How to get rich slowly
How would you like a cheap and low maintenance path to wealth? Count me in, cry investors who pay high fees for poorly performing mutual funds with long, confusing names.
Worse, the mutual funds, which inhabit most RRSPs, RESPs and RRIFs, provide little clue as to return, especially if one is making regular contributions or withdrawals.
Nor do the majority of investment statements give any hint about the fees paid to own those funds or how they perform relative to a benchmark, let alone the fund’s peer group.
As a result, investors dump money into products year in and year out without knowing how they are doing or their investment costs.
An excellent alternative is The Easy Chair -- a simple, boring portfolio using exchange-traded funds (ETFs). The management fees are very low and each product is clear -- you know exactly what you are getting and how it is performing.
The Easy Chair portfolio, created in 1997 by Eric Kirzner, professor of finance at the University of Toronto’s Rotman School of Management, has produced an eight per cent annual compounded return since then.
Though the ETF universe has exploded with 300 or more variations, choosing three ETFs for this portfolio is still far easier than negotiating the 15,000 plus mutual funds littering the Canadian investing scene.
The following is an updated RRSP Easy Chair, which adheres to the original principles but utilizes new products.
Unless you have gobs of it or just a small percentage, open a high interest RRSP savings account. Shop around for the best rates and don’t forget the virtual banks, trust companies and credit unions.
This approach is less convenient than having cash inside the main RRSP because you have to deal with two accounts. But as rates rise the gains will outweigh any extra work.
If cash is a significant part of an RRSP then a short-term GIC, or a laddered series of GICs (short, medium and long term) inside the brokerage account will offer flexibility and the best combination of return.
Right now with rate increases somewhere in our future, I’d go out no further than three years at the long end.
A short-term corporate bond Exchange Traded Fund (ETF) offers a high degree of security with a return that’s better than cash or government bonds. Such an ETF tracks or mimics an index that holds a basket of investment grade bonds issued by large, stable companies such as the banks, telecoms and industrials like CN.
From just a couple of corporate bond ETFs 10 years ago there are now many available. Any of the following will fit the bill:
- Vanguard Canadian Short-Term Corporate Bond Index ETF (VSC)
- BMO Short Corporate Bond Index (ZCS)
- iShares Canada 1-10 Year Laddered Corporate Bond Index (CBH)
I like large companies that pay dividends for the Easy Chair. You may not get the price growth that can occur with smaller companies or those in niche sectors but the risk is lower and you get the benefit of those lovely dividends which tend to increase on a regular basis.
Try these ETFs for Canadian equities:
- BMO Canadian Dividend (ZDV)
- iShares Canada Dow Jones Canada Select Dividend Index (XDV)
- Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY)
The Canadian market has a lower return over time and is less diversified. Therefore it makes sense to invest a portion of funds in U.S. equities. There are numerous dividend-focused ETFs listed in Canada that cover the American market.
Any of these are good candidates:
- BMO US Dividend Hedged (ZUD)
- First Asset Morningstar US Target 50 Index Hedged (UXM)
- iShares Canada S&P US Dividend Growers Index Hedged (CUD)
Hedged ETFs neutralize currency fluctuations, which isn’t a bad idea since the Canadian dollar is in flux.
There are many more choices than the ETFs noted but any of these will provide a good basis for an Easy Chair portfolio.
Last week, I described how to spread your eggs or allocate assets over the above four baskets. Generally, the sooner you need the money, the less you can afford to invest in the stock market.
Someone close to RRIF age and withdrawal requirements might choose:
- 20 per cent cash
- 50 per cent bonds
- 30 per cent equities
A retired person, 10 to 15 years from needing to withdraw funds for income, might select:
- 10 per cent cash
- 40 per cent bonds
- 50 per cent equities
A younger individual with lots of job security and a great workplace pension might pick:
- 5 per cent cash
- 20 per cent bonds
- 75 per cent equities
Look at your situation, temperament and time frame closely before selecting an asset allocation. Then pick your products and relax in the Easy Chair.