Expected Returns for the Vanguard Asset Allocation ETFs

[@JustinBenderCPM]

100% of KZbin revenues received by the Canadian Portfolio Manager channel have been donated to SickKids Foundation.

[@raymaking2634]

Your videos are of academic standards, full of facts without any bias and personal opinion. This is such a great and rare thing to find on KZbin. What should one do if they want to get higher long term returns around 10% range with diversified portfolios like VEQT. Do you recommend sector tilts to improve returns? Thanks

[@JustinBenderCPM]

@Ray Making - Thanks for noticing! (this was certainly my intent). It's unlikely investors will experience 10% equity returns. I would personally not aim for this target, and instead look to increase your savings strategy/reduce expenses.

[@raymaking2634]

Thanks, may be because of such low expected returns Canadians are running towards real estate where it’s normal to leverage 4X and generate very handsome returns. This market appears to have some tailwind due to low interest rates, short supply and high immigration rates. I wonder how long this show will continue? Any thoughts?

[@JustinBenderCPM]

@Ray Making - Unfortunately, I can't predict the future (no one can), so my opinion on where I think stock markets are heading over the short-term would be of little to no value to investors.

[@raymaking2634]

Thank you, if possible please make a video on impact of leverage on equity returns using prime rates from past 20 years for the benefit of your followers. Love your videos.

[@marcoderfinanzchemiker841]

@@raymaking2634 If you want higher expected returns you need to invest in small cap value stocks and hold them for 20+ years. its the only way to beat the market in long term. (If you believe in the finance science of the last 100 years)

[@steve8803]

VSP was essentially at all time high's this time last year when this video was released, and it still managed to gain over 30% since! Crazy. Just goes to show how truly unpredictable the market is.

[@Gabriel_J]

Hi Justin, always a pleasure to hear what you have to say. Do you think the amount of printed money and ever-increasing amount of debt and leveraging invalidate the historically valid indicators for expected returns? I.e. Do you think we are in unprecedented territory when it comes to financial markets, rendering "all bets off" (even more than usual)?

[@JustinBenderCPM]

@Dan Joo - I believe Canadians should be focusing on other more controllable aspects of their lives (such as decreasing expenses that do not provide them with value, making themselves more employable, etc.). My thoughts haven't changed much in this regard over the past decade though. Markets have always been uncertain, and this isn't expected to change.

[@RyanThomasWoods]

Do you have a video covering VFV?

[@JustinBenderCPM]

@Ryan Thomas Woods - I discuss S&P 500 Index tracking ETFs (like VFV) in my "Understanding U.S. Equity ETFs" video: kzbin.info/www/bejne/rIStfWt5ateHba8

[@94hockeykid]

Awesome video. I’d love to get a video on how and why an ETF could end/close, including how this could effect an asset allocation ETF, and what that means for an investor.

[@HamiltonRb]

So retirees have seen the last of the classic 60/40 balanced portfolio. What are your thoughts on covered call etf’s to try to enhance the income

[@JustinBenderCPM]

@HamiltonRb - I take a total return approach to investing (I use the same approach with my retired clients). As long as you have a solid plan in place and make adjustments accordingly each year, retirees don't need to seek out more complicated investment product solutions (like covered call ETFs): www.vanguardcanada.ca/documents/total-return-investing-tlrv.pdf

[@HamiltonRb]

Justin Bender if that total return for 60/40 only gets me less than 4%, that won’t do it.

[@JustinBenderCPM]

@@HamiltonRb - I would suggest working with a fee-only planner if you feel you won't be able to achieve your goals in retirement with lower expected portfolio returns. They can help you decide on reasonable alternatives (such as reducing expenses, downsizing a home, etc.). Here's a link to a reputable fee-only financial planning firm: springplans.ca/

[@nelfmo910]

My plan was to max out tfsa first, then rrsp, then get working on a taxable acct. So with said tax drag, does it make more sense to prioritize the taxable acct?

[@JustinBenderCPM]

@Nel Fmo: Even though there's more unrecoverable foreign withholding tax drag on the asset allocation ETFs when held in RRSPs and TFSAs (relative to taxable accounts), remember that there's likely way more unrecoverable income taxes in a taxable account (so generally, most investors should prioritize their RRSP or TFSA savings/investments ahead of their taxable account, regardless of the additional foreign withholding tax drag). My next video release will be "The Ultimate Guide to Foreign Withholding Taxes", so be sure not to miss it! :)

[@nelfmo910]

Justin Bender Thank you! Awesome video.

[@NiagaraWeddingVideographer]

Given these relatively low “expected” returns, would you expect a portfolio of diversified actively managed mutual funds to fair any better?

[@JustinBenderCPM]

@Colin Peters Films - I would expect the diversified actively managed mutual funds to underperform a low-cost asset allocation ETF by the difference in their fees. So if the actively managed mutual funds had an average MER of 2.00%, and the Vanguard Asset Allocation ETF had an MER of 0.25%, I would reduce the expected returns for the actively management mutual funds by 1.75%.

[@NiagaraWeddingVideographer]

Justin Bender thanks for the reply. I agree, I just didn’t know if that general rule of thumb may have changed based on the pretty low expected returns for VGRO/VEQT. But I guess that’s what happens when we’ve earned 10%+ annually over the last decade. :)

[@guillaumegiroux9425]

Colin Peters Films Yeah, it isn’t really an active/passive investing schism, but really just the very high Shiller CAPE that has inflated many stocks over the last years, to the benefits of those who rode it, but the disappointment to those entering.

[@jabezcreed]

People should have been watching this 2 years ago.

[@MrBman2435]

Are the dividends paid out part of that return or would they be on top of? Thank you for your videos, they are fantastic!

[@JustinBenderCPM]

@MrBman2435 - We're glad you're enjoying the videos! The dividends would be part of the expected return (not on top of it).

[@venkatinator]

Great video Justin, thanks. I’m confused, do the expected returns include inflation? So if VGRO returns 4.5%, the expected real return is 4.5 - 1.4 = 3.1%?

[@JustinBenderCPM]

@venkatinator - Thanks for watching! You're correct - the expected "real" return for VGRO (after product costs and foreign withholding taxes) would be around 3.1%.

[@geeta59]

Does this return include distributions paid by these ETFs

[@JustinBenderCPM]

@geeta sadanala - The expected returns would include any net dividends or interest paid by these ETFs.

[@julientousignant9652]

Thanks for the video Justin. Very informative as always. I have a about 2/3 of my portfolio in VBAL. It's such an amazing ETF.

[@JustinBenderCPM]

@Julien Tousignant - Very cool - I also hold some VBAL in my personal portfolio too (it makes investment management a breeze! :)

[@kevinconklin9125]

Hi Justin, great video! does this mean that bonds are actually going to have a negative real return?

[@JustinBenderCPM]

@Kevin Conklin - that would depend on a number of factors (such as whether yields increase/decrease/stay the same, and the actual future inflation rate). But the expectation is that bonds will not perform as well as they have over the past 10-15 years.

[@kevinconklin9125]

@@JustinBenderCPM Thank you!

[@Steven-wq8tx]

Great explanation Justin

[@sapitron]

what does TEP mean?

[@JustinBenderCPM]

@sapitron - TEP = Trust and Estate Practitioner step.ca/

[@guillaumegiroux9425]

Hi Justin, awesome video. I just subscribed. I have a question: are there historical precedents for ~4% annual return over ~15years periods for stocks? We have been so used to the insane growth since the 1980’s (at the expense of worker’s wage in many parts of the world). RDI Économie (here in French) claimed the current P/E ratio of many large firms is more reminiscent of the Nifty Fifty of the 1970’s than the 2000’s tech bubble, and those Nifty Fifty were a prime example of disappointing returns over 15ish years period. I try to grab exposure and add diversification to value ETF’s in my portfolio (IJS and IUSV), but I try to see if there’s an historical precedent for such a high Shiller CAPE (without a bubble). All the best of success with this channel!

[@JustinBenderCPM]

@Guillaume Giroux - thanks for subscribing! If you'd like more historical data, check out the StarCapital article on the topic: www.starcapital.de/fileadmin/user_upload/files/publikationen/Research_2016-01_Predicting_Stock_Market_Returns_Shiller_CAPE_Keimling.pdf

[@MM-hw6fz]

Awesome explanation.. so impressive. Your analysis is always so critical and neutral, helping me greatly to build my portfolio. Thanks Justin for the free knowledge share sessions !!!!

[@JustinBenderCPM]

@M M - I'm glad you found the video useful - thanks for watching!! :)

[@MyFinancialFamily]

Very well presented Justin. I enjoyed this and I think its good for people to understand what rates they might expect. Subscribed!

[@MyFinancialFamily]

BTW I hope you post more frequently :D

[@JustinBenderCPM]

@My Financial Family - Thanks for subscribing! I'm glad you enjoyed this episode. There's many more on the way - I'm aiming for a release frequency of every two weeks.

[@MyFinancialFamily]

Justin Bender that’s awesome! Appreciate your site too

[@BiesTV]

Great video, as always. I am looking forward to watching more of these (especially on AA ETFs).

[@JustinBenderCPM]

@Sébastien Desforges - I have a tonne of content ready to go on AA ETFs (I just need to record the videos now :)

[@asdasd-lq2hd]

@@JustinBenderCPM I’m new to investing, I have 30k in my Questrade TFSA account looking to invest in 100% VEQT. So all I have to do is buy as many shares I can with my 30k and that’s it? Besides logging in to buy more shares every month for 30+ years, I don’t need to do anything else on my Questrade account? Can I set it and forget it?

[@JustinBenderCPM]

@@asdasd-lq2hd - You could also consider setting up a DRIP on the TFSA account (to reinvest the annual dividends): questrade-support.secure.force.com/mylearning/view/h/Investing/DRIP-Dividend-Reinvestment-Plan//

[@squishtomar1676]

Thank you for the video. I have been playing with the foreign withholding tax spreadsheet and really like it.

[@JustinBenderCPM]

@Blaze Neff - I'm glad to hear you downloaded the CPM Foreign Withholding Tax Ratio Calculator. As I also mentioned to Nel Fmo, my next video release will be "The Ultimate Guide to Foreign Withholding Taxes", on Thursday, September 10th.

[@ianpatti7101]

Excellent! Thank you!

[@JustinBenderCPM]

@Ian Patti - you're very welcome - glad you enjoyed it!

[@ToddMatthewsFitness]

Would ❤ an update on this. Inflation is higher and my fixed income is 5%+

[@HND104]

Thanks for the info Justin! 👍

[@JustinBenderCPM]

@Cesar Reyes - No problemo - thanks for watching! :)

[@rkaz5423]

So investors working with advisors should expect returns between about 0.9%-4.4%...the latter being accompanied with 30%+ market swings...yikes

[@JustinBenderCPM]

@R Kaz - Yet another good reason for investors to negotiate lower fees from their advisors (or consider DIY investing). For those using an advisor, they should demand tax-efficient investment strategies using broad-market ETFs (such as foreign withholding tax mitigation, asset location, tax-loss selling, etc.). They should also receive financial planning services for the fee.

[@DC-nj8kv]

Makes the current 5+% GICs look like a great option with (virtually) no risk 🤷

[@JustinBenderCPM]

@DC-nj8kv - It's a decent time to be a conservative investor ;)

[@ueg8286]

nice work. im just confused why you used the canadian inflation expectation for international stocks rather then a weighted average of the international countries inflation expectation. inflation in the international countries would effect the price of those stocks, not canadian inflation. also, for anyone that has a FI portion of their portfolio, i really dont understand why they would even consider holding bonds. why would holding cash in place of bonds not make sense? with a bank like EQ or motive you can get 1.7%+ on your money, rather then 1.3% on a bond. And this is before the volatility and risk of bonds. most importantly though, when rates rise, bonds are going to get destroyed. even if it takes years for rates to rise, doesnt matter. at the moment a savings account will yield higher then bonds, and when rates rise bonds will have outrageously horrible returns. dont see in a reason in holding bonds at the moment.

[@JustinBenderCPM]

@UEG - Thanks! I had to simplify the assumptions to make the video and process more practical for DIY investors. Bonds can help diversify a portfolio better than cash if bond yields decrease further. As well, investors with larger portfolios cannot place all of their fixed income allocation in the cash account of a single bank (they may not be fully CDIC insured if the bank were to default). Another option for low bond yields could be a diversified ladder of 1-5 years GICs. You can generally obtain a higher yield-to-maturity on the GIC ladder with less term risk (only around a 3 year average maturity for the GICs vs. an 11 year average maturity for a Canadian bond ETF).

[@ueg8286]

@@JustinBenderCPM very true point about the insurance. doesnt effect me personally at the moment, but i definitely see how that would be a problem for hnw people. i get that government bonds have unlimited "insurance", but what about bond ETFs? are you only insured up to CIPF limits, even though the underlying ETF holdings would obviously be safe?

[@JustinBenderCPM]

@@ueg8286 - CIPF does not insure the underlying ETF's bond holdings from default (so investment grade bonds held by the ETF could still potentially default). CIPF coverage would apply if the brokerage holding the ETF for the client were to become insolvent. The calculations are a bit tricky, but this article does a decent job at outlining the process: www.cipf.ca/docs/default-source/communications/m2_top4facts_jun11_adv.pdf

[@ueg8286]

@@JustinBenderCPM not exactly what i meant. one of the reasons against holding large amounts of cash is due to the small insurance cap. government bonds would obviously solve this issue, but if you held government bond etfs, then you are still caped by insurance, even though the underlying bonds would be safe, you would loose everything above the insurance cap if the brokerage went insolvent. obviously the cipf is way bigger then cdic, but same principal. would this be solved by holding bonds directly? just curious about this one. thanks.

[@JustinBenderCPM]

@@ueg8286 Individual bonds would be held at a brokerage, so they would still be at risk if the brokerage were to default (so this is a similar risk to holding a bond ETF at a brokerage).

[@Ritzoid]

All in on TSLA. 700% returns per year

[@JustinBenderCPM]

@Ritzoid - You get that you don't just receive the same return as last year, right?

[@hermes8258]

If stock amd ETF returns are so poor,why bother? Why not just take out CDs, especially in foreign countries that pay higher interest rates?