One question I’m often asked about my investment approach is when it makes sense to switch my portfolio from 100% global equities (represented by Vanguard’s All Equity ETF – VEQT) to something less risky that includes bonds and/or cash.
In other words, does it make sense to switch from VEQT to VGRO to possibly VBAL as you enter retirement?
A traditional rule of thumb for asset allocation is for investors to hold a percentage of equities equal to 100 minus their age. A 60-year-old, therefore, would hold just 40% of their portfolio in equities and 60% in bonds.
More risk-seeking investors might adapt that rule to be 110 or 120 minus their age, but that would still mean holding a maximum of 60% equities at age 60.
Target date funds took this approach and ran with it, creating a diversified one-fund solution designed to automatically decrease its equity exposure as you get closer to retirement.
Take BlackRock’s LifePath Index Funds, made popular in defined contribution pension plans across Canada and the US. Contributors pick a fund that most closely aligns with their desired retirement date and over time the fund adjusts its asset mix from aggressive to balanced to conservative.
Indeed, the LifePath Index 2025 Fund is made up of 40% global equities and 60% bonds.
Self-directed investors in Canada don’t generally have access to purchase target date funds, and so the closest approximation would be to invest in VEQT in their 30s, sell it and buy VGRO in their 40s, sell it and buy VBAL in their 50s, and sell it and buy VCNS in their 60s. Something like that, anyway.
Scott Cederburg, an associate professor of finance at University of Arizona, challenges this traditional thinking around “lifecycle investing” with his latest research. He tried to determine the optimal asset allocation to achieve the highest retirement consumption and bequests.
“An optimal lifetime allocation of 33% domestic stocks, 67% international stocks, 0% bonds, and 0% bills vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests.”
Cederburg compared this all-equity strategy to a two benchmarks: a balanced strategy with 60% domestic stocks and 40% bonds and a target-date fund that employs an age-based, stock-bond strategy.
Interestingly, a couple using the balanced strategy must save 19.3% of income (i.e., nearly twice as much) to achieve the same retirement and final estate outcome as a couple investing in the optimal strategy and saving just 10% of income.
The couple investing in the target date fund must save 16.1% (i.e., 61% more) to match the expected utility of the optimal all-equity strategy.
Vanguard’s All Equity ETF (VEQT) is the closest approximation we can get to Cederburg’s optimal lifetime allocation.
VEQT holds:
- Canadian equities = 30%
- US equities = 46%
- International equities = 17%
- Emerging market equities = 7%
My takeaway from this research is to not only buy and hold VEQT throughout my working years but also to maintain that 100% global equity allocation all throughout retirement. It’s to literally VEQT and chill, for life.
By doing so I can either get away with saving less throughout my working years to achieve the same retirement outcome as a more conservative investor, or I can get away with spending more in retirement and/or giving more away to my kids if I maintain a similar savings rate.
But I understand the psychological challenge of holding 100% stocks throughout retirement. We don’t have any pension income, so we’ll rely on significant withdrawals from our various accounts throughout retirement. That won’t feel good in the years that stocks are down.
But the Cederburg research takes those poor performing years into account, and the all-equity investors for life are still better off if they can keep their emotions in check.
For those who can’t, I still recommend a two-fund solution where you continue to hold the same risk appropriate asset allocation fund with 90% of your retirement assets, but just add a 10% allocation to a high interest savings ETF to meet your withdrawal needs. This “bucket” approach can typically cover 1-3 years’ worth of expected withdrawals in retirement.
After all, the best investing approach is going to be the one you can stick with for the long-term.
Here’s Ben Felix with a closer look at why it might be time to rethink lifecycle asset allocation:
This Week’s Recap:
Last week I explained when it makes sense to hire a full service financial advisor, even as a backup plan for DIY investors.
From the archives: building if/then statements into your financial plan.
Promo of the Week:
I got the call from Wealthsimple saying that they’re finally rolling out self-directed corporate accounts next week! I’ve got an appointment set-up with a “gold glove” team member to assist with the transfer of our existing corporate investing account from Questrade (a transfer that I’m perfectly capable of doing on my own, mind you, but the account type still does not appear to be available to open online so perhaps some extra handholding is still required).
In any case, the timing is great because we’re moving just under $500,000 over to Wealthsimple, which will qualify me for an iPhone 16 Pro or a MacBook Pro with M4 chip. Merry Christmas to me!
There’s still time to register for this promotion (until December 13th) and by registering you’ll have 30 days to deposit or transfer $100,000 or more over to Wealthsimple.
Open a Wealthsimple account here.
Once the corporate account is transferred I’ll have eliminated Questrade from our lives and just have an outstanding RESP at TD Direct Investing left to manage. Incidentally, self-directed RESPs are still on the roadmap for Wealthsimple and should be available towards the end of Q1 2025 (so I’m told).
Weekend Reading:
A deep dive into the world of investing with Ben Felix and David Chilton on The Wealthy Barber Podcast. What, you didn’t know The Wealthy Barber is back putting out personal finance content? Subscribe to his newsletter here.
Wealthy older investors with cognitive decline risk losing money. It’s one reason you need a Trusted Contact Person (Globe and Mail subs):
“A recent study suggests that how well we perceive our own cognitive decline can have a huge impact on our retirement success. It also found that the financial losses that can result from being unaware of cognitive decline are most felt by wealthier investors who are active in the stock market.”
Why John Bogle was wrong about expected future returns and what it means for young investors.
What you’re getting wrong about dividend investing – a look at the pros and cons of this popular income investing strategy:
“What investors don’t realize is that stock prices do adjust for those dividends that are paid. I might have a full-size bar and a bite-size, but my full-size bar has shrunk just a little bit and I have the same amount of chocolate as before. So, you and I have the same amount of chocolate, but my fallacy is that I’ve got a little piece that you don’t have, so I somehow have more.”
“You always have this option to create income by selling shares of stocks that you own. But that creates a whole other set of questions: Which shares do you sell from your portfolio? Then do you have subsequent decision regret because, “Oh, I sold those shares and now those shares have gone up.” And I’m not suggesting in any way that you settle for a suboptimal strategy or anything like that, but simply saying from a psychological standpoint: Dividend investors don’t face those questions because they are receiving that regular income from their portfolio without having to sell shares.”
The Ontario Securities Commission (OSC) and the Canadian Investment Regulation Organization (CIRO) are undertaking a joint review of sales practices in bank branches amid worries about “potential investor harm due to alleged high-pressure sales practices for mutual funds at some Canadian banks.”
Finally, congratulations to Nick Maggiulli on getting engaged – and here’s his excellent take on things you can’t buy.
Have a great weekend, everyone!
