Personal Finance

Advices for a young investor atypical situation

  • Last Updated:
  • Aug 6th, 2010 5:51 pm
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto

Advices for a young investor atypical situation

Hi all,

I'm in a somewhat atypical situation for a young investor and am looking for advice. I have my own ideas about what to do, but I'm open to more experienced input.

Here are my important metrics:

Age: 29
Dependants: None
Cash on Hand: $375,000 (In a corporate account) and, 25,000$ (in a personal account)
Debt: $150,000 on condo purchase at 1.6% rate (condo is worth $350,000+)
Monthly Investment Contributions: $10,000+
Short Term Cash Requirements: $0

RRSP Balance: $2,500 (In a fidelity Mutual funds, -3% in the last 3 years)
RRSP Contribution Room: $13,000
TFSA Room: $10,000
Risk Tolerance: High

I'm comfortable with the technical implications of TD e-Series, ETFs, and several other financial instruments. So far, i have read many good books and internet articles that praise the benefits of a passive index investing strategies.

A 80% stocks / 20% fixed income sound good to me, something like this:

20.00% iShares CDN Composite Index Fund XIC
30.00% iShares CDN S&P 500 Index Fund XSP
30.00% iShares MSCI EAFE Index Fund CAD Hedged XIN
20.00% iShares DEX Universe Bond Index Fund XBB

Comments welcome ! :)
62 replies
Deal Addict
Oct 1, 2006
2484 posts
2802 upvotes
Montreal
patmanz wrote: A 80% stocks / 20% fixed income sound good to me, something like this:

20.00% iShares CDN Composite Index Fund XIC
30.00% iShares CDN S&P 500 Index Fund XSP
30.00% iShares MSCI EAFE Index Fund CAD Hedged XIN
20.00% iShares DEX Universe Bond Index Fund XBB

Comments welcome ! :)
Your plan sounds good to me.

The only thing I would to different is to pay down the mortgage first and once this is done start investing in Ishares ETFs.
Deal Fanatic
User avatar
Oct 23, 2003
8275 posts
1832 upvotes
was about to say, mortgage out the window first, then max tfsa...and after that you got your own plan to follow.
Deal Addict
User avatar
Sep 26, 2007
3960 posts
146 upvotes
SC
seems like you are on the right track.
Sr. Member
Apr 11, 2003
701 posts
181 upvotes
Edmonton
Why pay off the mortgage first when it's at 1.6%? Surely any of those investments pay better returns than that, after tax. They're the better option, no? Sure, pay off the mortgage first when it's 5.25% and you're only earning 4% in bonds or something, but when it's reverse, why would you do that?
Deal Fanatic
User avatar
Oct 23, 2003
8275 posts
1832 upvotes
netwise wrote: Why pay off the mortgage first when it's at 1.6%? Surely any of those investments pay better returns than that, after tax. They're the better option, no? Sure, pay off the mortgage first when it's 5.25% and you're only earning 4% in bonds or something, but when it's reverse, why would you do that?
depends how long hes got it at 1.6 point is not to lose any money in investments and then not have enough to fully cover mortgage when it jumps.

for the time being though you're right. go with the flow. 1.6% is very low and good.
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
netwise wrote: Why pay off the mortgage first when it's at 1.6%? Surely any of those investments pay better returns than that, after tax. They're the better option, no? Sure, pay off the mortgage first when it's 5.25% and you're only earning 4% in bonds or something, but when it's reverse, why would you do that?
i follow the same rationale

add to this, the condo is worth much more than i own and i plan to sell before the end of the mortage.

I already pay 40% more per month on that mortage and put a 20k downpayment last year.
Sr. Member
Feb 1, 2010
872 posts
173 upvotes
The mortgage is 1.6 after the latest hikes? That is low! If it is really 2.1 now, you might pay off the mortgage with the FI portion of the plan as it is the same result (paying off mortgage is same as buying FI as far as exposure to FI) while being more cost efficient. Otherwise, looks good.
Newbie
Nov 18, 2003
82 posts
6 upvotes
One item I haven't seen discussed yet in this thread yet is that the $375k cash is in a corporate account. Are you planning on implementing your iShare ETF investments in your corporate account?

I've heard conflicting information on the tax-treatment of investment gains within a corporation. I've been told by some people that at the end of the day the treatment is similar to investing personally and I've also been told it gets taxed more than personally. I really need to do some research on this and satisfy myself as to what the correct answer is.

Are you planning on trying to transfer this money to yourself personally over-time? All at once? (Tax implications) I'd recommend bringing out at least enough to use up your available RRSP contribution room. It may make sense to invest using TD e-Funds or something similar rather than the ETFs in the RRSP to reduce commissions.

I'd agree with your 80%/20% investment mix. Only comment is that you have no US stock component to your investments. Was this intentional?

I'm actually in a somewhat similar position (different $ values, mortgage rate, mortgage amount, etc) and I am trying to decide if I should try to bring out enough money from my corporation to pay down my mortgage, invest within my corporation, or something else / some combo.
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
sdw wrote: One item I haven't seen discussed yet in this thread yet is that the $375k cash is in a corporate account. Are you planning on implementing your iShare ETF investments in your corporate account?

I've heard conflicting information on the tax-treatment of investment gains within a corporation. I've been told by some people that at the end of the day the treatment is similar to investing personally and I've also been told it gets taxed more than personally. I really need to do some research on this and satisfy myself as to what the correct answer is.
The bulk of the investments will be made in my corporate account.

I also plan to max my RRSP/TFSA.

Regarding your comments about tax-treatment of investments return, i have no information regarding anything "special" when it come to calculating tax for an individual vs corporate, excep that regarding the dividend Tax Credits.
sdw wrote: Are you planning on trying to transfer this money to yourself personally over-time? All at once? (Tax implications) I'd recommend bringing out at least enough to use up your available RRSP contribution room. It may make sense to invest using TD e-Funds or something similar rather than the ETFs in the RRSP to reduce commissions.
I do plan to transfer this money to myself, from what i have seen so far the mechanics of doing this efficiently is quite complex. A financial advisor tried to push a "Universal insurance" to me to facilitate this but it sounded like your typical "financial advisor" ******** sale pitch.

There already enough in my personal account for RRSP.
sdw wrote: I'd agree with your 80%/20% investment mix. Only comment is that you have no US stock component to your investments. Was this intentional?
The XSP track the SP 500 but is hedged in CDN.

http://ca.ishares.com/publish/content/r ... XSP_EN.pdf
sdw wrote: I'm actually in a somewhat similar position (different $ values, mortgage rate, mortgage amount, etc) and I am trying to decide if I should try to bring out enough money from my corporation to pay down my mortgage, invest within my corporation, or something else / some combo.
I would be happy to learn what you finally do.

For myself, like you, i am still at the planning stage, trying to benefits from what older/wiser people have to say :)
Member
Apr 13, 2009
296 posts
149 upvotes
Kelowna
netwise wrote: Why pay off the mortgage first when it's at 1.6%? Surely any of those investments pay better returns than that, after tax.
Surely?

I don't think any of those investments are a sure thing - a lot of people would argue that most markets are overvalued right now, bond returns are low and have even become more volatile. Plus, it's probably 2.1 on a variable mortgage, not 1.6.

That 2.1% would be guaranteed after tax returns, plus that rate will probably go up.

If you really think that it's worth piling money into index funds right now then another option would be to pay that mortgage off, reborrow against the property to invest and at least it becomes tax deductable.

My personal opinion: sell your condo now before it loses over 20% of it's value in the next couple years. Invest conservatively right now (much less than 80% stocks, more like reversed 20/80) and slowly up that ratio (i.e. don't try to time it completely, but do some form of dollar cost averaging to reduce your risk to a big hit to your lump sum).
Deal Addict
Jul 28, 2005
3237 posts
27 upvotes
Any particular reason for using hedged funds?


Hedging does cost money and reduce returns. If you need access to the money soon, a decent argument can be made for hedging the US fund, but the argument becomes weak if you are planning to hold it for a long period of time. And hedging a large basket of currencies in the international fund has always seemed silly to me.


Or did you just buy the hedged funds because iShares Canada doesn't have enough selection, and you aren't interested in buying foreign-based ETFs?
Banned
Feb 17, 2007
3190 posts
202 upvotes
Not sure he got enough money for a Hedge Fund.


Investing in Canada is a good hedge against USD lol. If you want hedging against USD, try to invest in companies that have International Sales.
It works like this, when USD is down, I do mean way down, your International Sales will be magnified into huge profits with the currency translation. Which in return boosts your underlining profits, then your company's share price goes up.

I don't believe in Gold and Silver when hedging against USD.

Just invest in US companies with high International Participation.
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
asdfvcx wrote: Any particular reason for using hedged funds?


Hedging does cost money and reduce returns. If you need access to the money soon, a decent argument can be made for hedging the US fund, but the argument becomes weak if you are planning to hold it for a long period of time. And hedging a large basket of currencies in the international fund has always seemed silly to me.


Or did you just buy the hedged funds because iShares Canada doesn't have enough selection, and you aren't interested in buying foreign-based ETFs?
I didnt buy anything yet ;)

The main reason i decided to go with hedged funds is because i had the idea (may be wrong) that most brokers charges fee's when you invest in a US ETF with CDN$.
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
amyandjason wrote: Surely?

I don't think any of those investments are a sure thing - a lot of people would argue that most markets are overvalued right now, bond returns are low and have even become more volatile. Plus, it's probably 2.1 on a variable mortgage, not 1.6.

That 2.1% would be guaranteed after tax returns, plus that rate will probably go up.

If you really think that it's worth piling money into index funds right now then another option would be to pay that mortgage off, reborrow against the property to invest and at least it becomes tax deductable.

My personal opinion: sell your condo now before it loses over 20% of it's value in the next couple years. Invest conservatively right now (much less than 80% stocks, more like reversed 20/80) and slowly up that ratio (i.e. don't try to time it completely, but do some form of dollar cost averaging to reduce your risk to a big hit to your lump sum).
I confirm its 2.1%.

The money is in a corporate account, and i dont see any logic of borrowing (and paying interest) when i have 300k+ sitting and looking at me...

Add that i can "only" pay 20% of that mortage per year due to limitation in the contract, this leave me 3-4 year...

Regarding the drop's in condo price, thanks but no thanks, i want to keep my condo :)
Newbie
User avatar
Jul 22, 2010
51 posts
Vancouver
Too much Canadian stuff, not enough international.

Change XBB to a global fixed income or global index fund. Buy more 2x stuff, higher expected returns.
Member
Jul 10, 2006
267 posts
33 upvotes
Edmonton
patmanz wrote:
A 80% stocks / 20% fixed income sound good to me, something like this:

20.00% iShares CDN Composite Index Fund XIC
30.00% iShares CDN S&P 500 Index Fund XSP
30.00% iShares MSCI EAFE Index Fund CAD Hedged XIN
20.00% iShares DEX Universe Bond Index Fund XBB

Comments welcome ! :)

sdw wrote: One item I haven't seen discussed yet in this thread yet is that the $375k cash is in a corporate account. Are you planning on implementing your iShare ETF investments in your corporate account?

I've heard conflicting information on the tax-treatment of investment gains within a corporation. I've been told by some people that at the end of the day the treatment is similar to investing personally and I've also been told it gets taxed more than personally. I really need to do some research on this and satisfy myself as to what the correct answer is.

Are you planning on trying to transfer this money to yourself personally over-time? All at once? (Tax implications) I'd recommend bringing out at least enough to use up your available RRSP contribution room. It may make sense to invest using TD e-Funds or something similar rather than the ETFs in the RRSP to reduce commissions.

I'd agree with your 80%/20% investment mix. Only comment is that you have no US stock component to your investments. Was this intentional?

I'm actually in a somewhat similar position (different $ values, mortgage rate, mortgage amount, etc) and I am trying to decide if I should try to bring out enough money from my corporation to pay down my mortgage, invest within my corporation, or something else / some combo.
I would agree in the RRSP/TFSA should use e-funds or other index mutual fund as the amount in your RRSP is not big enough to be worth commissions at this time.

Re: tax treatment of investment income in a corporation, this is what my accountant told me:
Passive investment income gained by a corporation is actually taxed at a higher rate than if you were investing personally.
See this link from KPMG website for tax rates (also broken down to province, and active business income vs. investment income).

The advantage to a corporation is that you receive the preferential lower tax rate on actively earned small business income - so for me in Alberta, instead of my income being taxed at 39%, I am only get taxed at 14%. To flow the money through to you personally, it will need to get taxed - should discuss with your accountant whether you want to take it as salary or dividends (that's a whole other discussion). The point of a corporation really is to DEFER paying taxes, as you will need to pay tax on it when you eventually bring it to the personal side. However, if you don't need that money right away, you have more money to invest within your corporation.

Because investment income is taxed more in the corporation, you should try to hold your interest/fixed income type investments outside of your corporation, in either your RRSP (where you defer taxes until withdrawal) or TFSA, where it is not taxed. Of course, with your current numbers, 20% of your total will exceed what you can protect in the RRSP/TFSA. Capital gains and dividends, which are taxed preferentially, are better to be held by the corporation.
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
A.Marshall wrote: Too much Canadian stuff, not enough international.

Change XBB to a global fixed income or global index fund. Buy more 2x stuff, higher expected returns.
So say i should lower my CDN exposure and up my International ? What ratio would you recommand and wich ETF.

Thanks for helping !
Member
Mar 3, 2009
389 posts
34 upvotes
patmanz wrote: Hi all,
RRSP Balance: $2,500 (In a fidelity Mutual funds, -3% in the last 3 years)
RRSP Contribution Room: $13,000
TFSA Room: $10,000
Risk Tolerance: High

Comments welcome ! :)
How come you have so little RRSP contribution room....assuming you made that money you should have quite a lot more?
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
charsoxer wrote: How come you have so little RRSP contribution room....assuming you made that money you should have quite a lot more?
Good question !

Until recently, i was paying myself almost 100% with dividends, they are not used to compute your max RSSP contribution ;)

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