Quotations by Dan Bortolotti

The original 4% rule (from the 1990s) assumed a 30-year retirement and a balanced portfolio of half stocks and half bonds. The 4% withdrawal rate was based on the portfolio's starting value, and it increased with inflation annually. For example, if you retired with $1 million and inflation was 2% annually, you would be withdrawing $40,000 in year one, $40,800 in year two, $41,616 in year three and so on. Using these assumptions, your chances of ruining out of money before you die were found to be very low. Unfortunately, the expected return on bonds-and probably stocks too-is much lower today than it was when the original research was done. [2021] - Dan Bortolotti

If your employer offers a group savings program, you should probably take full advantage, especially if the employer matches at least part of your contribution. Defined benefit pension plans are rare in the private sector these days, but many companies offer defined contribution plans and group RRSPs. Many workplace plans even offer index funds as options. these are rarely as cheap as ETFs, but if your employer is matching part of your own contributions, it will more than offset any additional fees, and the automatic payroll deductions will enforce those regular savings. [2021] - Dan Bortolotti

If your portfolio is less than six figures, small differences in funds fees matter a lot less than you think. It's better to focus on spending less than you make, saving the difference and investing with low-cost diversified index funds, even if your portfolio is not the absolute cheapest option available. Once you've built significant wealth, you can focus on reducing your investing costs further and then watching your portfolio compound even more. [2021] - Dan Bortolotti

While bonds are clearly less volatile than stocks, they can still lose value during periods of rising interest rates. That's why conservative investors also look to savings accents and GICs for safety. It's true you won't lose your principal with these investments, but even they're not without risk. The silent killers of all investment returns are inflation and taxes, which can reduce the real return on "safe" investments to zero, or even turn them negative. [2021] - Dan Bortolotti

In general, any money you need in less than 5 years shouldn't be in stocks. Even balanced portfolios of 50% stocks and 50% bonds have lost money over that length of time. If you're saving for a down payment or another major purchase in the near term, your top priority has to be protecting your principal. Keep this money in a high-interest savings account or GICs. [2021] - Dan Bortolotti

You have to look at rolling 20-year periods before there's a very high probability of equity returns close to 8% average. This means if your time horizon or temperament prevents you from thinking that far ahead, you need to dampen your portfolio with an allocation to high-quality bonds. This will lower your expected return, but that is the inevitable trade-off between risk and reward. [2021] - Dan Bortolotti

It's important to understand that correlations are not constant. The same two assets may trend in opposite directions for a long time-even a decade or more-then move hand-in-hand with each other for a time, and then behave independently. However, there are two asset types that have historically made good dance partners: stocks and high-quality government bonds. In most countries, over the very long term, the two have moved independently and for long periods their correlations have been negative. [2021] - Dan Bortolotti

Adding stocks to an all-bond portfolio actually lowers the risk of the overall portfolio. That's why many believe retirees should keep at least 20% of their portfolio in equities, even if they're very risk-averse. It works the other way around, too. Historically, a portfolio of 20% bonds and 80% stocks has been significantly less volatile than an all-equity portfolio, with only modestly lower returns. So even if you're a very aggressive investor, you should probably keep at least 20% of your portfolio in bonds. Thoughtful diversification can deliver higher returns with less risk. No wonder it's sometimes called the only free lunch in investing. [2021] - Dan Bortolotti

Bonds have historically returned almost 5% annually, according to the data from Credit Suisse. It's hard to see how an investor could expect that to continue in the foreseeable future, with high-quality bonds in many countries yielding less than 1%. One place to look for a realistic estimate of future returns for bonds is to invest the web page of an ETF that tracks the overall Canadian bond market, such as the Vanguard Canadian Aggregate Bond Index ETF (VAB). Look for the fund's "yield to maturity": this is the total return you should expect if interest rates don't change. [2021] - Dan Bortolotti

Expected returns should be viewed with a time horizon of at least 20 years. If your target rate of return is 5% or 6%, then a portfolio of 60% stocks probably isn't going to cut it. If you're comfortable with a more aggressive approach, that's fine, but remember that most people over-estimate their risk tolerance. If possible, you should consider increasing your savings rate or giving yourself more time. [2021] - Dan Bortolotti

There are occasions when it's appropriate to reconsider your asset allocation. An investor who started in her 30s with a portfolio that was 70% equities might want to dial back to 50% as she approaches retirement. Another reason for making changes to your asset allocation is a major life event; for example, if you inherit a large sum of money, you may want to lower your risk level to protect your new wealth rather than aggressively trying to grow it. [2021] - Dan Bortolotti

Canadian equity index funds are generally cheaper than international equity funds, often by as much as 0.20%. Dividends on Canadian stocks are also taxed more favourably than those of international stocks, especially for people with lower incomes. This holds true even if you're investing in a RRSP or a TFSA: that's because US and international dividends may be subject to foreign withholding taxes even in these sheltered accounts. In most cases, if Canadian, US and international stocks all deliver the same returns before fees and taxes, Canadian stocks will come out ahead after these costs. [2021] - Dan Bortolotti

Hold equal amounts of Canadian, US and overseas stocks. For example, if your overall portfolio target is 60% stocks, you'd hold 20% in Canada, 20% in the US, and 20% in international equities. You can slit that last category into 15% developed markets and 5% emerging markets. (That mix of three-quarters developed and one-quarter emerging is a good rule of thumb.) [2021] - Dan Bortolotti

I recommending including a mix of government and high-quality corporate bonds in your portfolio, and you can do this easily with a single fund. The most widely used bond indexes in Canada include about 70-80% government bonds, with the reminder in corporates, a blend that should suit most investors. These so-called "broad-market" bond funds also include a cross-section of maturities. About 40-45% are short-term bonds (which mature in less than 5 years), another 25% or so are intermediate (maturing in 5-10 years) and the rest are longer-term bonds with maturities of more than 10 years. In general, bonds with short maturities are the least volatile and have the lowest expected returns. [2021] - Dan Bortolotti

GICs don't lose value when interest rates rise, neither do they get a boost when yields fall. This means that during a bear market for stocks-which often leads to falling interest rates-your GICs won't deliver the offsetting benefit you should expect from bonds. Since bonds and GICs each have pros and cons, you might consider a balanced approach and use both in your portfolio. For example, you could use GICs for about half of your fixed-income allocation and use a bond DTF for the other half. [2021] - Dan Bortolotti

Stuff you don't need in your portfolio: REITs, preferred shares, real-return bonds, high-yield bonds, gold, smart beta ETFs, and currency-hedged ETFs. [2021] - Dan Bortolotti

The Dow Jones Industrial Average was created in 1896 and still widely followed today-although it really shouldn't be. The Dow includes just 30 companies, hand-picked by a committee, and instead of being weighted according to a company's size, it's weighted by share price. This made sense 120 years ago when the calculations were made with pencil and paper, but it's almost useless today, and the Dow Jones Industrial Average is a relic that survives only because it's owned by the same company that publishes the Wall Street Journal. So do yourself a favour: ignore the Dow and avoid index funds or ETFs that track it. [2021] - Dan Bortolotti

In the last few years, it's become increasingly common for ETFs to use indexes created by lesser-known firms, because the big guys like S&P charge high licensing fees. It's a bit like the decision to use generic prescription drugs instead of brand drugs. [2021] - Dan Bortolotti

Cap-weighted indexes are the traditional tool of index investors, and they should be your default choice when comparing ETFs. There are several reasons for this. First, they're the most representative of the overall stock market. Second, in almost all cases they're the cheapest (as little as 0.03-0.06%). Finally, cap-weighted index funds-especially those tracking the broad market-typically have the lowest turnover, which means stocks are rarely sold and replaced. This can result in fewer realized capital gains, making these ETFs more tax-efficient if you hold them outside of TFSAs and RRSPs. [2021] - Dan Bortolotti

It's true, there have been many periods of 5 and even 10 years when stocks underperformed bonds, but most of us remain confident that equities will deliver a premium over the long term. Most people lose patience when their strategy underperforms for a year or two. Then they jump to another one that has enjoyed some recent success, probably just before the music stops. [2021] - Dan Bortolotti