The Single Best Investment: Creating Wealth with Dividend Growth, is the title of a classic investment book first published in 2006 by Lowell Miller, who heads Miller/Howard Investments.
It came to my attention via Wes Moss, who I interviewed for an upcoming MoneySense column, whose book You Can Retire Sooner Than You Think we reviewed here at the Hub. I mentioned the book in passing last week in this MoneySense blog last week. That blog focused on asset allocation but provided a big hint about Miller’s philosophy: there’s no place for bonds in Lowell’s investment worldview.
The book’s first chapter sets the tone in its title: Say goodbye to bonds and hello to bouncing principal. Like many stock believers and bond haters, Miller takes it as a given that the investing environment generally includes inflation. Since “safe” investments like t-bills, bonds, money market mutual funds and CDs (Certificates of Deposits in his native USA; known as GICs in Canada) are all “poor investments because what they give is less than inflation takes away.” Read more
By Jonathan Chevreau
After Robb revealed his “conversion” and I appealed for other readers with similar stories, readers started to come out of the woodwork. In one of the cases, the “confession” appeared first at MoneySense and now here and the Hub.
In addition to the two readers profiled in the MoneySense blog, I’ve already started to receive more emails from other “pure” readers. Please let me know by emailing me at email@example.com. Hopefully, we’ll discover that there are a lot more than the half dozen I’m so far aware of.
I’ve republished the original version of the blog below and included photographs of the two readers that were not included in the MoneySense version:
Pure indexers step forward
Early in January, popular blogger and fee-only financial planner Robb Engen announced on Twitter and his Boomer & Echo site that he had finally bitten the bullet – he’d liquidated his portfolio of individual dividend-paying stocks in order to become a 100% “pure” indexer.
As he subsequently revealed in a blog at the Financial Independence Hub, he “felt like a part of me died,” but nevertheless manned up and sold off his 24 stocks, $100,000 worth of them. He replaced them with just two Vanguard ETFs that happen to be MoneySense ETF All-stars: the All World ex-Canada ETF (VXC) and Canada All Cap Index ETF (VCN) and “that’s it.”
Click on the link for the full story but the rest of this blog is about two young investors who responded to my request for similar dramatic Damascene conversions. It had seemed to me that Robb’s heroic conversion was unique although the pages of MoneySense’s magazine and books have occasionally been graced by a similar tale from Millionaire Teacher Andrew Hallam.
Embracing the Global Couch Potato
Jason St. Hilaire (@TcommeFinance on Twitter) is 31 and lives in Quebec City. The medical physicist started to invest seriously in December of 2011, when he put the ING Direct Balanced Fund in his TFSA and ING Growth Equity Fund in his RRSP. His early research made the case for index investing, so he put four TD e-Series funds in his TFSA (the Global Couch Potato portfolio).
“At some point I even bought some Bitcoins. You can see that I was all over the place.” Then, like Robb Engen before his dramatic turnaround, in the summer of 2012 St. Hilaire discovered the Canadian Drip Primer and the DRiP Investing Resource Center.
“I figured I could try my hand with good dividend stocks with nice yields …I built myself a 10-stock portfolio with no real investing plan whatsoever. I would buy what I would feel like buying.” By 2013, he and his partner were raising cash to buy a home, liquidated the index funds and transferred the stocks to their brokerage account. They still have three stocks: “I see the stock market going down and can’t help but tell myself to wait until my positions recover. Can you say ‘behavioral bias?’ “
Unable to stay completely out of the market, early in 2015 he restarted his Global Couch Potato portfolio in his TFSA, adding $200 every other week. “The dividend stock experiment was fun, but I don’t want to spend so much time researching companies and trying to find bargains. In my situation, going with market returns with a simple portfolio is appropriate. I just need to get over my own non-sense to finally become a pure, 100% index investor. And now that I just confessed this to someone, I might just do that.”
“Pure” since 2011
Another young investor who contacted me was Pat McIver (@mrpatmciver on Twitter.) After a brief fling picking individual stocks, he and his wife became “100% pure indexers” in 2011. They use only index-tracking ETFs for their RRSPs and TFSAs, and even for their toddlers’ RESPs.
“I had a professor at Carleton University tell me back in 2003 in his 3rd-year finance class that I shouldn’t bother trying to pick stocks, market time, or waste energy on trying to beat the market. He said the smartest thing we could ever do as investors was buy index funds (ETFs or mutual funds), and hold them.”
Despite this, after graduating, he dabbled in Nortel, RIMM, BMO, and CP but held them for only short periods and neither made or lost money. “I realized early on I was somewhat a risk-averse investor when it came to picking individual securities, and never had the confidence that I was able to identify the ‘winner’ fund or the ‘loser’ stock.”
With prescient timing, they withdrew funds from their RRSPs in August 2008 to buy their first home, and started to reestablish their RRSPs in January 2009 (also great timing!). They owned Altamira Canadian Index, TD International Equity Index Currency-Hedged and US Index and the actively managed TD Canadian Bond. They departed from this only to buy a few shares of Canadian Pacific.
In January 2011, after reading various blogs, including MoneySense, he switched his wife’s RRSP into iShares ETFs (25% XBB, 25% XIU, 10% XCS, 20% XSP, 15% XIN and 5% XEM.) Then Pat ditched the CP shares and a few mutual funds to go “all-in with index ETFs: 20% XBB, 35% XIU, 25% XSP and 20% XIN. “This past summer, I reduced the holdings in my wife’s RRSP from six to four.”
Pat says the blended annual cost is 0.31%. “We also switched our XSP for VUN and switched XIU for XIC to broaden our diversification in the US and Canadian markets, respectively.” They rebalance once a year.
“When we started investing again in early 2009, I decided we would go with a mostly-index-based portfolio. In 2011, I decided we might as well go on in and once our allocation weightings were set, just leave it and let it ride until we retire in 2036 (the earliest date we can retire as federal government civil servants).
As a busy family man with a two-hour daily commute, Pat is happy “knowing I have a broad-based diversified portfolio that is low-cost and contains minimal funds gives me great comfort (and no sleepless nights) that I don’t have to worry about whether I am “winning” or “losing” vis-a-vis the market. I doubt I would ever go back to being an active investor ever again.”
So, counting Hallam and a handful of advisors I know, I’m aware of half a dozen truly pure indexers. Anyone else out there? Email me at firstname.lastname@example.org.
… contributing as much as $5,500 to your TFSA (Tax Free Savings Account) if you’re Canadian. Launched at this time in 2009 and behaving somewhat like America’s “Roth” IRAs, it’s hard to believe this is already the seventh time you can contribute. By my calculations, that means $36,500 of collective contribution room plus any investment growth. That’s four years at $5,000 and now three years at $5,500: the maximum was boosted by $500 as an inflation adjustment for calendar 2013.
So if you’re one half of a couple, that means $73,000 in joint contribution room, even if you left it in interest-bearing investments paying almost zero. If you’ve been investing mostly in equities (either stocks or equity ETFs), it’s likely your TFSA had reached $40,000 or more by year-end, so it’s quite conceivable that some couples now have close to $100,000 invested in TFSAs between them.
Thursday, Jan. 1 was of course a holiday. While Friday, Jan. 2, 2015 is likely to be a quiet day for most, there’s no reason why you can’t contribute the next $5,500 to your TFSA that day, particularly if you use online banking and/or discount brokerages.
Good place for equity ETFs
What to invest in? In retrospect, those who invested in US investments with unhedged exposure to the US dollar would have done best up till now. Our daughter’s TFSA is more than half invested in US tech stocks and broader ETFs and the exposure to the greenback has boosted her TFSA to several thousand more than our own TFSAs with more exposure to the loonie.
Generally, I think a Couch Potato approach to investing in TFSAs makes the most sense, using broadly based ETFs from firms like Vanguard or iShares. Those closer to retirement may want a healthy exposure to Canadian dividends: foreign dividends will lose a bit of withheld tax in a TFSA and are better held in RRSPs for that reason. But for younger investors it may make sense to hold non-dividend paying US tech stocks in a TFSA for both the extra growth potential and the exposure to a strong US dollar that is showing no signs of weakening.
I still say the TFSA and Roths are the best games in an over-taxed town. While it’s true that many had hoped the 2015 limit would be more than $5,500, remember that unlike RRSPs, you can continue to contribute to TFSAs well past age 70 or 71: in fact, if you live that long you could still be contributing if you’re a hundred or more.
The key is to get the money in there as soon as you can and let it grow. And that means early January each and every year. While I think the benefit is particularly powerful for the young, they should balance the growth potential with debt repayment. There’s not much point in paying close to 20% a year in credit-card interest if you’re only earning 2% interest in a GIC or cash equivalent contained in a TFSA.
Why? Mister Canadian Couch Potato himself, Dan Bortolotti — now also an investment advisor for PWL Capital Inc. — explains the behavioural investment quirks that makes the simple complicated in my Wednesday blog at MoneySense.ca.
My latest MoneySense blog on robo-advisers can be found here.
If you’ve been listening to the news lately, then you’ve noticed that low-cost automated investment services are making the leap from the U.S. market to Canada. While in the U.S. they’re called robo-advisers, a better word for the Canadian versions might be semi-automated “light advice” services.
Recent issues of MoneySense have talked about the arrival of NestWealth, WealthSimple (which has just received regulatory approval) and WealthBar Financial Services. WealthBar’s website says it will be arriving “soon” and is registered as a portfolio manager in British Columbia, Alberta and Ontario. As well, SmartMoney—owned by Money Capital Management—is also about to launch in Canada. Most of these use exchange-traded funds (ETFs) as the underlying investment vehicle. That means investors can expect to pay either a monthly subscription fee or an asset-based fee of about 0.5% a year. Even adding in the management expense ratios (MERs) of the underlying ETFs, the total cost should come in at less than half what actively managed Canadian mutual funds or wrap accounts charge.
Apart from these startups, you can also expect to see more established firms reinventing themselves with similar models. Take ShareOwner Investments Inc., of Toronto. Since 1987, it’s been the place knowledgeable Canadian investors have bought individual stocks through DRIPS (dividend reinvestment plans). Last May, ShareOnwer announced the launch of a new portfolio building service that’s based now on individual stocks but—you guessed it—ETFs.
As with its DRIP program for individual stocks, ShareOwner’s ETF portfolio service is very cost-efficient. Contributions and distributions are automatically invested in all the ETFs in one of the five model portfolios chosen by the retail investor. As with the other services, asset allocations are reviewed and rebalanced to ensure they stay with agreed target levels. For instance, if Canadian equities are supposed to be weighted at 20% of a portfolio, the service won’t let the allocation dip below 17.5% or above 22.5%, says ShareOwner president and CEO Bruce Seago. (Previous ShareOwner head John Bart, is now retired.)
Clearly, long-standing ShareOwner customers own individual socks but many are now also using ETFs as the core of index part of their portfolios, particularly for international exposure outside North America. ShareOwner has about 500 Canadian and U.S. stocks. There are no commissions to buy or sell but a fee of 0.5% of assets is charged on the portfolio value, billed monthly, and capped at $40 a month for any account over $100,000. As an example, an investor may want to add $500 a month to portfolios holding between eight and 12 ETFs. The $500 will be spread among all those ETFs automatically with each payment, in the correct proportions and with no trading costs. Similarly, any cash from dividends will also be deployed and fractional shares can be accommodated.
Because the emphasis is on core, broadly diversified ETFs, the funds are mostly from BMO, BlackRock Canada’s iShares and Vanguard Canada, Seago says, although oehters are available for those who want custom portfolios. He adds that even if clients want to invest in both individual stocks and ETFs, they would maintain separate accounts for them. For the most part, the model portfolios stick to the major asset classes or stocks, bonds and cash, but those who want to do so can get previous metals or gold exposure through ETFs—one that holds mining stocks, the other that holds bullion—directly.
While the service is aimed at do-it-yourself investors, personal human advice is provided for those who feel they need help choosing an appropriate portfolio. “Building a portfolio does require thinking about risk tolerance,” says Seago. “Once you know how much risk to take, you can pick one of our portfolios—most of which usually match up with the needs of our investors. We are adding a human element on top.”