The renter’s revenge is a six- or seven-figure investment portfolio built over decades.
Renting has many drawbacks – lack of control over where you live, eviction risk and you don’t get to build equity in a property you can sell tax-free if it’s your principal residence. But you save a ton as a renter compared with owning by not paying for maintenance, upkeep and property tax. Directing that money into investments over the decades can generate a lot of wealth that is much more liquid than home equity.
Let’s get into some specifics on how to invest as a renter with Ben Felix, a portfolio manager with PWL Capital in Ottawa who has done extensive analysis of the financial differences between renting and owning. First, you need to consider having most or all of your investment portfolio invested in stocks rather than safer investments such as bonds or guaranteed investment certificates.
“If your objective is to accumulate wealth at a similar pace to homeowners, then it’s a requirement to be aggressive with the asset mix,” Mr. Felix said.
Using historical housing price data, he estimates the long-term average annual gain on houses at inflation plus one percentage point. Your chances of beating those returns as a renter improve as you replace bonds with exposure to the stock market.
Bonds take the edge off stock market declines, so they’re essential for the vast majority of investors in some degree. But the model portfolio we’re discussing here is 100 per cent in exchange-traded funds that hold stocks. The annualized return for the six ETFs in this portfolio, including share price changes and dividends, was 7.5 per cent for the 20 years to May 31.
Given the huge runup in stocks in the past 15 months, Mr. Felix says 6 per cent is probably a better expected return for the years ahead. Whatever annualized return you use, you should expect an all-equity portfolio to test your resolve to stay on plan.
The return for the 12 months to May 31 was 33.6 per cent, while the worst 12-month loss was 33.8 per cent in 2008-09. “That’s not easy for people,” Mr. Felix said. “That’s the behavioural challenge.”
Here are the trade-offs for making the portfolio less aggressive by moving 20 per cent into a bond ETF: The gain for the 12 months to May 31 falls to 25.9 per cent, the 20-year annualized total return falls to 7.2 per cent, while the worst 12-month return improves to 27.2 per cent. The 20-year return on $100,000 invested at 7.5 per cent exceeds the return at 7.2 per cent by a total of $23,091.
The model portfolio Mr. Felix proposed for renters prepared to invest aggressively (see chart) covers all the usual categories – Canadian, U.S. and international developed stock markets, plus emerging markets. An extra tweak to improve returns is to include some exposure to shares of small companies that are considered to be undervalued. In investing terms, that means small-capitalization value stocks.
Mr. Felix considers these stocks to be the most efficient way to improve returns beyond a more traditional portfolio mix. “Just like stocks are riskier than bonds, small cap value stocks are riskier than large cap growth stocks. That’s why you expect a higher return, but with more variability.”
Investors have made a lot of money in the past 15 months by investing in sectors and stocks that have generated a lot of buzz. Mr. Felix sees too much risk in chasing hot investments of the moment. “Typically, what happens is that you end up overpaying for potential opportunity in a sector and you end up with low returns.”
A way to partially offset the advantage homeowners have in being able to sell a principal residence tax-free is to invest the maximum amount per year in a tax-free savings account, currently $6,000 a year.
For overall tax-efficiency, Mr. Felix suggests favouring a TFSA when your current tax rate, including payments for social benefits like employment insurance, is lower than it will be in retirement. A registered retirement savings plan works well when your current tax rate is higher than it will be later on. If taxes will be the same later as they are now, then TFSAs and RRSPs are interchangeable, Mr. Felix said.
Use a non-registered account when you fill your TFSA and RRSP allotments. A non-registered account offers the benefit of using the dividend tax credit for dividends paid by Canadian corporations and the 50 per cent inclusion rate for capital gains.
Renter’s revenge
Here’s a portfolio of exchange-traded funds (ETFs) that a renter
could use to build long-term wealth comparable to the equity
of homeowners. This is a very aggressive portfolio suitable for
investors comfortable with stock market ups and downs.
Exercise caution in using past returns as a guide to the future.
Stocks have surged recently and future gains could be
more muted.
Fund
Ticker
Weighting
iShares Core S&P/TSX Capped
Composite Index ETF
XIC-T
30%
Vanguard U.S. Total Market
Index ETF
VUN-T
30
iShares Core MSCI EAFE
IMI Index ETF
XEF-T
16
Avantis U.S. Small Cap
Value ETF
AVUV-A
10
iShares Core MSCI EM IMI
Index ETF
XEC-T
8
Avantis International Small Cap
Value ETF
AVDV-A
6
Portfolio management expense ratio
0.17%
Notes: XEF covers international markets, i.e. those outside North America; IMI
stands for investable market index, which includes small, medium and large
companies. XEC covers emerging markets.
Total returns
To May 31
12-month
33.6%
Three-year
10.3
Five-year
11.8
10-year
10.9
20-year
7.5
Worst 12 months
(March 2008–Feb. 2009)
-33.8
Best 12 months
(April 2020–March 2021)
49.6
THE GLOBE AND MAIL, SOURCE: rob carrick; pwl capital
Renter’s revenge
Here’s a portfolio of exchange-traded funds (ETFs) that a renter
could use to build long-term wealth comparable to the equity
of homeowners. This is a very aggressive portfolio suitable for
investors comfortable with stock market ups and downs.
Exercise caution in using past returns as a guide to the future.
Stocks have surged recently and future gains could be
more muted.
Fund
Ticker
Weighting
iShares Core S&P/TSX Capped
Composite Index ETF
XIC-T
30%
Vanguard U.S. Total Market
Index ETF
VUN-T
30
iShares Core MSCI EAFE
IMI Index ETF
XEF-T
16
Avantis U.S. Small Cap
Value ETF
AVUV-A
10
iShares Core MSCI EM IMI
Index ETF
XEC-T
8
Avantis International Small Cap
Value ETF
AVDV-A
6
Portfolio management expense ratio
0.17%
Notes: XEF covers international markets, i.e. those outside North America; IMI
stands for investable market index, which includes small, medium and large
companies. XEC covers emerging markets.
Total returns
To May 31
12-month
33.6%
Three-year
10.3
Five-year
11.8
10-year
10.9
20-year
7.5
Worst 12 months
(March 2008–Feb. 2009)
-33.8
Best 12 months
(April 2020–March 2021)
49.6
THE GLOBE AND MAIL, SOURCE: rob carrick; pwl capital
Renter’s revenge
Here’s a portfolio of exchange-traded funds (ETFs) that a renter could use to build long-term
wealth comparable to the equity of homeowners. This is a very aggressive portfolio suitable
for investors comfortable with stock market ups and downs. Exercise caution in using past
returns as a guide to the future. Stocks have surged recently and future gains could
be more muted.
Fund
Ticker
Weighting
iShares Core S&P/TSX Capped
Composite Index ETF
XIC-T
30%
Vanguard U.S. Total Market
Index ETF
VUN-T
30
iShares Core MSCI EAFE
IMI Index ETF
XEF-T
16
Avantis U.S. Small Cap
Value ETF
AVUV-A
10
iShares Core MSCI EM IMI
Index ETF
XEC-T
8
Avantis International Small Cap
Value ETF
AVDV-A
6
Portfolio management expense ratio
0.17%
Notes: XEF covers international markets, i.e. those outside North America; IMI stands for
investable market index, which includes small, medium and large companies. XEC covers
emerging markets.
Total returns
To May 31
12-month
33.6%
Three-year
10.3
Five-year
11.8
10-year
10.9
20-year
7.5
Worst 12 months
(March 2008–Feb. 2009)
-33.8
Best 12 months
(April 2020–March 2021)
49.6
THE GLOBE AND MAIL, SOURCE: rob carrick; pwl capital
Ideally, a renter who sets up the aggressive ETF portfolio will make regular contributions using an online broker or investing app that charged little or nothing to buy ETFs and stocks. Check out this recent column on minimizing ETF trading commissions.
A simpler but still effective approach for the renter who wants to invest aggressively is to use an asset allocation ETF that holds only stocks. These funds, also known as balanced ETFs, typically blend stock and bond market exposure into a fully diversified portfolio in one convenient package. However, there are also some all-equity products that cover off Canada, the U.S. and foreign markets as well. Two examples are the iShares Core Equity ETF Portfolio (XEQT-T) and the Vanguard All-Equity ETF Portfolio (VEQT-T).
“These funds are very good portfolios if we’re talking about a relatively inexperienced investor who is trying to get comfortable with the idea of renting and investing,” Mr. Felix said.
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Rob Carrick