How I Invest My Money: Part II

What I wrote about investing in 2021 was long winded, so I’ll keep this intro short. My views have evolved quite a bit since then too. In Part I, I covered risk management and insurance. Let’s now look at how Carley and I invest, what’s changed, and why.

Below is exactly what I wrote. I desperately want to fix the grammar and syntax, but I won’t.

Comments from Vince in April 2021

Enough of the boring stuff. On the investment side of things we have RRSPs, Carley’s LIRA from her time with the federal government, my defined contribution pension plan through EJ, oh, and I set up an RESP for my nephew. We don’t have TFSAs, and that’s because our cash flow doesn’t allow it. We had them in the past but used them up to buy our house. They are one of the best investment vehicles in the world, and that’s why we just restarted our monthly savings to them now.

Every single year since I graduated from university, I’ve used up all of my RRSP contribution room. It’s been very tough, but it’s a goal I’ve set and will continue to set. Saving 18% of your gross income is hard, but being frugal helps. We put money into our RRSPs before our TFSAs because we like getting big tax returns. Money today is worth more than money tomorrow, all things equal, and especially in April or May when we get our returns.

On the actual investment front, I don’t really care about the whole “active versus passive” debate when it comes to investments. That is, if someone charges a high fee for me to use their investment product, and their investment product provides value for that fee, I’ll use it. Also, I think losing your mind and wasting your time about what amounts to a nominal difference in potential returns is pointless. Setting aside and saving more each year and doing what you can to decrease your tax burden each year is vastly more important than paying an extra 0.05% in investment fees. That said, about 60% of our money is in passive investments (ETFs), 30% is in individual stocks, and the rest is in two mutual funds.

On the stock side of things, we own every company that we use on a regular basis. That means we own BMO, TD, Bell, Shaw (soon to be Rogers), Amazon, a lot of Apple, Spotify, Square, Fortis, Netflix, Visa, MasterCard, Home Depot, and a few others. It gives us peace of mind that when we pay those companies’ monthly or annual fees or buy product from them, we’re getting it back in either dividends or the appreciation in the value of their shares. I know countless studies have come out saying this is not the “best” way to invest, but I don’t care. It helps with my peace of mind, especially when the stock market does something stupid. Because if their share prices are collapsing, but me and everyone I know are still their customers, I know the business will be OK.

On the ETF side of things, I’m boring, so all of our passive investments are in AOA on the New York Exchange and VEQT on the TSX. Those are ETFs of ETFs. Quite literally, we own the entire stock market.

The two mutual funds we own are Edgepoint Global Growth and Income and Fidelity Global Innovators. We own them because they invest in things we would never think of, have historically provided a return that is better than the market after their fee, and we have faith in their investment process. The mutual funds are all in Carley’s LIRA and the RESP for my nephew.

What about bonds? My mum’s belief in them really resonated with me. Instead of allocating to bonds, we pay as much as we possibly can (without penalty) on our fixed-rate mortgage every year. I know this isn’t the smartest thing to do: our mortgage rate is 2.04%, and our investments, on average, provide a much higher percentage return than that. But I hate debt, and being mortgage-free is the most important thing to Carley and me from a financial perspective. When we get older and know we’ll need to draw income from our investments, we’ll own some bonds. Hopefully, interest rates will be a lot higher when we get to that place.

Comments from Vince in December 2024

Looking back, our approach in 2021 reflected where we were in life and what we knew at the time – not to mention how investors can behave in bull markets. But as we’ve learned and gained more clarity, we’ve made some changes to simplify our investment strategy. Let me start with what hasn’t changed: we still max our RSPs every year, excess cash goes to our TFSAs, we continue to prioritize paying down our mortgage (even though we know it’s suboptimal), and we still avoid bonds. Our reasons now are the same as our reasons then. We also know we could still be slightly more efficient. I’ll explain more about that in a future post.

What’s Changed?

We no longer own any individual stocks. Research from Hendrik Bessembinder at Arizona State University (link here) really changed my perspective. His findings show that only a tiny fraction of stocks drive the majority of market returns. Don’t get me wrong – picking the right stocks can be rewarding. But it’s incredibly hard to do, and you often won’t know if you were right (or lucky) until years, or even decades, later. These shifts reflect our goal of reducing risk, streamlining our strategy, and focusing on what we can control. I don’t want one stock to rob us of potential long-term returns. And if we did pick that one winning stock (not likely), it would result in excessive overconcentration risk in retirement.

The decision to move away from individual stocks wasn’t just about the data. It was also about reducing the stress of monitoring individual companies and ensuring our investments are aligned with what we can control. We don’t want to have to worry about what some CEO might say or do on any given day. We trust that markets work. The entire market’s track record outweighs any potential upside from owning individual stocks.

We also don’t own those two mutual funds anymore. They had their merits at the time (and the Fidelity Fund provided nice returns), but we’ve moved toward simpler, lower-cost options that better align with our long-term goals.

So, How Do We Invest Now?

Every dollar of Carley and my life savings (and my nephew’s RESP) is invested in either XEQT or the Dimensional Global Equity Portfolio.

XEQT lets us own the entire global stock market for little cost, and the Dimensional Global Equity Portfolio lets us invest with Dimensional’s evidence-based approach for a low cost. For those of you screaming from the rooftops, we know Canadian Dimensional Funds are setup as mutual funds and not ETFs. We don’t care. They have costs that are slightly greater than broad-market ETFs. We strongly believe Dimensional’s approach will provide slightly greater long-term returns for us. I’ll talk more about Dimensional’s approach in a future post too, but here’s a teaser: there is plenty of evidence that suggests that markets work, risk premiums matter, and that many indices are inefficient.

Our portfolio today is simpler, more effective, relatively tax-efficient (this will be another future post), and fully aligned with our long-term goals. In Part III, I’ll share how our financial plan has stayed relatively consistent, even as life and markets have shifted around us.