Minimalistic investment portfolio for 2019

This article is about the investment allocations for a disciplined minimalist Canadian investor for 2019. I decided to use only two asset classes in the liquid side of the portfolio: equities and government bonds, while also considering the primary residence as part of the portfolio. For a typical Canadian, the primary residence is a considerable part of the family assets. Many advisers do not include the real estate in the NAV and in the portfolio analysis - I think still that real estate forms an integral part of one's assets. So we assume that the family has around a half of assets placed in the house equity and a moderate mortgage.

The proposed sample 2019 allocation is below:

Global Equities: 40%
Government bonds: 15%
Primary residence: 65%
Borrowing/Mortgage: -20%

Why not allocate more to equities? A family that owns its primary residence already has equity exposure - as a rule of thumb, we can assume that a house is basket of 30% equities and 70% fixed income, so the total household equity exposure would be around 58%. Secondly, and most importantly, in this late cycle environment, it is prudent to own downside protection, and bonds provide one, along with USD exposure. We believe the long duration US bonds (20-30 year if possible) provide good diversification to a Canadian investor.

Why not include other asset classes (REITs, credit)? Firstly, the goal is to create a very simple portfolio, and managing additional sources of return takes considerable extra effort. Secondly, for credit, we may see a period of poor return as this economic cycle is in its late stages, and as the quality of credit has somewhat deteriorated. REITs are already a part of the global equities and, for the sake of simplicity, we exclude them.

Why not allocate more to Canadian equities? In fact, Canadian investors get taxation breaks on investing in Canada, but that comes at the expense of diversification. I will write about that in the following posts, which will cover more complex portfolios and their advantages. But this post is about being minimalist.

Which securities to use?

Here the key consideration is to deliver the desired exposure with cost and tax efficiency. The dividend and interest income on all securities are taxed by any combination of the following: the government of domicile country, the US government (where the sponsoring bank for the ETF is located), and by the Canadian government.

Allocation by type of account: RRSP/TFSA/RESP/non-registered

The RRSP account is the easiest from the tax standpoint: because of a tax agreement between the US and Canadian governments, the dividend and interest income is not taxed by either government. There is still the foreign income taxation, but that seems unavoidable. In RRSP, we allocate to the following ETF delivering global equity and long-duration US treasuries:

ACWI: 73%
TLT: 27%

The TFSA account is the worst misnomer - "Tax-Free Savings Account" is not tax-free, and it should not be used for "savings", but for longer-term investments. TFSA is free only from Canadian taxes, but the U.S. still taxes the income on any US-listed ETF. To avoid that, there are swap-based ETFs that use total return swaps to gain the exposure and do not distribute any income. In TFSA, we allocate as follows with ETF giving exposure to S&P 500 and 7-10 year treasuries:

HXS.TO: 73%
HTB.TO: 23%

The same allocation will work for non-registered accounts.

Those with children - RESP accounts do not allow US currency and are subject to the same US witholding taxation, so the same HSX / HTB ETF will work.

To summarize, I build a set of tax-optimized minimalistic portfolios for this part of the economic cycle. As always: by reading this, you agree that this is not a financial advice and that individual investors' situation may require other allocations. 

Below is a detailed reference on the taxation of registered investment accounts:

https://www.firstasset.com/resources/education/?article=Reference+Guide%3A+Foreign+Withholding+Taxes+on+ETFs+for+Canadian+Investors

The next post will be about more complex and diversified portfolios.



Comments

Post a Comment

Popular posts from this blog

A smart collateralized non-recourse futures contract on Ethereum: first impression

Image
Today is yet another exciting day, because I just built the first "smart" Ethereum contract that performs a futures trade between two parties. The contract allows two entities with Ethereum accounts to enter into an ether-settled, margined futures agreement on any market (or non-market!) variable - be that the closing price of SP 500, the air temperature at Noon in downtown Manhattan, or a hurricane event in the Caribbean. Why are smart distributed financial contracts important? The world creates a huge notional volume of "exchange-traded" and "over-the-counter" derivative transactions. At this time, these transactions go through investment banks and through exchanges, adding a layer of fees for buy-side institutions and individual investors. If the decentralization trend continues, we will see this marketplace evolve from fees based on volume ("spread") to fees based on access, or consulting fees, making trading cheaper. Smart contracts and E...
Read more

Ethereum Client Platforms: Parity versus Go-Ethereum

Image
The next step in the Ethereum world, after mastering the basics of the Solidity language and the smart contract development, is about developing simple production applications. The key ingredient here is client software. In this article, I review parity , the newer client software layer, and compare it to geth, the product of the Homestead project. What does the client software do? It downloads the whole blockchain onto your system on a regular basis, keeping the tab on the whole network. It verifies all transactions and contracts on the blockchain. If you are building your own contracts, it broadcasts them to the network so that they are included in the next block and confirmed by the miners. Client software can also do the mining but these days you may need a super-computer do make any ether this way. Why is this important? In order to successfully integrate blockchain transactions into a real-world application, a reliable client layer is needed. Just using https://etherscan...
Read more

How to steal money in Ethereum (and how to protect your Ether)

Ethereum's smart contracts can be deceptively easy to code, but the devil is in the details. This post is about the vulnerability underneath the DAO hack and the preventative measures. First of all, I am grateful to Daniel Nagy, my friend and an Ethereum developer, for explaining the below material concisely. This is public material but not so trivial to understand, especially when written for technical audiences, so here you go - a simple explanation of the DAO hack and the ways to design your contract to avoid being a victim of this type of attack. You and a group of 5 friends want to get into a Drake concert, but do not want to pay for 6 tickets. How get around it? You look around the concert site and find that the people that check the tickets do not stamp or take them away - and the fence around the concert area is tall, but a chain-link type - and now the solution is trivial. You buy one ticket, agree on a secret meeting spot with your friends around the fence of the con...
Read more