Tuesday, February 17, 2015

Money diminishing for life

The television ad promised "money for life." It showed a very happy and a very relaxed retiree enjoying the benefits of having money for life. It sounded too good to be true but I contacted Sun Life Financial anyway. I thought this was probably just a fancy ad for the Sun Life annuity products. and it was -- sorta.

I learned that if I gave Sun Life Financial $100,000, they would provide my wife and me with a monthly income of $435.12 for a guarantee period of 15 years. If either one of us lived longer, we'd continue to benefit. If we died before the 15 years had passed, the remaining money would be paid to our estate. I believe this is an income for life annuity with a guaranteed period certain benefit.

$435.12 per month is $5221.44 a year. This is only 5.221 percent per year on our 100 grand and no inflation protection. Is this good? Maybe -- but I strongly suspect it isn't. It all depends upon how long my wife and I live. I have a bad heart. Everyone will be surprised if I am still here in 15 years. But my wife's grandmother lived into her 90s and my wife shows every sign of doing the same.

Let's consider the effect of inflation on this "money for life." If the next 15 years are like the past 15, then inflation will average 1.91 percent. Historically, this is a rather low rate of inflation. We have gotten off easy these past few years. Still, in just 15 years, my "money for life" would be greatly diminished in value, delivering something in the neighbourhood of 30 percent less buying power.

If my wife lives to 90, another two decades plus, her "money for life" annuity would be slashed in buying power by something approaching almost 50 percent. At age 95 my wife would still be getting a monthly cheque for only $435.12. Does this sound like a good deal? It sure does, for Sun Life.

But I shouldn't be too quick to knock annuities. There is something to be said for having some guaranteed income, even if it is shrinking in buying power every year. My pension is shrinking. It is not completely protected from the ravishes of inflation. But that pension is a wonderful thing to have despite its shortcomings.

Interestingly, I own stock in Sun Life Financial. My investment is up 84% in just a few years. In other words, if I had put $100,000 in Sun Life Financial back when I made my original investment, today I'd have $184,000 in stock. And even better, Sun Life pays a very nice dividend. My initial $100,000 would have purchased 4727 shares and today I'd be enjoying an annual dividend of $6806.88.

This not to say one should never buy an annuity. Annuities have their place in your financial plans but they are not the only investment vehicle to consider. Even the Sun Life representative said as much. He'd put some of our portfolio into an annuity -- he suggested we should have a guaranteed income greater than our expected expenses -- and he suggested putting the remainder of our portfolio into other investments, equities and bonds, while keeping an eye on the tax treatment.

My visit with the Sun Life fellow was educational but it didn't convince me to rush into "Money for Life." Interest rates are down and may drop more. I'll take my chances and hope that by the time my wife and I hit the must-convert-age that interest rates will have recovered somewhat. Higher interest rates translate into higher monthly annuities payments.

When I hit the must convert to a RIF or annuity wall, I hope to know more about investing and the tax treatment of investments. Right now, I believe my wife and I will be ready to add an annuity into our financial plan at that time.

And, I'm keeping the Sun Life rep's card. I liked him.


This add is in response to the second comment following this post. I agree with the writer that we all have fixed expenses and variable expenses. I track both categories using an Excel spreadsheet. To keep my expense records accurate, I charge everything using  a card that rewards me with a full one percent rebate based on the total amount charged.

I charge all food, telephone, clothing, all car expenses except for insurance and much much more. I easily charge more than $20,000 annually and collect more than $200 in rebates. (We charged a new furnace and a new central air unit a few months ago. The rebate helped ease the pain of that unexpected purchase.) By charging almost everything, I have a monthly record supplied by the credit card company that tracks in detail most of our expenses.

Now, let me make this quite clear. I do NOT enjoy a 6.8% yield on my Sun Life stock. What I was attempting to do was compare apples and apples. When I retired, I got some quotes from banks and insurance companies concerning annuities. I was not impressed.  I was told a hundred thousand dollars would deliver maybe $5,500 per year and that payment would remain stuck at $5,500 until both my wife and I died.

Instead, I put my wife and my money in the market. Today our investments have grown by 60% and that is after we have removed tens of thousands of dollars from our portfolio in order to live in retirement. One stock I purchased for us was Sun Life. Here is a screen grab of our investment.

Click on the above in order to enlarge and read.

I paid only $21.50 for a stock that paid a dividend of 36-cents this past December. A hundred thousand dollar investment made in Sun Life itself sometime after my retirement would be delivering about $1675 every three months. This is about $558 per month or $6700 annually. The icing on the cake is the capital gain. The stock has gained almost 85% since purchase. Click on the above screen grab to enlarge and read.

And it is not the only winner in my portfolio. The past few years have been an amazing time to be in the market. When my wife and I get a little closer to the 71 years of age milestone, we will again consider annuities. Maybe, just maybe, the government will have, by then, changed the withdrawal rules and we may then just allow our portfolio to continue chugging away until we both have died. Our estate can take care of the expense of liquidating our registered retirement savings.

Click on the above in order to enlarge and read.

As for high dividend paying stocks, there are a few out there that I like for long term holds. For instance, Dream Office Real Estate Office Trust (D.UN). It has been knocked down a little by recent news, the head of the REIT moved on, the holdings in the West are being questioned as the price of oil plummets. With the price not, in my estimation, accurately reflecting its value, the dividend payment calculates out at an inflated value: 8.53% today.

Both my wife and I own units of D.UN. Her tax free savings account has grown by a full 25% since she opened the plan. Today that account delivers more than $1400 annually. It would take a massive correction to put her plan at risk of falling into the red and the cushion is growing.

Monday, January 26, 2015

Investing: not gambling but still taking chances

I liked what I knew about Norbord. In my opinion, it made a good product and it had a commanding position in the industry. The product? Oriented strand board (OSB). One can think of OSB as a cross between plywood and the cheaper, both in price and quality, chipboard. There is a lot of OSB used in building construction, especially home building. As home building in the U.S. rebounds, Norbord should benefit. I bought some stock.

Norbord briefly popped and then started on a long, bumpy road downward. I should have bought more when it dipped below $22 but fearing the falling knife, I have some deep financial wounds from doing this in the past, kept me on the sidelines.

Today, Norbord is back in the black in my books. My tax free savings account, started after I retired, is now up almost 25%. Is this like winning a small lottery? No. This gain is simply the result of making a good call. A good investment call.

Take care, invest carefully, and, over time, you will win more than you lose. There is no way to guarantee a win with a lottery ticket. In fact, buying lottery tickets for all but the very lucky is a guaranteed way to lose money.

Learn about asset allocation, set some investment goals, find some stock analysts you trust . . .  And stick to your decisions unless something happens to prove you were wrong. Don't flit here and there, buffeted by changing financial winds.

I am going to go on record as saying I will hold Norbord until I have at least made a profit of about ten percent on my original investment. That was my original goal and I see no reason to change it. Because I am retired and I need to be moving into safer investments, I will put my investment plus the profits into something less risky, something less volatile. If I were younger I'd be bolder. But, I'm not. I'm old.

For instance, I will be making fewer forays into resource stocks like Labrador Iron Mines in the future. My winners have easily covered my losses in LIM. I didn't jump into LIM with both feet. Still, it was not a great move for a retired chap. But, my asset allocation encompasses making wild-flings-for-fun and I did not put more into LIM than I had budgeted as a manageable loss.

Will the path upward be smooth for Norbord in 2015? I don't know. I would be surprised if it was. Still, I have confidence Norbord will deliver a tidy profit in the end.

Other stocks and ETFs that have helped buoy my portfolio:

Bank of Nova Scotia: up 122%
Crescent Point Energy: up 34%
iShares XIC: up 36%
iShares MSCI Singapore: up 60%
iShares XMD: up 47%
Royal Bank: up 55%
Sun Life Financial: up 85%

Only four of my investments are in the red.

Wednesday, January 14, 2015

Living in Retirement

The market waxes and wanes but my expenses just keep on growing. Putting my retirement money in the market, I was told, was a bad idea. I did it anyway. Even with the recent pullback, my wealth has grown by more than 50 percent since leaving The London Free Press. And that is after removing some funds annually to balance my books.

Today I checked the present yield my wife's Dream Office REIT is delivering. She is enjoying an almost 7.5 percent yield when calculated on her original investment. And the best part is that her total investment has grown in value and is still hundreds of dollars to the plus side. The stock is actually down from where she bought in but the constant flow of monthly dividends has given her investment the needed buoyancy.

We don't need to cash the dividends and so they simply 'puddle.' Each month the cash in her account grows. Each month the percentage of cash in the account tends to increase. The account gets less and less risky over time -- if you equate volatility risk. Today her tax free savings plan is about 14 percent cash. 84 percent equity and 14 percent cash is not a great ratio if safety is one's goal but it is still a pleasant holding of cash. The interest on her cash isn't much but it helps protect the cash from the ravages of inflation.

We won't buy more D.UN. No point having too much exposure to one stock. But we will buy another solid, dividend-paying investment and let it sit with dividends 'puddling.' When we get into our mid 70s and need a good source of steady income, I'm hoping our two TFSAs will be there to help fill the need.

Thursday, January 8, 2015

Some investments holding up well

When my wife opened a tax free savings account she had very little money to shove into the plan. Because of the limited funds, she simply stuck all the money in some shares of  Dream Office REIT (D.UN).

Recently the stock started moving lower. Thanks to over a year of accumulated monthly dividends it took awhile for her account to descend into the red, but eventually it did. But today it is back in the black thanks to those same dividends that earlier provided some buoyancy. She is now almost six percent to the good. With interest rates at historic lows, this is not a bad yield. In seven days she will realize another dividend payment and the cushion sheltering her from a loss will grow yet again.

Like my wife, I have little money available to invest in a tax free savings account. But I divided my money between two companies: the Royal Bank and Norbord. My RBC share not only pay a nice dividend but have grown in value. Even with the recent downturn in financials, I am up about 74 percent on my investment. My Norbord is down if all one considers is the stock price but it is up almost 3.5 percent after the dividends are considered. Thanks to good luck and those nice dividends, my tax free savings account is up some 24.7% in very few years.

With the market battling to gain a little ground, with volatility the name of the present game, it is easy to lose faith in the market. At times like this, I like to stand back and look at the big picture. Where are my investments today compared to the day I retired? My investments are up. Way up. After removing tens of thousands to live in retirement, my retirement portfolio is up more than 55 percent.

Have I always made the wisest investment choices? No, but just how bad is something one can argue about over a beer. The dividends have been a godsend in retirement. At the end of the month I'll see how I am doing this year compared to two alternative investing approaches, both easily done: the TD Monthly Income fund and the Complete Couch Potato.

A reader recently made me aware of another TD fund that has performed very well over the years. I'm watching it and may blog on that fund at some later date. I may even buy a little for myself.

Wednesday, January 7, 2015

Tightening the financial belt

Our VW Jetta TDI has not been costly.
The good times are over -- for now. When the markets were climbing, as was the case in recent years, my wife and I enjoyed the windfall. We have a new car, a Volkswagen Jetta TDI, we made lots of improvements to our home, making it a nicer place to hang in our retirement. I refreshed my wardrobe. The list goes on.

Now, with the markets down and our portfolio down even more, the taps controlling our spending have been closed. Not completely, we are will still be taking my oldest granddaughter to see Paddington Bear at the nearby cinema, but big tickets items are no longer in the budget.

And when I say budget, I am not just talking figuratively. We have an actual budget. It is an Excel spread sheet and it pulls no punches. I list all our sources of income and all our can't-wiggle-out-of-these expenses. I then add the expenses we can control and these are the ones I trim. The shortfall is what must come out of our RSPs. This year we will try to remove less than four percent. This is less than our dividend income.

To get our expenses down, I have applied zero-based budgeting where all expenses must be justified. For instance, I could not justify our monthly cell phone expense. I've canceled our monthly plan and moved us to a prepaid annual plan. This chopped our cell phone expense from some $420 a year to about $100. Although there were some one time costs associated with the move. I figure these only amounted to about another $50.

A budget is important and a very important part of the budget is the section where one estimates how much one might spend on stuff that was impossible to accurately estimate. For instance, our central vac hose has split and must be replaced. We did not anticipate this expense. But, I have a field for these unanticipated expenses and it is not blank. I know I will be blindsided during the year. I am just not sure by what.

For instance, we had to have a new furnace installed immediately after Christmas. This was one of those financial hits difficult to see coming. Recently, we have been battered onto the financial ropes by both increasing expenses and decreasing income. This will be a year for testing the resilience of our investment strategy.

Sunday, January 4, 2015

Returning to the fold

Years ago I experimented with index investing. I bought iShares back when these units were under the control of Barclay's and I opened a TD self directed account just so I could buy the bank's e-series funds. I also had a few mutual funds (TD, CIBC, RBC, Septre and Mawer) but overall I put relatively little money into these funds. With each passing year I jettisoned more and more of those former holdings and I'm not sorry I did. I did just fine on my own.

Now, going into my seventh year of retirement, I find I have just suffered my first truly bad year. I got whomped and whomped soundly. My investments are still pumping out the cash needed to live in retirement but the overall value of my investments is way down from what it was just a year ago.

When my portfolio was at its peak, I should have changed horses. My approach was running out of steam and I didn't notice. The winner, when not only capital growth but also dividend payments are considered, was the Complete Couch Potato portfolio. The CCP didn't pay the most in dividends, my approach did that, but the CPP paid well and clearly the risk/reward was way better with the CCP. I can still sleep at night but the losses I've suffered would leave many small investors tossing and turning with anxiety.

Click on the link and check it out. This portfolio turned in an amazing performance in 2014. Admittedly there were mutual funds that beat it but the complete couch potato tended to deliver great dividend bang for the buck, a rapidly growing buck. Today this portfolio is up well into double digit territory since early January 2014. This is thanks in large part to it U.S. holdings.

The TD Monthly Income, which I follow, was also a winner, and if teamed with the e-series U.S. index fund to create a balanced portfolio with exposure to the States, it delivered even better returns than the CPP. Where this mix fell behind was in the dividend payout. The ETF mix was clearly the better choice here. As a senior, I have to begrudgingly give the nod to the ETF mix above over the mutual fund approach mentioned.

Am I going to dump my present holdings and move my investments to last year's winners? No, I'm not. Chasing last year's leaders is rarely a good idea. I still have faith that some of my holding will outperform the market. I'm on board the individual-stock-owning train now and I want to be still riding when it pulls into the station. I don't want to be one of those who buys high and sells low.

One of my holdings, Norbord, has cut its dividend as expected but it is still yielding better than four percent. I believe I see a nice pop in value in its future. Crescent Point Energy should rebound when the global oil market recovers a little. My banks stocks are also down from their highs but the dividends are solid and I see no benefit to selling what I bought at fire sale prices back in 2008 and 2009. I can go right through my entire portfolio and for most holdings I can see a brighter tomorrow.

As my portfolio recovers, and hopefully at a quicker pace than the index-based portfolios, I will again revisit the idea of moving my investments back into the index fold. (At the moment, I am doing better than my old personal benchmark nemesis -- the TD Monthly Income fund. We are only days into the new year but I am still willing to take a little comfort wherever I can find it.)

If you follow the links to the Canadian Couch Potato site, there are other suggested portfolio mixes that also performed quite nicely in 2014. I mention these only because I followed them and was impressed.

This is not to say the approaches not mentioned are not worth considering, this is simply to say I have not personally back-tested them. Do your homework, back-test some of these portfolio approaches and if you find anything interesting, write. I'd love hearing from you.

Me, I'm following two new test portfolios. I created one using the TD Monthly Income and another using the Complete Couch Potato mix. Both are based on the value of my actual portfolio at the end of 2014. As the year progresses I will post how these two imaginary portfolios are preforming relative to my actual investments.

Friday, December 26, 2014

In the end, it's your decision, your gain or your loss

Some time ago, I bought a few hundred shares of Norbord. I was betting on a recovery in the U.S. housing market driving the shares of the large OSB maker higher. The monster dividend was nice but I had doubts that it was sustainable. I expected to see a cut in the dividend in 2015.

After purchase, the stock popped briefly and then settled into a decline that dragged my losses into the four digit numbers before finding a floor. Norbord, once a market darling, lost its luster and many analysts downgraded the shares.

In October Raymond James cut their price target by two dollars to $22. That same month, RBC Capital dropped its target also to $22. As I recall, even a Norbord booster like ScotiaBank dropped its target price a little. And what happened? The Norbord stock price started on the road to recovery. Today, not two months later, my holdings are again in the black. The dividend is being cut in the new year but I got two good payments before the announcement. Some analysts are even raising the target price on the stock. I'm happy.

The lesson? Others have opinions but there is only one that really matters: Yours. Do your homework. Don't just buy on the advise of others. Have some rules and stick to them. For instance, I have a rule against buying companies that are unprofitable. Almost every time I have ignored this rule, it has cost me money.

And there is another lesson. If you buy stock in a good company and the price drops, don't panic. Sell if the story surrounding the stock has changed for the worse but if the stuff that attracted you is still intact don't be overly concerned with a small fall in share value. Stock prices go up and down. This is just life. No reason in itself for great concern.

I invest for the long term. If a stock is paying a dividend of four percent or better based on its present price, I feel it is paying its way. I hold and I don't lose sleep. Companies like Precision Drilling fall into this category. Until oil prices rebound, I will hold onto stocks like my Crescent Point and take solace from the dividend. In some cases my dividend has shrunk but my faith in these companies has not. There may still be a sports car in my future.