Asset Location - Part 3: The Plaid Strategy

[@JustinBenderCPM]

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[@SpiritOfTheLaw]

Love all your videos Justin! Very clear explanations and great graphics to make things easy to follow. One thing that came to mind throughout is if you think the plaid strategy still works once the RRSP becomes a RRIF and has forced withdrawals each year. Being forced to withdraw from a 100% equity account early in retirement seems like it would be a little scary in a falling market.

[@JustinBenderCPM]

@Spirit of The Law - Thanks for dropping by! It would still work in a RRIF, but you may need to sell equities in your RRIF account and buy them back in your non-registered account to keep your after-tax asset allocation in balance (you would also want to consider having a small cash allocation in the RRIF).

[@patrik4656]

Thank you !!

[@batardglouton5455]

RRSP can be timed that you would withdraw at lower income tax bracket, which is the most important part. So between let's say 55-71, it's a decent enough time to split withdrawals while potentially having years of compounding before as well. Anyway, more money before taxes is still more money after taxes.

[@IanCollingsCanada]

Great explainer Justin! Well done with the top-notch content!

[@russellmitchell]

Thanks for the information Justin.

[@JustinBenderCPM]

@Russell Mitchell - You're very welcome, Russell - thanks for watching!

[@mremumerm]

Thanks Justin. Actually this matches what intuitively i have been doing- though using a tax rate of only 25% the impact wasn't as dramatic in the extra apparent risk, but it was great to follow the more in-depth reasoning. It does mean some rebalancing work once a year, and some big question marks on Capital Losses reporting because I included VCNS as a way to get lower mix in Non registered (i love numbers enough that these were fun exercises)

[@Michael-su7ip]

Me as well. It was nice to see the formal math on this, it confirms my intuition.

[@fede198888]

Great video!

[@JustinBenderCPM]

@Fede - Thanks for watching! :)

[@matiasiozzia9547]

Great series, Justin just to clarify, Why would one assume that it is the government taking the extra equity risk? I do not understand that part. Thanks in advance!

[@JustinBenderCPM]

@Matias Iozzia - I would suggest watching the first episode of this asset location series, which goes into detail about which portion of the RRSP is yours and which portion is owned by the government.

[@jamegrabham9992]

Excellent series...excellent content...thank you...:)

[@benjaminzizi3145]

Hi Justin, a big thanks for the great content and knowledge sharing! I was wondering if there were any other reason to use VAB and VGAB than matching the exact pourcentage for the purpose of the demonstration. Would there be a negative impact to use VCNS for Non-registered account, that has around the same stock allocation, and is simpler to use?

[@JustinBenderCPM]

@Benjamin Zizi - The asset location series focusses on breaking up an asset allocation ETF in order to improve the portfolio's tax-efficiency. Using a single asset allocation ETF would be the "Light" strategy (which is still a great strategy, but it ignores any asset location fundamentals).

[@benjaminzizi3145]

@@JustinBenderCPM Thanks for the answer! I was meaning, to follow with the examples taken in the video " VEQT for RRSP + TFSA, and then VCNS for non-reg account. I am under the impression it would be around the same, and two accounts less to manage (merging VEQT + VAB + VGAB into VCNS for non reg account only) ?

[@JustinBenderCPM]

@@benjaminzizi3145 - It might be okay initially, but once you start adding new funds to the portfolio, it will likely get out of balance from the overall target (so I wouldn't try to incorporate VCNS into a portfolio temporarily).

[@benjaminzizi3145]

@@JustinBenderCPM Well understood, thank you again!

[@Kevin_Ng974]

Great video! Any tips for thriving during a bear market? Thanks!

[@JustinBenderCPM]

@Kevin Ng - Don't sell and keep saving/investing ;)

[@fede198888]

In my humble opinion: 1) do not be scared about market movements 2) do not overweight risky assets (crypto for example) Myself I will dollar cost average as usual...one contribution to my portfolio the 1st of the month

[@andriy1]

Hey Justin. What are your thoughts about using a tool like "Passiv" (free for Questtrade users), to make the plaid strategy (or anything other than "Light"), easier?

[@JustinBenderCPM]

@Andriy Tovstiuk - Unless you have a way to avoid Questrade's currency conversion fees, buying U.S.-listed ETFs will likely put you in the red, compared to sticking with Canadian-listed ETFs.

[@havaneseday]

@@JustinBenderCPM Is that inclusive of NG?

[@stephaniev1194]

Hi Justin. What is the order for stock allocation when you have a CCPC as well as TFSA and RRSP for the Plaid model? In 2019/2020, I started with a “ludicrous” profile after reading your article on them and based on tax optimization suggested by my accountant. He recommended to first do CDN ETFs in CCPC, as much foreign in TFSA as possible (then do spillover into CCPC because he didn’t feel I should use much RRSP given a lower end personal income pulled out from the CCPC) and then bonds in RRSP with any spill over going into CCPC last

[@JustinBenderCPM]

@Stephanie - If you're managing a "Plaid" asset location, the order for equities should be RRSP/TFSA first, and CCPC last. If you're managing a "Ludicrous" asset location, the order for equities should be TFSA first, CCPC second, and RRSP last.

[@billypan9222]

The Ludicrous strategy portfolio example showed an after-tax portfolio return of 3.75%. The Plaid strategy portfolio example showed an after-tax portfolio return of 3.55%. The plaid strategy is supposed to be more tax efficient as more stocks are held in the RRSP account instead of the Non-Reg, but from the examples in the two videos, this doesn't seem to always be the case. Could you help explain a little more why this isn't always the case?

[@JustinBenderCPM]

@Billy Pan - The Ludicrous strategy outperformed all strategies because it took more after-tax equity risk (it wasn't technically more tax-efficient - it just had a 75% after-tax allocation to equities). If we had set the Ludicrous asset location strategy at an after-tax asset allocation of 60% stocks and 40% bonds (the same as the Light and Plaid strategies), it would have underperformed both.

[@Crusader370]

Justin, the only thing I am not clear about is... how do you determine/estimate the tax rate? Why 50%?

[@JustinBenderCPM]

@Ivan Bilicki - The 50% tax rate is just an example - you need to estimate your own average tax rate during retirement, likely with the help of a fee-only financial planner. Or you can keep things simple by ignoring after-tax asset allocation and buying the same asset allocation ETF across all accounts - your choice ;)

[@Crusader370]

@@JustinBenderCPM Thanks! Right, I was wondering if you determined some kind of methodology for that (erring on the side of caution, i.e. on the side that minimizes the left tail risk, but I am not sure if that's possible because really the tax rate is determining where you put Canadian vs US equity and both of them are still equity). Maybe it could be the average tax rate you use today as a first order approximation, but it really depends on your net worth in retirement. There are 3 relevant variables: net worth, when one will retire and the legislated tax rate. We could calculate the average for all of them based on some kind of a probability curve... but these are not independent variables (if my net worth ends up being higher, I might retire sooner). There are also other circumstances (family, extra kid, medical expenses) that are difficult to predict (but might be possible to model). Anyway... don't mind me...

[@Ari-yu4uo]

Hi Justin. Wanted to know your thoughts on asset allocation in light of all the "bonds are dead" talk lately. For instance, in the case of someone whose risk tolerance, age and stage-of-life would traditionally result in them opting for a 60/40 portfolio, would that traditional thinking around asset allocation be outdated and should they opt for let's say 80/20 instead?

[@JustinBenderCPM]

@Ari - I didn't know they were sick - my condolences. But seriously, bonds (and stocks) are expected to return less going forward, based on low bond yields and high stock valuations. This doesn't change investors' comfort level with risk - if they couldn't handle an 80/20 asset mix before, they can't handle it now, regardless of whether it would increase their expected return, relative to a 60/40 portfolio. My advice would be to work with a fee-only planner to determine a suitable asset mix based on your financial objectives - if the suggested asset mix is too aggressive for your comfort level, you may need to reduce your expenses and save more, or adjust your goals. Taking more equity risk is almost never the answer.

[@ivanW89]

Great video and easy to digest. However just want to clarify why the RRSP is tax effected while the non registered account is not. I assumed the RRSP was tax effected because amounts will be taxed at 50% when withdrawn. Wouldn't the same thing happen to the non-registered account?

[@JustinBenderCPM]

@ivanW89 - The non-registered account started off with no unrealized capital gains (i.e., it was just cash), so no tax adjustment was necessary. Once unrealized capital gains start to accumulate, the calculation of your after-tax asset allocation becomes even more complicated.

[@Narcissist86]

Is there going to be a higher level beyond "Plaid" now for a 5-fund ETF, taking into account US-listed vs Canadian-listed ETFs for RRSP and TFSA?

[@JustinBenderCPM]

@Narcissist86 - I think I'm all finished with this asset location video series. I wanted to avoid bringing foreign withholding tax mitigation (using US-listed foreign equity ETFs) into the discussion, as I didn't want these tax concepts getting mixed up with the asset location tax concepts. If you've interested in the process, I've written about it here: "Optimal" Asset Location, Applied: www.canadianportfoliomanagerblog.com/optimal-asset-location-applied/

[@edirol]

So if doing a balanced 60/40 allocation using the light method, what is the effective after tax allocation?

[@JustinBenderCPM]

@Edirol - If you're using the light method, the after-tax asset allocation for a 60/40 before-tax asset mix would also be 60/40.

[@mrslcom]

The more complex the portfolio, the greater the effort to monitor and maintain its holdings. Not to mention the greater tendency to tinker with it unnecessary. All of which will likely offset any potential gains from trying to optimize asset location.

[@Michael-su7ip]

Nice spaceballs reference by the way...

[@adbp473]

Justin, great series of videos. However, you know the saying 'a little knowledge is a dangerous thing'...you better warn Dustin, he may need to rein me in. ;-)

[@JustinBenderCPM]

@David Bateson - Thanks for watching the series! I'll let Dustin know he'd better review his asset location notes before chatting with you ;)

[@odourboy]

A potentially significant shortcoming of this allocation is that much of the tax loss harvesting potential is lost by holding equities in the registered accounts. Comments?

[@JustinBenderCPM]

@odourboy - I agree this is a shortcoming. Charitable giving potential with equities in non-registered accounts is also reduced.

[@odourboy]

This seems counter-intuitive to me.. I'd have expected the least tax efficeint bond holdings to belong in registered accounts. Has anyone tried to calculate the aftertax return of minimizing fixed income in non-registered accounts?

[@paulmeahan3667]

Asset location? Where we're going, we don't need asset location...