It’s atypical for someone his age, but this 27-year-old tech support worker we’ll call Duke is confident he doesn’t need financial advice when it comes to spending or budgeting.
Duke, who earns $66,000 per year in Toronto, has been meticulously laying out his budget since he started working part-time in 2015. He divides his monthly take-home salary of $3,700 by 4.5 to give him a weekly budget of about $822. Each transaction he makes is placed into a spreadsheet where it’s dated and filtered into a category such as food and entertainment. A final column shows what percentage of his weekly budget was spent.
He’s never spent more than he’s earned, he said. In fact, he’s usually left with $1,000 at the end of the month to pump into his chequing accounts, which total $108,000.
“I don’t feel a financial adviser would be able to tell me anything I don’t already know,” said Duke of his spending.
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He knows that, despite his budgeting, he could benefit from cutting down his food bill, which totalled $742 in the month Spent looked at his expenses. The bulk of that budget goes to groceries. Duke spent $286.66 over three trips to No Frills, $95.92 at Costco, $25.35 in two trips to Loblaw’s, $8.77 at Fortinos and an additional $100 at a local Chinese grocery store.
As far as the rest of his spending, he said he can’t make any other concessions. He only uses his car for transport — no ride sharing or public transit expenses appear in his monthly spending — and he spends just above $400 on insurance, gas and parking. His entertainment budget is light and so are his bills — $1,000 for rent, $42 for his cellphone and $15 for a gym membership.
Where he could stand to benefit from professional advice is not in regards with how to manage his funds, but how to invest them.
Duke does not have any money in a tax-free savings account and the only space being taken in his RRSP is from a work pension plan. When he first started investing in 2017, he placed $10,000 into a non-registered account and invested in a suite of mutual funds.
Over a year, he quickly grew frustrated with the high management fees he was paying and the heavy losses he was taking.
“I had no faith this person behind the counter could do a better job than me if I just got a little bit more of a background on what to invest in,” he said.
So he waited a few months before breaking even again and pulled his money from mutual funds, redirecting $3,000 into four index funds where he gave Canadian equities, U.S. equities, international equities and Canadian bonds an equal weighting of 25 per cent each.
Duke has had more success with this portfolio, but he wants more. He’s eyeing higher returns and is willing to put $100,000 of his money to work to generate them. He’s willing to take on risk, but at the same time, he wants his portfolio to be hedged against potential danger. Spent asked Frank Ortencio, portfolio manager of Raymond James’ Ortencio & Associates Wealth Management Group to help guide him.
Ortencio describes himself as an asset allocator — not a stock picker. He builds his portfolios by using ETFs to give him exposure to certain geographic regions and sectors.
Duke is still young and doesn’t have a pressing need to use his money over the next five years. He should be looking to take on more risk, Ortencio said.
“If he can live with the volatility he can increase his equity allocation to 90 per cent equities and 10 per cent bonds,” Ortencio said.
The first steps in Ortencio’s plan are to have Duke max out his contributions for both his RRSP and his TFSA. That would mean pumping $20,000 and $63,500 into the respective accounts. The remaining $17,500 would be placed into his non-registered account, joining the $3,000 already in there for a total of $20,000.
As for how he’d invest it, Ortencio said Duke can get all the bond exposure he’d need by investing 10 per cent of his portfolio into a single global bond ETF that would be held in either his RRSP or TFSA.
Duke would then begin slicing up the weightings in his equity portfolio by geographic region. Ortencio knows some investors might balk at the suggestion, but he wouldn’t recommend Duke place more than 12 to 15 per cent of his equity portfolio into Canada. He suggested the iShares MSCI Canadian Minimum Volatility ETF, which has dividend-based bank, utility and pipeline stocks among its top holdings.
“Canada is only about four per cent of the world market,” said Ortencio, who explained that Duke could much more easily diversify his portfolio if he avoids home bias.
Sixty per cent of Duke’s portfolio would then be weighted to global stocks, Ortencio said. Duke could either look for one global ETF that excludes Canada from its holdings or one fund that holds U.S. stocks and another that focuses on international firms. Again, he recommended two low-volatility products in the iShares Core MSCI All Country World Index Ex Canada ETF and the Power Shares S&P 500 Low Volatility ETF.
It’s in the remaining portion of Duke’s portfolio that he’ll take on more risk and expose himself to volatility, Ortencio said. Ten per cent can go to small and mid-cap stock ETFs, another 10 can go to REIT and technology ETFs and the final five per cent would be attributed to emerging markets. Within this section of the portfolio, Duke can also buy individual stocks — he voiced some interest in names like Tesla Inc. and Beyond Meat Inc. — but Ortencio wouldn’t recommend investing more than 10 per cent in one name.
“And 10 to 20 stocks would be too many,” he added.
Duke can keep some of his index funds in his non-registered account, as long as he adjusts their weightings. He can then use a Systematic Investment Plan, which allows investors to make automatic purchases and contribute $700 on a monthly basis going forward.
The important thing for Duke to remember, Ortencio said, is that while this portfolio might fall short of the max growth on the table during a raging bull market, it’ll also better insulate him in a sell-off like the one investors saw in March.
“This portfolio because it has a heavier tilt toward equity … the best-performing market, let’s say it’s up 10 per cent, his returns should be in the seven to eight per cent range,” Ortencio said. “But when the markets are down 10 per cent, because of the diversification, he may participate only on 70 per cent of the downside.”
Ortencio’s portfolio is an appealing one for Duke, who is happy with the opportunity to make more returns than he has in his time as an investor while also ensuring he retains some safety.
“This is definitely something I want to get up and running,” Duke said.