentage in the portfolio.
    • The Equity portion can be about 40% Canadian and 60% US and International.
    • So if the Bond is 20%, then the portfolio is 20% XBB, 36% XIC and 44% XAW. 
  • Open a self-directed investor account, that contains an RRSP and TFSA accounts.
    • If you will have enough savings to fill your RRSP and TFSA and have some leftovers, then also open a Taxable account.
    • I use BMO Investorline, it works very well, but others work too.
  • Decide how much you will save each month.
  • Contribute cash each month.
    • Distribute this amongst your RRSP and TFSA, based on available contribution limits.
    • If there is savings cash over and above your RRSP and TFSA limits, put this to the taxable account. 
  • Buy ETFs every 3 to 6 months.
    • Given typical savings amounts, you should buy the ETF when there is about $2000 cash in the account, and at least every 6 months. 
    • Buy all 3 ETFs in each account according to your portfolio percentage.
    • Buy enough of each ETF to maintain the cumulative portfolio percentage. 
  • Do not do dividend re-investment. 
    • See post Financial Basics 11 for the reasons.
  • If you have a Taxable account, keep track of your Adjusted Cost Base (ACB) for investments in this account.
  • Keep track of your net worth

Additional Sophistication. 

This section adds some complication, but you will save a little on income taxes and reduce transaction fees. Instead of putting all ETFs in all acoounts we will only put them in some accounts which will reduce transaction fees. Putting each ETF in a specific account will reduce income taxes. 

There are two scenarios, with different levels of complication (sophistication?)

1. You only have an RRSP and TFSA. You do not have enough savings to have a taxable account. 
  • Put the US and International equity in the RRSP, as this reduces the withholding tax lost. Put Bond and Canadian Equity in the TFSA. You may have some of each of those in the other accounts, just make sure to keep your portfolio at the correct percentages.
  • Use the Portfolio Live spreadsheet to determine what funds you will buy in each account.
    • This link here is to a version of the spreadsheet already set up with the portfolio above (20% XBB, 36% XIC and 44% XAW) and just the RRSP and TFSA accounts.

2. In addition to RRSP and TFSA, you have enough savings for a significant amount in the Taxable account.
  • You should prioritize the location of specific ETFs in specific accounts to reduce you taxes payable each year. See the blog post FB#9 - Which Fund in Which Account.
  • Use the Portfolio Live spreadsheet to determine what funds you will buy in each account.
    • This link here is to a version of the spreadsheet already set up with the portfolio above (20% XBB, 36% XIC and 44% XAW) and using three accounts - RRSP, TFSA and Taxable accounts.

I hope this post helps you get started on your self directed investing. I am always pleased to answer any questions you have.

Disclaimer:  These posts are not fully comprehensive financial advice.  You should seek your own qualified investment, tax and legal advice.

No comments:

Post a Comment