Asset Mix II: Find Your Balance
1. The first step is to Figure out your net worth.
I haven’t decided what to do with our condo value. Conservatively, I suppose we could just add the money we paid off against our mortgage. Or we could follow the market and assume appreciation, but that would only be paper gain, and it makes me uncomfortable (remember, only hard cash is real money!)
For the moment, I will not account for real estate in our Cash Net Worth for the purpose of investing.
2. Decide how much we’re both willing to invest.
We pool our money together, what’s mine is his and vice versa. So we have to agree on this, and since my husband is like a Depression-survivor, too, I’ll have to do some convincing.
Depending on one’s age, time to retirement, health, employment situation and annual income, there will be a percentage that is safe to keep in stocks.
Given our age and health, typical allocation recommended for us would be 70% Stocks / 20% Bonds / 10% Cash.
My personal low tolerance for risk won’t allow me to invest more than 10% of our cash, at least at the beginning. I have a feeling that the more money we have, the more conservative we will become – unless our investments are very successful. How successful? Well, I’ll be conservative and consider a success anything over 6-7% return after tax. This theoretically beats inflation and the little extra would make it worthwhile to bother investing at all. If do it for the inflation alone, why not use GIC’s (or bonds), which net 3% annually after tax right now.
3. Decide whether to invest once annually or add some $ every month/quarter.
I’m leaning towards the Lazy Portfolio – diversified index funds portfolio. Not very exciting, in fact boring, but supposed to bring good reliable results. 35% Canadian / 20% US / 35% Global / 10% Bonds (possibly, still don’t like bonds much). Diversified enough, and not completely boring.
4. Have fun
Yes, I do want to make money through investing. But I want to have some fun with it, too! So I’ll keep my Play Money fund, and will increase it to $5,000. I’ll invest that money into individual stocks.
This is the plan that took me 2 months to flesh out. Very simple, but hey, I’m a beginner at this, and if I’m to believe any of the books I’ve read, this could possibly be the way to outperform most managed mutual funds out there.
RE: point 3.
While I’m in the middle of aggressively paying off non-mortgage debt I’ve been planning an investment strategy to follow for retirement. I thought I would share with you what I had in mind.
I’m leaning towards setting up a self-directed RRSP with Credential Direct.
I then contribute 10% of my paycheque to index funds (TD e-Series Funds seem to be good) in the RRSP.
Fill out “Form T1213” to “reduce tax deductions at source” so that I don’t pay any income tax on what I contribute to my RRSP.
And lastly, every year or two I transfer money out of the Index Mutual Funds into exchange traded funds (ETFs.)
This approach has the benefit of dollar cost averaging, low MER index funds, even lower expense ETF purchased infrequently to keep the trading costs low, and is tax smart in that the government doesn’t get to hang onto income tax that I should never have paid due to the RRSP contributions.
I’m also toying around with the idea of purchasing stock with an emphasis on dividend payments as these are taxed favourably. I’d probably do this outside of my RRSP.
Whatchya think?
Hi Gwaine,
sounds like a well thought-out plan. You know your situation best.
Last July I opened up an RRSP eFunds account with TD. I started with the minimum $250 in each TD Canadian Index and TD Monthly Income, and I set up automatic $100 monthly withdrawals (split 45%/55%).
It worked well until I realized it doesn’t really make sense for me to have an RRSP at all since I plan on leaving Canada in approximately 3 years. So I closed the account. Upon closing they automatically deducted 10% tax since the amount was under $5,000. Luckily the interest this investment made in about 9 months covered the tax amount! So I basically got all my principal back. Of course I also have to add it to my income this year.
What’s the moral of the story? I don’t have any real advice – I sincerely believe you have a good plan. Just thought I’d let you know that I was happy with the short-term return of the eFunds and the whole experience was easy. Their customer service was good, too.
Best of luck to you 🙂
Thanks for the information, yes it’s a good idea to look through this area before the RRSP deadline arrives, in case there are still ways you can save on your taxes.