Release the Cash

Well after sitting on just over $100,000 cash in our RRSP accounts for months now I finished my research in various Exchange Traded Funds (EFTs) and came to agree with the model portfolio option #4 over at the Canadian Couch Potato.

In case you are too lazy to click the link, the portfolio is made up of four major ETFs:

  1. VCN – Vanguard FTSE Canada All Cap
  2. VUN – Vanguard US Total Market
  3. XEF – Ishares MSCI – International
  4. VAB – Vanguard Canada Bond

I laughed because I had predetermined that I would break up our portfolios into 60% equity and 40% bond before I started the research and that is ironically the exact break down recommended by Dan (author of the Couch Potato blog).

So you might wonder what the hell the advantage of going to ETFs are?  Well in a word: fees.  The MER on this portfolio is a rock bottom 0.192%, given we were previously in an index mutual funds with fees of 0.7%, that means we are saving just over $500 per year in fees, which more than offsets the $80 in trades it took to deploy the cash into these portfolios today.

Also you have to consider compared to the average mutual fund fees is around 2% or higher.  So on $100,000 portfolio switching to these exchanged traded funds like this will save you $1808 per year in fees.  Yes you can earn almost an extra $2000 per year in gains just by keeping your fees lower…isn’t that just a little mind blowing? Especially when you consider that compounding of that over a decade.

In case you were wondering…if you invest $100,000 at 6.5% return, after fees of 2% you end up with $157,000 in 10 years.  If you lower you fees to 0.192% your final balance jumps to $187,0000…and that assumes you haven’t added a dime into those accounts.

So that is today’s point….keep your fees low.  It will help you in the long run.  So do you know what your MER fees are for your investments?  If so, how low/high are you?

14 thoughts on “Release the Cash”

  1. Well done. I have a “3 fund” portfolio in place. I love the simplicity and the diversification. 60/40. Total US Stock index, Total International Stock index and Total Bond index.

    I do use an Intermediate-Term Tax-Exempt bond fund in our taxable account. Trying to be as tax efficient as possible.

    The low ER is awesome. Many $ saved over the long term.

  2. Well, I virtually pay NO fees, as I mostly hold individual stocks.

    I go through the holdings of the various ETF’s and buy many of the same stocks that they hold.

  3. I remember reading (Andrew Hallam’s site, I think) that if you may be better holding VTI in and RRSP instead of VUN. It’s the same fund but VTI is denominated in US Dollars. You may lose a little in the exchange when buying and selling but if it’s in an RRSP, there is no US witholding tax.

    Other than that, your picks are virtually identical to my current RRSP holdings.

  4. I’m the same allocation using Dan’s Option #2 (TD e-Series funds). If I was younger I probably would have gone for a 20/80% split, but I’m over 40. Been on it for about 2-3 years now and thus far LOVE the simplicity of the Couch Potato. I really wish I’d found it as soon as his site went up!

    A few more years and Dan will be the Canadian John Bogle. …Though “Bortolottiheads” is much more difficult to say.

  5. You may have bought at a good time. The markets fell quite a bit over the last two weeks. Not sure which way they’ll go now. Any thoughts to setting stop losses, in case of big drops, so as to preserve cash, then buy back again when/if upward trend resumes?

  6. Jim – I don’t think Tim is a dirty market timer… 🙂

    I have held and hold some ETF’s this year but not for couching purposes. Pay little to no attention to the MER since I’m in and out pretty quickly on most. The one I’m looking at now is HDGE (hedge on SPY since the short interest % on SPY is now over 30%). Just waiting for a signal. CVOL also looking interesting (volatility ETF).

  7. Nice and simple post, that is how I originally deployed by fund in my Scotia iTrade account but gradually changed to just VCN VUN & ZRE. I may drop ZRE as I have a bunch of money in real estate through separate market exempt holdings.

  8. Congrats on finally picking a model portfolio! For my son’s RESP I picked the complete couch potato portfolio. Instead of holding VUN you might want to hold VTI, assuming your broker allows you to hold funds in both Canadian and US currencies.

  9. @Jim – The timing was more accidental than planned. I wanted to put the cash to use this month some time and happened to hit a bit of drop. I would try to avoid timing the market unless you have it as speculative cash, the return is uncertain at best.

    @Everyone – Thanks for the suggestions of other ETFs. I’ll look into them and consider them in the future. For now I’m going to just let the new positions do its thing for the next few months and then re balance in the New Year (or not if it hasn’t moved too far from the original %).

    @Emily – Yes it feels good to get the cash into work mode…just reminds me I sat on deciding this for too long. A classic reminder your worse enemy is yourself.


  10. If I knew what I know now 15 years ago, I would have aimed for a job with a utility and a defined benefit pension where others take my retirement risk and shortfalls are simply added to rates. So kudos for committing to what is probably the optimal risk minimization strategy in today’s environment at a very young age.

    Not having known what I know now 15 years ago, I am now entirely responsible for my own retirement and as such have been obsessively socking away money for a number of years. I am a big fan of TD e-series funds for recurring purchases and Vanguard ETFs for lump-sum purchases. Continuing to purchase e-series funds with every paycheque since 2007 paid off handsomely throughout the Great Recession. And to TD’s credit, I have had nothing but positive experiences with them.

    My only concern is that index funds, especially index ETFs, now seem to have become cool. The Economist had a lengthy article on their proliferation a few months ago. The Globe and Mail has written about them twice. Seven years ago, they were a niche product for a few personal finance buffs. Now people discuss them around the water cooler.

    I am a little worried about what will happen if the majority of the population will decide to simply buy and hold the index. What about all the small-cap stocks and emerging companies that are currently part of high-priced actively managed funds? Will they continue to receive the necessary funding to get a few of them to grow enough to make it onto the index? What about the relatively instantaneous response to good news / bad news items with large cap stocks? Will this be dampened if more and more people start ignoring the news? Let’s face it, sometimes there is a benefit to other people being irrational.

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