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Portfolio Changes Coming Up

Motivated by the limits of certain types of registered accounts as well as a growing portfolio that is now large enough to access new options, I’m planning to make a few portfolio changes this year:

1) We’re moving from TD e-Series funds to ETFs. The commission-free ETF purchases at Questrade provide one good way to do this and we’ve already opened a couple of accounts there. I’m not sold on Questrade yet so we’re changing the TD accounts over to give us access to online trading, which will let us move those to ETFs. That will leave less than 10% of our portfolio in traditional index mutual funds.

I’ll work with both Questrade and TD for a while to see which one seems like the best option. Questrade is definitely cheaper but there are a few potential concerns. TD offers some options to help reduce the trading costs so it may win out in the end.

2) Now that we have access to more options I’m starting to look at fundamental indexes. I can see the danger of ETFs since I’ve already had to restrain myself to only buying a few. However I’ve been interested in fundamental indexes for a while. I’m currently reading Rob Arnott’s book on the topic and it adds a lot of evidence to the basic idea that I’ve always liked.

I’m not completely convinced that they can keep doing as well as they have in the past. The fact that you can invest in a fundamental index now may change market behavior. But the basic idea is rooted in investors making simple mistakes that seem likely to continue. Whenever I hear about how the average investor under-performs by making a certain type of mistake, I try to do the opposite of that. Fundamental indexes may be a good way to do that. I’m looking at using them for a portion of the portfolio at first.

3) We’re running into the limits of the current tax shelters we’re using. There are some that I don’t want to use fully, particularly on the RRSP side, because they can turn out to be false savings for various reasons. This year I’ll be looking at a few including variations of the Smith Maneuver and corporately-held investments, which can work similar to RRSPs in many ways but don’t have the same low limits. The only potential issue with corporate investments is that they may require a tradeoff between higher fund fees and higher taxes.

As a last resort we can turn to regular unregistered investments. A lot of people talk about long-term returns there being close to 0 after tax but I’m not sure if that’s very accurate. It may look that way at the moment due to the generally low returns available, but it’s still better than not investing.

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  1. Dave
    April 3, 2013 at 12:22 am

    I’m currently investing through my company and I don’t have any issues with higher fees. I’m using Qtrade and they don’t charge me any annual fee to have my corporate account with them. I know for Scotiabank, they charge $300 just to open up an account, and a $100 annual fee for maintenance.

    As for tax, I’m using my after tax money, taxed at 15%, to invest. I’m currently taking dividend out of my company as oppose to a salary, so when my investments distribute dividends to my company, my company can then distribute those dividends to me without being taxed. Of course I’ll still have to pay personal tax on my dividends from my company.

    • April 3, 2013 at 1:14 am

      Good to know Dave! An account with a discount broker would be great. I’ve heard that some types of investment income are preferable in a corporate structure (for example Canadian dividends) so those ETFs may be the first to fill up that account. I think the only other advantage of corporate-class mutual funds is the ability to rebalance without having to pay taxes, but that’s not too big of an issue since I can just use new contributions or rebalance in other accounts. So in the end there may not be much of a barrier to holding a good portion of our portfolio that way.

      Of course the current federal budget may change things by limiting the ability of funds to convert gains into tax-preferred income, and removing part of the dividend advantage. I don’t think that’s enough to change my plans at the moment, which are very similar to what you’re doing.

  2. April 3, 2013 at 2:36 am

    I’m moving out of TD, myself. Vanguard ETFs here I come on Questrade.

    I actually really like Questrade in general. I find it easy to use now that I know how to. Of course it isn’t as foolproof as TD, but I do like saving money………

    • April 5, 2013 at 2:10 am

      I’m planning to write a review of Questrade later. At first I thought the service was terrible… then I realized that when I actually deal with any bank it’s about that bad. Online self-service has allowed me to avoid that and Questrade actually lets you do a lot yourself.

      That said, there was one part in the process of funding an account where I had to bypass some of their rules using my technical skills so I could get to the next step. It was something innocuous (the form wouldn’t accept a valid date) but it makes me wonder when this sort of thing is both necessary and possible.

      The only point in TD’s favor (almost) is that you can accumulate money in the e-Series funds and then do less frequent trades to ETFs so it’s not as expensive.

  3. Dave
    April 3, 2013 at 5:02 am

    I’m currently using solely ETF’s for investments, so the fee I pay are only the trading commissions and the MER. This is based on what my financial planner told me, but it seems for us Canadians, there are eligible dividends, ineligible dividends, and interest that stocks can distribute, and they’re all taxed differently depending on the stocks/ETF’s. I personally have no clue about how they work or what they do.

    Like you, I was aiming to rebalance with new contribution, instead of selling ETF’s, this way to save on any capital gain tax. Although now I’m reading Value Averaging by Michael Edleson, I might have to look into implementing selling as a way to keep my investments on track.

    As for the budget and changes, I read on Canadian Couch Potato that it’ll more likely affect those ETF’s with exotic structure, ie swaps or derivatives. Likely it won’t affect my portfolio, which is mostly plain vanilla ETF’s from Vanguard and iShares.

  4. Dave
    April 4, 2013 at 5:27 am

    Yeah, I hate the low bond yield now, especially when you get to the short term ones (I switched to VSB recently), wish I’m back in my parents’ time, investing during the 90’s…but then I wouldn’t be able to enjoy the internet and all the technological advancements haha.

    I don’t believe in holding cash either. There is more upside to holding bond funds, in my view, if the market is volatile, because it tends to have a negative correlation with stocks. Secretly I’m hoping that would be another crash so I can load up on cheap ETF’s.

  1. April 2, 2013 at 7:34 pm

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