Nov 172016

Asset Allocation

Many investors use a common rule of thumb to help with their asset allocation. They simply hold a percentage of stocks equal to 100 minus their age, and put the remaining amount in fixed income assets. So for a typical 30 year old millennial, 70% of his portfolio would be in equities, and the rest (30%) would be comprised of bonds and other relatively safe investments. Determining stock allocation based on age is an effective strategy to gradually reduce one’s investment¬†risk over time. ūüôā


But this 100 minus age guideline is starting to become outdated because people are living longer, and bond yields are at historical lows. So we can modify the rule to be more suitable for the current times. For example, we can increase the baseline to use 110 minus our age. Those who have a higher risk tolerance than average can even go with 120 minus their age. Also, men have an average life expectancy of 80 years old in this country, while women can expect to live to 84. Since women live about 4 years longer than men on average, they would probably have higher costs in retirement than men. This means ladies have an incentive to be a little more aggressive with their asset allocation, especially during their working years compared to guys, assuming all other factors being equal. ūüôā

Keep in mind that this guide to asset allocation speaks only to financial assets within a liquid portfolio. It’s also important to consider real estate, geographical diversification, taxation, idiosyncratic circumstances, and other factors when building a balanced portfolio. The 100 minus your age rule isn’t right for everyone, but it’s a good place to start for those who are just starting out to invest. ūüėÄ

Random Useless Fact:


Jul 072015

Deciding which accounts to hold different assets in

Should you put stocks in your RRSP or TFSA? What about fixed income like bonds? This post will answer these types of asset location questions. Readers should already be somewhat familiar with tax advantaged accounts such as the RRSP, and regular taxable accounts.

The importance of asset location

Asset allocation helps to spread out our risk so we don’t put all our eggs in one basket. But asset location is also important because different types of investment incomes are subject to different tax rates. We can hold our investments in special tax advantaged accounts to shelter our profits so we don’t pay more tax than we have to. ūüėČ

asset location for investment efficiency

In an ideal world we would hold all our investments inside tax advantaged accounts such as a TFSA or RRSP. However some people have more investments than what their tax advantaged accounts will hold. If that’s the case then investment income that is taxed at higher rates should take priority inside a TFSA or RRSP. So with that in mind let’s get down to the nitty-gritty. ūüôā

Which Investment Vehicles to use: TFSA, RRSP, or Non-Registered

Where is the best place to put stocks, bonds, mutual funds, and ETFs? Should they go in an RRSP or a TFSA? There is no categorically correct answer. But here are some general guidelines that I would follow.

If you only use RRSP and TFSA:

  • RRSP for interest producing investments and U.S. dividend paying stocks.
  • TFSA for everything else.

If you have RRSP, TFSA, and a non-registered account:

  • RRSP for interest producing investments and U.S. dividend paying stocks.
  • Non-registered accounts for Canadian dividend paying stocks and preferred shares.
  • Everything else can go into the TFSA.

For a deeper look, below are two charts that go into specifics. The first chart shows how different types of investment income is taxed in different kinds of accounts for someone in the 31% marginal tax bracket. The second chart suggests the best accounts¬†to buy different types of specific investments in. ūüėÄ


Additional asset location notes to consider:

  • If we¬†hold U.S. dividend stocks in a taxable¬†account we’ll pay the 15% U.S. withholding tax off the top. But we can claim¬†a foreign tax credit on our tax returns to recover some or all of this amount. However we’ll pay tax at our marginal rate on the full amount of the U.S. dividend. The result is that U.S. dividends held in a non-registered account will be taxed at the same rate as interest income.
  • Dividend income from U.S. dividend stocks in a Tax Free Savings Account (TFSA) is also subject to the 15% withholding tax, however this tax is non-recoverable. But the remaining dividend and any capital gains will not be taxed.
  • Dividend income from U.S. stocks in an RRSP are exempt from the 15% withholding tax. But this only applies if we directly hold a stock or ETF traded on a U.S. exchange. If we hold U.S. stocks in a Canadian mutual fund or ETF, we will need to pay the unrecoverable 15% withholding tax on the dividends.
  • Although many investment incomes are tax efficient while being held in an RRSP, any money withdrawn from the RRSP or RRIF later on will be subject to income tax at the full marginal rate and could trigger claw-backs for income tested government benefits like OAS.
  • Tax efficiency should not be the only factor when deciding which account to put an investment into. Simplification of record keeping, personal financial situation, risk tolerance, and retirement goals all have to be considered.
  • For most intents and taxation purposes RESPs behave the same way as TFSAs. RRIFs and LIRAs behave similar to RRSPs.

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Aug 012014

There’s a saying that younger¬†people¬†should invest more in equities (stocks) and older people¬†should buy¬†more bonds. Some like to use the “100 minus your age” rule to determine asset allocation. Start with the number 100 and subtract your age. The resulting figure is the percentage you¬†should allocate to equities, and the rest should be invested in bonds. For example a 30 year old investor¬†could have¬†the following portfolio:

70% = Vanguard Total World Stock Index Fund Investor Shares (VTWSX)
30% = Vanguard Total Bond Market ETF (BND)

This simple yet balanced portfolio should benefit from the long term growth of the U.S. and global markets, while providing fixed income stability ūüôā But should everyone follow this rule of thumb? Probably not. Age should not determine our¬†asset allocation. Consider the following situations.

Economic Situation:

U.S. government 10-year bonds today only pay about 2.5% interest a year. But ten years ago they were paying twice as much. This means in order to achieve an adequate return on a fixed income portfolio today we would have to mix in higher risk investments such as non-investment grade bonds and mortgage backed securities. However at some point the risks will not be worth the expected returns. So in a low interest rate environment it may be prudent to lower our exposure to bonds, and stock up on more equities instead, at least until interest rates move higher.


Three decades ago those 10-year government issued bonds were paying 15% interest a year due to a more robust economy and higher interest rates. In that kind of situation we want to¬†be overweight in bonds because the¬†15% annual return is¬†virtually risk free since it’s guaranteed by the U.S. federal government ūüėÄ

Personal Situation:

If a young person in his late twenties has $50,000 in savings, what should he invest in? We see questions like this on Reddit all the time, but it’s impossible to give a categorical answer without knowing the individual’s personal situation. If he plans¬†to buy a home in a couple of years using his savings as a¬†down payment then he should probably avoid risky investments and be 100% in bonds. On the other hand if he has no plans to purchase a big ticket item, and¬†he works¬†for a State university that offers¬†a generous fixed income retirement plan, then he should probably invest most of his own savings into growth stocks.

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Aug 082012

Skilled and outgoing individuals are what companies look for when they hire. They don’t care about how rich or financially successful an interviewee is. They’re called the “human” resources department because they’re responsible for recruiting the best ‘human’ capital. In part 1, I wrote about what¬†that¬†means, today will be about why it’s useful.

By properly maintaining our human capital and keeping our professional skills adequate we can ask for fair wages regardless of how inflated our currency becomes. This is because if our human capital is still valuable relative to the rest of the market then the services that we offer must also become more expensive to pay for.  As long as we keep improving our skills we should be able to keep up with the cost of living in our respective fields.

Even though I believe in general that human capital is our most valuable asset, it isn’t always the case.¬†It’s valuable when we’re young because even a teenager, who doesn’t have any financial capital, can utilize her human capital to babysit and readily make some income. However when she retires at the age of 65 then her human capital and financial capital switch roles.¬†Seniors are expected to have a paid off home, social security, and a decent pension or investment nest egg. But their human capital isn’t worth much anymore because seniors simply can’t work as efficiently as they used to.

This is why it’s important to save and invest during our working years. Eventually we won’t have the capacity anymore with our human capital to pay the bills. When that time comes, which is inevitable for everyone, we better have enough financial capital such as rental properties, or dividends, to offset our declining working potential so we can still have a dignified retirement¬†(^_~)

One last thing I’d like to highlight. We all have a financial plan. But a lot of people mistakenly ignore human capital when making their plan. If a financial advisor says he can help us create a complete financial plan based on just our tangeable variables like salary, age, risk tolerance, and when we want to retire, then that’s not entirely true. Someone may think he should invest 60% in stocks, and 40% in fixed income (like bonds) based on his current financial situation. But once we include human capital into the equation we may learn that he’s a university professor. He will retire and receive a defined benefit pension (fixed pension) which is adjusted every year to the cost of living. Since this will already represent a generous amount of¬†fixed income in his retirement years (which he didn’t account for before) he may now want to be a little more aggressive with his asset allocation for his personal investments.

The age rule for calculating how much fixed-income vs equity you should have.

Human capital can give us a more complete picture of what our financial plan ought to look like. That’s why we have to learn about and get to know our own capacity for human capital, because a big part of financial planning has to do with personal worth, and no financial planner in the world can know our own potential better than ourselves.

Random Useless Fact:¬†Talent doesn’t always improve our human capital. There are many useless skills out there, like the one below, which probably won’t help you increase your income.