But what should I invest in?

This website is not a stock picking website. We don’t recommend specific stocks, or speculating on alternative assets such as commodities or Bitcoin. There is nothing inherently wrong with making investments in specific companies, but I personally do not want to do the ongoing research into the fundamentals of specific companies. This is consistent with how we manage our own investments.

We instead focus on making the investing process as simple as possible. To that end, the Canadian Couch Potato does provide three simple portfolios that are appropriate for most investors.

One alternative to the Canadian Couch Potato portfolios are the Vanguard asset allocation ETFs. Each of these portfolios contain the same underlying ETFs, but with different risk characteristics:

These portfolios invest in other Vanguard ETFs, resulting in a one-fund portfolios that rebalances periodically back to their target asset allocations.

These funds provide the following advantages:

  • They are very low cost, with management expense ratios (MERs) expected to be in the range of 0.25%;
  • They eliminate the need to rebalance your portfolio – something that individual investors aren’t as disciplined about doing;
  • They are denominated in Canadian Dollars, making them very simple to invest in; and
  • It’s easier to remove the emotional elementof investing, as you don’t see the performance of a specific ETF that may be underperforming in the short-term.

These funds would be less appropriate in the following circumstances:

  • You aren’t comfortable trading your own stocks. ETFs trade on public stock exchanges, meaning that the process of purchasing them is similar to buying an individual stock. Not everyone is comfortable placing a limit order, or understands what a bid/ask spread is. If this is the case, then you might want to stick with mutual funds;
  • If investments must be held in taxable accounts, which is not uncommon for retirees that don’t spend the entire amount of their minimum RRIF withdrawals. This is because the fixed income portion of these ETFs will be taxed at a high marginal tax rate compared to equity dividends and capital gains; 
  • You’re unable to execute trades during the TSX’s market hours (9:30 AM to 4:00 PM EST from Monday to Friday) or
  • You are uncomfortable with self-managing through an online discount brokerage.

We personally use the Vanguard Growth Portfolio ourselves as a low-effort way to invest, allowing me to focus my time on other things that matter more to me. I execute the trades during the lunch hour once a month. 

By keeping it simple, we are more likely to stick to our plan, and not obsess about the ups and downs of the market. We contribute to our accounts on a monthly basis. A few days after the transfer I sign into our broker’s app on my phone and purchase the funds (total cash available divided by the current ETF share price). I can do this in under 5 minutes.

If you do need a discount brokerage, then consider using Questrade. I have found their customer service quite good, and the interface very simple to get used to.

(Note: if you are considering opening a Questrade account, please consider using our referral code to support the website, and get a bonus $25-$250!)

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The Value of Emergency Funds

Part 2 of the series “The Basics”

Most financial planning blogs and books will emphasize the importance of having an emergency fund. This post will help you assess (1) why do you need one; (2) how much do you need; and (3) where should you keep the money.

(1) Why do you need one

An emergency fund is meant to ensure that your core fixed costs are paid for in the event of a financial emergency (job loss, illness, etc). This means that the emergency fund would cover the cost of:

  • Housing
  • Food
  • Health care
  • Utilities
  • Transportation
  • Personal expenses
  • Debt

An emergency fund is not meant to replace your dependence on God. 

And my God will supply every need of yours according to his riches in glory in Christ Jesus.

Philippians 4:19 (ESV)

That said, planning for emergencies and having adequate insurance as a means of providing for future needs is a biblical principle. 

A prudent man foresees the evil, and hides himself; but the simple pass on, and are punished.

Proverbs 27:12 (ESV)

But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.

1 Timothy 5:6 (ESV)

(2) How much do you need

General recommendations is that emergency funds should cover 3 to 6 months worth of expenses. So which one should it be? The answer to that question is very situation dependent, and generally depends on how risky your lifestyle is. Here are some general guidelines:

  • 3 months would be appropriate if you have steady job with either an established company or the government, or have more than one household income.
  • 6 months would be appropriate if you have a job that is prone to rounds of layoffs, are self-employed, don’t have short term disability insurance, or work at a start-up that carries a higher degree of bankruptcy.

This is not a binary decision, you may decide that a 4 or 5 month emergency fund is appropriate for you based on the factors and variables outlined above.

(3) Where should you keep the money

The savings should not be invested in risky assets. If they are they should be in very low risk investments such as GICs, short-term bonds, or cash. Generally speaking the lower risk the investment, and the more accessible the money is, the better. It is sometimes helpful to think of the emergency fund as an insurance policy against financial shock rather than an asset that you can expect to get an expected rate of return on.

There are a couple of places that you can keep your emergency fund:

  1. A high interest Tax Free Savings Account (TFSA) with a CDIC insured institution. This makes the most sense if you have unused contribution room because all interest earned will never be taxed.
  2. A high interest savings account with a CDIC (1) insured institution. This makes the most sense if you don’t have unused contribution room in your TFSA. All interest earned in this account will be included in your taxable income.

Conclusion

Having an Emergency Fund is not meant to be a substitute for relying on God for his provision. However, having an adequate Emergency Fund is a critical part of any financial plan, as they help you absorb financial shocks without having to worry about going into debt. 

Footnotes:

(1) CDIC is the Canadian Deposit Insurance Corporation, a federal Crown corporation that protects your deposits for up to $100,000 at CDIC member financial institutions.