Wednesday, November 10, 2021

Invest As I Say, Not As I Do

When I answer investing questions for friends and family, I tend to steer them to simple solutions that are consistent with their level of interest in investing.  However, I run my own portfolio differently in certain ways.  In reading Dan Bortolotti’s excellent book Reboot Your Portfolio, I noticed that the advice I give usually matches his advice, and it’s my own portfolio choices that sometimes differ from what’s in the book.  Here I see if the differences between my portfolio and Bortolotti’s advice hold up to scrutiny.

Before I go any further, I want to be clear that this isn’t a case of me having a “smarter” portfolio where I’m actively trading to beat the market.  I steer people to low-cost passive investing and that’s what I use myself.  The main difference between me and other do-it-yourself (DIY) investors is the degree to which I’ve built most of the complexity of my portfolio into an elaborate spreadsheet that alerts me by email when I need to take some action.  I’m happy to automate complexity in this way and let the spreadsheet tell me what to do.  I can safely ignore my portfolio for months without worry.

Pay Yourself First

Bortolotti says “‘Pay yourself first’ has become a cliché because it works.”  “Sure, you could wait until the end of the month and then save whatever is left after paying all your expenses.”  “People following this approach rarely wind up with any surplus cash.”  “Make your savings a fixed expense, too, and you’ll be well on your way to meeting your investment goals.  It’s impossible to overstate how important this is.”

This is excellent advice.  I recommend it to my sons.  My wife and I never followed it ourselves.  From a young age we were used to only spending money on necessities.  It’s taken us decades to get used to spending money more freely.  During our working years, our savings rate bounced around, but it was rarely below 20%, and reached 80% for a while when the family income rose and the kids cost us less.  This wasn’t a case of us scrimping or having a savings target.  That’s just what was left after we bought what we needed and wanted.

Expected Future Returns

Vanguard research showed “that most of the techniques people employ to forecast future stock returns are utterly worthless.”  “So don’t get clever when you’re trying to estimate stock returns in your own financial plan.  That average over the very long term—about 5% above inflation—is a reasonable enough assumption.”

As a retiree, I find it wise to back off from the long term average of 5% and use 4%; I’d rather spend a little less starting now than be forced to spend a lot less in the future if stocks disappoint.

Bortolotti is right that P/E ratios have little predictive value.  I made this point myself recently.  However, long-term data show a consistent weak correlation between P/E levels and future stock returns.  This effect is almost unmeasurable over a year, and is very weak over a decade.  However, it builds over multiple decades.  I model this effect by assuming that P/E levels will decline to a more normal level by the time I turn 100, and corporate earnings will grow at an average rate of 4% annually above inflation over that time.  At the time of writing, this amounts to assuming stocks will return 2.6% above inflation over the rest of my investing life.  The missing 1.4 percentage points comes from the assumed drop in P/E levels over the decades.

The difference between my assumption of 2.6% and Bortolotti’s 5% is substantial.  It’s probably not important to those still a decade or more away from retirement; they have time to try to save more, work longer, or plan a more modest retirement.  Current retirees are another matter.  If they assume their stock allocation will beat inflation by 5%, high spending in early retirement could leave them with meagre later years.

Factor Investing

Investment research over the decades has shown that stocks with certain properties have outperformed.  These properties are called “factors,” and this whole area is sometimes referred to as “smart beta.”  Some well known factors are value (“stocks with low prices relative to their fundamentals”), small cap (small companies whose market capitalization is below some threshold), and momentum (“when stocks rise in price, they continue that trend for months before eventually settling back to earth”).

Although the research behind factor investing is solid, there is no guarantee that factors will outperform in the future.  There is good reason to believe that once people routinely invest in factors, the outperformance will decline or disappear.  Bortolotti makes a number of other good arguments for avoiding smart beta.  For myself, I decided years ago that the most solid factor was the set of stocks with both the small factor and the value factor.  Vanguard has a low-cost ETF for small value U.S. stocks with the ticker VBR.  So, for better or worse, I chose to make VBR part of my asset allocation.  Of all my deviations from Bortolotti’s advice, I find this one the hardest to defend.


The term “glidepath” refers to the path of your stock allocation percentage over time.  Bortolotti writes “there are occasions when it is appropriate to reconsider your asset allocation.  Your time horizon gets a little shorter every year, so you will want to reassess your portfolio’s risk level as you get older.”

I agree, but rather than reevaluating my portfolio’s risk level periodically, I’ve chosen a glidepath in advance.  My allocation to stocks drops slowly over time.  The process has some complexity, but that’s all buried in my spreadsheet.  If my slowly declining stock allocation happens to trigger the need to rebalance, I’ll get an email telling me what to do.

I’ve also decided to increase my fixed income allocation (cash, GICS, and short-term bonds) in proportion to the stock market’s P/E when this level is over a fixed threshold.  This is built into my spreadsheet so that if rising stock markets trigger the need for me to rebalance, I get an alert email.  Without this adjustment, my fixed income allocation would be about 20%, but the adjustment moves it up to 24% at the time of this writing.  This may not seem like much of an adjustment, but it’s large in dollar terms.  For the stock market P/E to get up to its current lofty level, stock prices had to rise substantially.  So, 24% of a larger portfolio is a lot more dollars than 20% of a smaller portfolio.  

In a technical sense, this part of my investing spreadsheet amounts to market timing.  However, the shifts are subtle, they take place over long periods, and they are fully automated.  I see this as very different from a nervous investor who suddenly decides to sell all his stocks.  I tend to think of this added money in fixed income investments when stocks are expensive as my answer to the question “Why keep playing the investment risk game when you’ve already won?”

U.S.-listed ETFs and Asset Location

“US-listed ETFs offer some advantages over those from Canadian providers.”  “The most obvious is lower fees.”  They are also “more tax-efficient in RRSPs [and RRIFs].”  “US securities held in RRSPs are exempt from [dividend] withholding taxes, thanks to a tax treaty between [the U.S. and Canada].”  This treaty doesn’t apply for Canadian-listed ETFs, even when they hold the same assets as U.S.-listed ETFs.

One downside of using U.S.-listed ETFs in your RRSPs is the need to trade in U.S. dollars.  This creates the need for either expensive currency exchanges or cheaper but complex Norbert’s Gambit currency exchanges.  Another downside is the complexity of trying to maintain near optimal asset location choices across your entire portfolio.  My spreadsheet figures this out for me, but I’d be frustrated if I had to figure it out every time I needed to trade.  Most DIY investors would struggle as well.

“I recommend that do-it-yourself investors stick to using ETFs that trade on the Toronto Stock Exchange.”  I make the same recommendation.  Bortolotti allows that “If you have large foreign equity holdings in your RRSP, and you’re an experienced investor who is comfortable with the added complexity, then you can make a good argument for US-listed funds, but only if you have US cash to invest or you’re able to convert your currency cheaply.”

I’ve recommended to my sons that they stick to Canadian-listed ETFs, but I use U.S.-listed ETFs in my own RRSPs.  The monthly savings my wife and I get from U.S.-listed ETFs and careful asset location choices is roughly equal to half of what we pay in income taxes each year since we retired.  To save this much, I’m happy to let my spreadsheet do the work.  I’d probably just use a single asset allocation ETF in all my accounts if I didn’t have the spreadsheet.


I’ve taken my shot at defending the ways my portfolio deviates from the advice I give others and the advice Bortolotti gives in his book.  However, I still consider myself to be strongly in the low-cost index investing camp.  In my view, those who pick some stocks on the side or time the market based on hunches are going further afield.


  1. Michael, is your spreadsheet Excel? If it is, do you need to leave the spreadsheet open?

    I look at my spreadsheet way too much. It has cells and fonts that change colour when it’s reasonable to consider re-balancing.

    My last question is, if you are running this on Excel, what is the name/details of the email plugin?

    Many thanks, Bob

    1. P.S. I'll be ordering the book for my son.

    2. Hi Bob,

      My spreadsheet is in Google Sheets. You can add an associated script to a spreadsheet. Mine checks the spreadsheet once a day to email me if I need to take any action.

      Hopefully, your son will find the book useful.

  2. Hi Michael: this if my first time posting here, but I've read plenty of your blog and Twitter posts (and it was your post that gave me confidence to do NG using inter-listed stocks, given that approach hasn't been written about much since DLR came around).

    This post contains my thoughts exactly. While reading the "simplicity" parts of Dan's book I was thinking "this is great advice, I don't plan to follow it, but it's great advice" haha. I do think with large enough portfolios it can make sense to worry about tax-efficiency and smaller fee differences, but it's definitely easy to make mistakes, some of which I've made, although I think I have a good plan and mindset now. One thing I've admired with your previous posts that have been a good lesson for me is the extent to which you just robotically trust your rebalancing spreadsheet, which prevents a lot of the second-guessing and other issues with multiple holdings.

    I've also recently applied a factor-tilt (basically went with 3/4 total-market, 1/4 small-cap-value, same ratio for US in Ben Felix's model portfolios). After listen to Ben's thoughts on the subject, the expected return arguments are less compelling to me than some of the diversification arguments (e.g. positive returns during previous periods of inflation) and I like the idea of additional re-balancing opportunities when small-cap-value is up/down relative to the rest of the market. I suppose this is a bit of an active mindset, but I also just feel better having the counterweight to the arguably top-heavy & frothy looking US index (same reason I like the the 33.3% Canada/US/International type of global diversification approach that ends up under-weighting the US from a a market-cap perspective).

    1. Hi Graeme,

      Thanks for the kind words. If you can quantify your savings from using U.S.-listed ETFs and strategic asset location choices, that should give you a good idea of whether the extra effort is worth the return. I find that many DIY investors get themselves into trouble with the pursuit of cost perfection no matter how much effort it takes. I prefer to maintain the mindset that there's an amount worth paying for the convenience of simplicity.

      One caution I'd make about going too far down the road into factors is that there are a great many advisors (including Ben), who need factors to have an expectation of positive returns to justify their fees. I find Ben to be intellectually honest and willing to examine evidence that factors may not perform in the future, but this entire area has an army of DFA advisors for whom Upton Sinclair's saying applies: "It is difficult to get a man to understand something when his salary depends upon his not understanding it."

    2. Computing the actual amounts is definitely helpful (in my case it's somewhere in the low 4 figures: not going to make or break my portfolio, but enough I feel like it's not pointless). To be honest, I also just kind of enjoy the portfolio management: I feel like the maintenance is a nice middle-ground between active management and just purchasing an asset-allocation ETF.

      By the way, I'm not sure if you've posted the details of this before, but I did have a couple of questions about your advanced spreadsheet (similarly, I have a program to help me manage things that I'm still building out):
      1. What thresholds are you using for re-balancing alerts?
      2. I assume for your spreadsheet to run on its own it has some sort of integration with live stock quotes. My current approach is to manually maintain the number of each holding and any cash balances, and then pull the live ETF prices from Yahoo. This isn't perfect (won't update cash balance after dividend payment, etc) but should be close enough as long as I update the inputs occasionally or after any transactions. I'm curious if you took a similar approach or had anything else you found was helpful to keep it running on its own?

    3. Hi Graeme,

      The rebalancing thresholds I use are explained in a paper pointed to in the following article (look for the link with the text "my rebalancing strategy"):

      I use the Google Sheets function GoogleFinance() to get stock quotes and currency exchange rates. I also use IMPORTHTML() to get the current Shiller CAPE. I manually maintain cash balances and number of ETF units in each account.

  3. Hi Michael,

    While reading your blog and trying to understand your approach to managing your portfolio, something sticks out to me. You use US-listed ETFs for the reduced MERs as well as expected FWT efficiencies if held in the RRSP.

    Holding US-listed ETFs in taxable accounts seems to greatly increase bookkeeping burden, with ACB needing to be tracked in CAD and each Norbert's Gambit transaction requiring additional bookkeeping. Additionally, there's the hairy issue of the T1135 reporting requirements, as well, if your positions in US-listed ETFs is substantial enough.

    In you use VEQT in your taxable accounts, probably to avoid this bookkeeping burden. It seems to me that for this to work, the after-tax allocation of the TFSA/RRSP have to mirror the allocation of VEQT. If so, how do you manage to keep things in balance with the constraint of also holding your VBR allocation only in the RRSP? Are you in a position that your target tilt to VBR fits neatly within the US equities allocation of the TFSA/RRSP combined portfolio?

    I suppose the question I'm building up to is, how would you handle it if the VBR allocation was not containable within the RRSP? Wouldn't you HAVE to hold US-listed ETFs in your taxable account?

    1. All my U.S.-listed ETFs are in my RRSPs (including VBR). My taxable accounts hold VCN, VEQT, and fixed-income. My TFSA is all VCN currently. This provides enough degrees of freedom that I've been able to maintain my asset allocation.

      So, looking at the allocation within accounts (something that I don't worry about except that they can't go negative), my RRSP has excess VBR, VTI, and VXUS, my TFSA has excess VCN, and my taxable accounts have excess VCN and fixed income.

    2. Thanks for the insights. The big question that pops into my mind is that presumably you're aiming to shrink your RRSPs in early retirement, to avoid the mandatory RRIF withdrawals causing you to take more of a tax haircut than desired. At some point, do you think you'll run out of RRSP room to hold VBR? I suppose for the other "vanilla" asset classes you have Canadian-listed alternatives to kick things out of the RRSP like VEQT/VCN/VUN if needed.

      In this hypothetical scenario where you say, burn your RRSPs to zero, would you continue to hold VBR in a taxable account, or just convert it to VUN and call it a day?

    3. It's true that I'm shrinking my RRSPs in early retirement. However, they currently hold almost all of my allocation to VBR, broader U.S. stocks, and international stocks. I don't expect to face having RRSPs (or RRIFs) too small to hold my VBR allocation for decades. If I were expecting this to be a problem sooner, it would be a sign that my RRSPs were small enough that I shouldn't be draining them any further in early retirement.

    4. I see, so your target glide-path avoids this issue of having to hold asset classes that are only cheaply available as US-listed ETFs outside of the RRSP.

      I recently went through an analysis of the benefits of a "plaid-like" portfolio involving after-tax allocation of the RRSP as well as asset location vs having a mirrored allocation across all accounts. When looking at the question of asset location, I found that I could quantify the expected tax benefits of locating equities of various geographies optimally, however it seemed to me that going down this path involved a lot of assumptions about future performance between asset classes, and not to mention tax regime.

      Ultimately, I wasn't comfortable subjecting my valuable future TFSA room to the idiosyncratic risk of a single market/currency as well as regulatory risk just for the purpose of assumed tax optimization, i.e. just holding VCN. I ended up deciding that the only asset location bet I was comfortable making was that equities > bonds in the long run. I decided on holding a VEQT-like allocation of equities in my TFSA and RRSP, and holding everything else in my taxable account such that my after-tax stock-bond allocation was on target, with the equities in each account allocated 30% Canada, ~43% US and 27% ex-North America. I do hold US-listed ETFs in my RRSP to cut down on the MERs there while maintaining the same allocation across the 3 categories. I hold VCN + VXC in the TFSA and taxable accounts to keep things simple and reduce the amount of taxable positions requiring ACB tracking.

      How did you approach this question of the idiosyncratic risk to account balances that comes with focusing specific tax-advantaged accounts on a given market, and how to justify the tax savings in light of that?

    5. I view all my accounts in after-tax terms. That means I have an opinion on the average tax rate I'll pay on each account type (based on current tax rules, expected returns, and withdrawal strategy). I focus only on the portion of each account that is mine; the rest belongs to the government. Viewed this way, there is little difference between the value of my different account types. It's true that if my RRSPs or taxable accounts had wildly higher returns than my TFSA, my average tax rates would climb, and I'd have been better off with the high returns in the TFSA. However, I find that this effect is quite small, even for large differences in returns.

      Changes in tax rules are a different concern, but all account types are vulnerable. The government could introduce an annual 1% tax on TFSA assets, or on RRSP assets, or they might stop indexing the progressive tax rate cutoffs. They could do many things that would harm one account type more than others.