If you’re wondering whether you’re holding your ETFs in the right accounts, this episode of the CPM Podcast is for you. During the show, investors will learn how to properly implement a traditional asset location strategy with the new Ludicrous Model ETF Portfolios. Justin will also reveal why a Ludicrous portfolio can be a superior choice to simply holding the same asset allocation ETF across each account. We’ll then break up the discussion with an ETF Kombat between two popular U.S. equity funds: XUU and VUN. After the match, we’ll compare the advantages and disadvantages of a Ludicrous portfolio. At the end of the episode, Justin will answer a common listener question: “Does all this technical tax stuff really matter for most investors?”
- The steps involved in setting up a Ludicrous portfolio [0:02:46.6]
- Does this asset location strategy actually work? [0:05:10.6]
- What’s really causing the Ludicrous portfolio’s huge performance advantage? [0:09:18.6]
- Comparing apples-to-apples (or after-tax asset allocations to after-tax asset allocations) [0:11:08.6]
- ETF Kombat: XUU vs. VUN (featuring PWL’s own Martin Dallaire as the voice of the judge [0:12:28.6]
- Great reasons to consider a Ludicrous portfolio [0:17:56.6]
- Potential disadvantages to managing a Ludicrous portfolio [0:20:49.6]
- Ask Bender: “Does all this technical portfolio tax stuff really matter for most investors?” [0:23:22.6]
Blog posts/resources discussed in this episode:
Canadian Portfolio Manager: Introducing the “Ludicrous” ETF Portfolios
Canadian Portfolio Manager: Model ETF Portfolios
Hi Justin,
I am building my Ludicrous portfolio. I have read about not having DRIPS in taxable accounts.
I do not use taxable account DRIPS for my VGRO. But I tend to buy them monthly.
Is the problem with the DRIPS a frequency issue? Meaning my buying monthly is creating the same hassle as DRIPS?
Should I be waiting with my cash and buy quarterly instead?
@Cameron – There’s no issue with DRIPs, other than more transactions to input when tracking your adjusted cost base (ACB). If you’re already making monthly purchases, you likely don’t need a DRIP set-up (as you can just pick up all available cash when placing your buy orders). This would result in only 12 buy transactions to input each year when tracking your ACB, instead of 24 (12 buy and 12 DRIP)
Hi Justin,
Thanks for putting in the time to something like this. I have been reading a lot of books lately but those are mostly focused on US investing and this is great for Canadians. I have a couple of questions if you have time:
1) I know you already referenced this a little but for my TFSA why would I not just hold all my CDN equities in that account to avoid the foreign tax withholding issue completely? Is it for re balancing reasons?
2) My next question, and I have asked a few people this but just trying to get a consensus, is why not hold the majority of fixed income in GICs. The YTM is far higher and I think with interest rates where they are at there is not room to go much lower and see that spike in bond prices if it does. I think the reverse is more likely albeit not for a long time. I did read your GIC and Bond study and that is what got me thinking about all this. If I open up a high interest savings at 1.65% and put in the $100,000 max for CDIC I would still have the liquidity that bonds provide at a higher YTM with no capital depreciation risk
Thanks in advance
Jesse
@Jesse Grove: You can hold Canadian equities in your TFSA first if you’d like. Just remember that if Canadian equities significantly underperform global equities during your investment horizon, it may result in a lower after-tax portfolio value (as you won’t benefit as much from the tax-free growth of the TFSA).
GICs are also an alternative to bond ETFs. I use them with my clients, due to their stability, tax-efficiency, and generally higher yields. However, there can be considerable tracking error relative to a bond ETF over shorter term periods, so you need to be comfortable with this aspect of GICs.
Hi Justin, I’m in the process switching from TD index to Ludicrous with Questrade. With $100,000 in each RRSP and TFSA, do you suggest I make the purchase all in once. I know we cannot predict future, but do you see risk of purchase large amount all in once now (the price is going up fast lately). I have no problem purchasing little by little over time to build the portfolio, but this switch with large sum makes me nervous.
Thanks for your time. Helen
@Helen: If you’re already fully invested in the TD index funds, why wouldn’t you want to immediately reinvest the proceeds in ETFs after selling your index funds (unless you’re trying to time the markets)?
If you’re not comfortable with your current portfolio’s asset mix, perhaps you should review this as a starting point.
https://canadianportfoliomanagerblog.com/choosing-your-ideal-vanguard-asset-allocation-etf/
Based on the experience of a friend who has an American wife, I would consider carefully dropping her American citizenship. Expect delays at the American border, possible bans of ever being able to return, nasty correspondence with the IRS, etc. etc. In other words, the American government doesn’t like people dropping their citizanship and makes if difficult to do and live with afterwards.
When does this go onto your youtube chnnel?
Cheers!
(Whoops I didn’t get to subscribe for a notification, but don’t want to spam my post again)
Hey Justin! Literally just finished reading and studying the “Ludicrous” blog post last night! So it’s great to have seen this released today. Thank you for the great work, and in-depth research. I had two questions (sorry in advance, as they are rather lengthy):
1. I really enjoy the ETF Kombat’s, and my kombat right now has to do with US Listed ETFs in RRSP vs. CAD listed. Your point #5 of Ludicrous Portfolio advantages is “Norbert’s gambit may not be required.”
I am completely comfortable with doing NG, but when you mention it may not be required, were you only referring to when “all equity allocation were in my TFSA and Taxable account”? or are there cases when you would actually (for example) hold “XUU, XEF, XEC” in an RRSP on a Ludicrous Portfolio?
To give you context, I am currently in the process of maxing out both my TFSA & RRSP and don’t plan on opening a taxable account for another 3-4 years, but the goal would be to get to Portfolio Example #3 in your Ludicrous Model ETFs.
2. Keeping it in relation to the US, sorry to ask these, but I wanted to get your perspective. I am currently just starting to read books about US and Canadian Tax laws (Brian D Wruk, Dale Walters, Robert Keats), but as I’m investing I have a slight sore in my mind regarding the fact that my wife is American. We’re recently married, and she doesn’t have an investment accounts in the US.
I’m not sure how many Canadian/ American couple portfolios you come across, but knowing that her TFSA is not a good vehicle for us to currently invest in as the US doesn’t recognize it as a registered account and will be taxed… we had thoughts of eventually revoking her US citizenship once she’s a Canadian Citizen.
We know we will be staying in Canada for our futures, but I can’t help but think that we might be missing out on an opportunity to invest within the US itself?
We will still be earning Canadian income, so we would have to convert currency as with Norbert’s Gambit, but is the mindset that making her TFSA account available the better option in regards to building our portfolio?
Thanks for taking the time to read through this, and sorry for asking US based questions. I’m just starting to research the laws (I’m an engineer by background so it’s really new to me), but hopefully I can gain more wisdom and insight from yourself, as I already have learned so much!
@Fitz: I’m glad you’ve been enjoying the blog/podcast. In regards to your questions:
1. Yes, if you can “fit” your total equity allocation in the TFSA and taxable account, then there’s no need for Norbert’s gambit. If you still need to hold some equities in your RRSP, you could still hold XUU/XEF/XEC, but there will be higher withholding taxes and product fees, relative to holding ITOT/IEFA/IEMG. However, this may still make sense, especially if you’re ramping up your taxable account contributions in the next few years, and will eventually be selling XUU/XEF/XEC in your RRSP and repurchasing them back in your taxable account (so if this sounds like you, it can be a very smart strategy). Great question, by the way.
2. You’ll need to speak with a cross-border accountant regarding your spouse’s specific situation, but the general advice from my clients’ accountants is for U.S.-Canadian dual citizens to avoid investing in TFSAs or RESPs.