Dumped DRW: Seemed like the right thing to do

Just a quick update.

Today I dumped my Wisdomtree Global ex-US Real Estate Fund. (DRW:NYSE) With DRW losing value quickly, I can imagine this fund dropping another ten percent. If it delivers a decent yield come the end of June and if it has dropped well over the ten percent, I might, I just might entertain buying a little. But, for the moment, I'm out.

With all the economic uncertainty in Europe, dumping this international ETF seemed prudent. It hasn't performed well, it hasn't delivered the expected yield; It has been a dog.

I am still up for the year with my portfolio. So, I feel good about getting out now and possibly buying some better yielding investments in the coming months. I'll give a list of the stocks I decide to buy in the coming days.

Cheers!

Still mulling over the questions posed by a reader. I'm learning a lot as I work through all the research info in order to arrive at some answers I can stand behind.

Risk and Volatility, Active vs. Passive management and more

Risk and Volatility

I have never been comfortable with risk questionnaires. I used to fill them out to appease the bank but I have refused to cooperate after having my responses thrown back at me. I was on vacation and my Latin American investment started to move up in value, rapidly. It was quickly becoming a relatively huge chunk of my portfolio. I had waited years for this damn fund to move and now it was. Unfortunately, I as on vacation and having so much of my portfolio in a "risky" investment went against my investor profile on file with the bank. They took it upon themselves to lessen my exposure. I had unknowingly given them this power while filling out the risk questionnaire.

I learned the risk profile questionnaire is designed to protect the bank as much as it is designed to protect me. This experience was one reason I took all control of my portfolio into my own hands.

Also, I learned that the bank and I see risk differently. I do not see volatility as risk. The world is an ever changing place. I'm comfortable with gains and losses. The tide comes in and the tide goes out. C'est la vie.

For a look at risk and volatility that makes sense to me, please read: risk and volatility by Gummy (don't ask.) Gummy sees risk, as commonly defined by the investment community, as financial techno-babble. Gummy may be attacking a bit of a straw man here, some advisers may see risk differently, but his criticism is right on when it comes to my experiences with banks and their investment arms.

  

Active vs. passive management

More to come. But now it is off to Port Stanley with the granddaughter. I've got a 33-month-old who wants to learn how to use a camera.

This is a picture that she shot yesterday. She loves purple and wanted to shoot a picture of the purple flower. I have cropped the image, set the endpoints and burned and dodged it in Photoshop but it is her picture at the core.

I'm trying to teach her to jump in and try. To look carefully first, compose her picture on the little screen and then take action: Shoot the picture.

I'll get back to this post soon. When I do, I will remove this silliness about my granddaughter and her photography.

Unsettled Times

Recently I had a comment noting that it is hard to take advantage of a downturn in the market if one is fully invested, as I often am.

The person commenting was right. When the market is down, I put my dividends into what I hope will be good spots to stash the cash but there are times I wish I had a bit more to invest. Well, I've taken that comment to heart and moved a bit of my investments from the market and into cash. If the summer proves to be a bad time to be in the market, I'm prepared.

I bought some Inter Pipeline when it was going for the fire sale price of about $8. I've enjoyed a nice monthly dividend every since. Recently, my holdings had grown to about 160 percent of the original investment, and this does not count the dividends that I have spent for living in retirement. Nice. I sold all my remaining IPL.UN at just more than $20 this week. I can see IPL.UN climbing another ten percent but I'm comfortable exiting at this time.

I now have close to 8 percent of my portfolio in cash. I will remove a little to live but no more than what I would have made if I had continued to hold the stock. By doing it this way, the cash will last for more than fifteen years.

I'm comfortable.

If there is a crash, and with Greece threatening to back out of their debt solution promises it could be in the cards, the cash will add stability to my portfolio. Plus, I will have the funds to buy some of the bargains. If the market does not crash but climbs, my other investments will carry my portfolio higher.

It is a can't lose situation. I thank the person who made the comment. I'm comfortable and that is an important part of investing.
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Trinidad Drilling (TDG) may be my next buy

P.S. Some of my recent plays, if you've been following, have done well, especially if you have gotten in and out as discussed. Progress Energy returned a quick ten percent and Penn West did likewise. If you have continued to hold as PWT turned south, my guess is that it will come back. There will be another exit point in the future. As long term holds, oddly I favour Progress Energy over Penn West but I'd rather not hold either well into the future.

Right now I am looking at buying some Trinidad Drilling (TDG). If it drops a bit more, I'm in. The dividend is small but it will do in a pinch. It's about 20-cents annually. Many believe that TDG will outperform and they see a future price of about $11 a share. Unfortunately, the risk is high.

This is what I found on the Scotiabank site:

Trinidad is Canada's fifth-largest contract driller with one of the newest, deepest, and most technically advanced fleets in both Canada and the United States, and growing exposure to Latin America. Trinidad's other business lines include coring, pre-setting, and rig construction.

They also say:

Solid outlook. We continue to have confidence in TDG's operations. With 65% of its fleet contracted for two years and essentially a Tier I fleet, we believe TDG is better insulated from reduced industry levels.

I checked some other sources and mostly they concur. I'll buy a thousand shares or so and move on when the shares get past $9. The dividend will keep me happy while I wait.

Cathedral Energy may be another option with 5.1% dividend

If TDG is not what you are looking for, my other pick in the drilling field is Cathedral Energy Services Ltd. (CET). This investment has the extra bonus of, according to Scotiabank, "a stable 5.1% dividend yield."

DRW fails to deliver March dividend

DRW: up 14.66%

The Wisdom Tree Global ex-US Real Estate Fund (DRW) did not have a distribution for March. Ouch! As a retired investor needing dividends to live, the failure of DRW to deliver a dividend hurts. I only have a small fraction of my portfolio invested in DRW. I will get by without the dividend but it will be missed.

On the upside, the yield is still rated as 4.95 percent as it has paid out twice in the past four quarters.

DRW invests in PFICs (Passive Foreign Investment Companies) and their losses are deducted from the distribution. Gains are added in up-years and losses are subtracted in down-years. The link below is a good description of these PFICs . . .

http://www.investopedia.com/terms/p/pfic.asp#axzz1qQX0hscS

Although the last two DRW dividends have failed to materialize, the value of the ETF itself has been climbing. I won't be buying more WisdomTree Global ex-US Real Estate Fund but I won't be selling it immediately either.

I'll see what transpires come June 30th or so. There may be a good dividend in the future. In fact, I'm sure there is --- but when? And will I be there to enjoy it? If DRW gains a little share value, while continuing to fail to meet my minimum yield needs, I will dump my units and move on. "There's nothing to see here."

I fear DRW is simply not dependable enough for an investor in my position. I'll blog on this again come late June at the latest. On the other hand, in the past it has paid handsome dividends. It may yet deliver a yield better than five percent, earning its place in my portfolio.

Here is another link to info on PFICs. Do a search using the letters PFIC.

Almost no bonds in this retirement portfolio

 This is important: After reading this post, please read the addendum. It is important and may put a slightly traditional spin to all this. Now, on to my post:

This may shock you. It is not something I like to talk about. It raises eyebrows and brings a tut-tut reaction out in many. I have next to no money invested in bonds. I'm retired and clinging to an equity centric investment strategy. I am skipping the investment step of subtracting my age from 110 to calculate the correct percentage of equities to own. (By that rule of thumb, I should have only 46 percent of my portfolio in stocks.)

Sometime back, as interest rates headed down, I watched the value of my bond funds climb. Bond funds, unlike bonds, do not mature. Bond funds act a lot like bonds that are bought or sold sometime during their investment life.

If interest rates climb and you are caught having to sell a bond before its maturity, you must sell your bond for less than its face value. This results in an apparent boost in the interest rate to spur interest in your bond. If interest rates drop, the reverse occurs. Your bond climbs in value. There is a formula used to calculate the exact change in value but the rule of thumb is:

A bond with a 10-year duration can be expected to change in price by approximately 10 percent when interest rates change by 1 percent. A fund with a 5-year duration might change in price by 5 percent when interest rates change by 1 percent.

For a more complete discussion of this and other bond related stuff, please read: Five Things Every Investor Should Know about Bond Funds. If you are about to buy into a bond mutual fund or a bond-based ETF, you should read Dan Hallett's piece "Distribution rate does not equal yield." Also read the comments. They are important.

When rates got as low as I thought they could go, I baled on my bond holdings. I sold all my XSB and bought stuff like bank stock, oil patch stock and stock based ETFs.

My wife and I have good stomachs for volatility. By thin I mean we can handle a loss without flinching. This is an important trait for an investor. Not everyone can accept a losing position with grace. On the other hand, everyone has a good stomach for gains. To tell the truth, when it comes to riding out the market's rough seas, I suffer financial seasickness well before wife.

Together we came through the crash of 2008-2009 intact. In fact, we bought more during the depths of that crash. Those purchases have proven to have been very good moves.

Which brings me to this question: Should a retired investor always be invested in bonds (or bond funds)? The usual answer is: yes. My answer, only applicable to me and my wife, is none or close to none at this time.

There is one caveat: My wife and I must be willing to ride out some big dips in the value of our portfolio and we must be aware that there is a small chance we could get trapped in our own, personal, financial Armageddon. But then, this is always a risk when investing in anything.

If interest rates were not at historic lows, I would not be touting the pure-equity portfolio. When rates recover, I will modify my approach. For now, I'm a pure meat eater, a financial carnivore. Pass the equities and hold the bonds, thank you.

Financial advisers tell me this is far too risky an approach to follow in retirement. I beg to disagree. There is no other sensible approach for folk like me. Period. Bonds do not pay enough. They are not an option. I am retired. I have only my pension from The London Free Press and my reduced CPP payments. I took a buyout at age 61and was forced to take a reduction of about 25 percent in both my pension and my CPP. My wife and I must make annual RSP withdrawals in order to live.

I don't want to cash any stock to raise money on which to live. I want to keep my portfolio intact, if I can. To that end, I only skim off  the dividends. Buy low, hold and spend the dividends; That's my investment philosophy. If the share value climbs radically, dragging down the yield, I might sell and move my money to a dividend investment with a higher yield.

If I held bonds, I would not have the cash flow necessary to live. I would be forced to sell some of my investments. Bonds, GICs and the like are out of consideration. Interest rates are just too low.

What do others say about this approach? Amazingly, I can find lots of support for my no-bonds approach. For another take on asset allocation please read the linked piece on InvestorsFriend. This article presents data suggesting:

"A 100% allocation to equities has historically worked out very well, beating the balanced approach by a wide margin, by the end of almost all historical 30-year saving periods --- using data that begins in 1926. The only exceptions was for the recent for 30-year periods, the one  started in 1979 and ended in 2008 where the balanced portfolio was the winner by 6% and the one started in 1980 and ended in 2009 where the balanced portfolio was the winner by a hair.  However the 100% equity approach features some truly ugly volatility along the way. Also in the period 1981 - 2010, the 100% equity approach won only by a hair."

I hope you paid attention to the line where the author admits "the 100% equity approach features some truly ugly volatility." If you are going to go the no-bonds route, you've got to be prepared for the stomach churning twists and dips in the financial road.

I am mentally prepared for a drop in the market of up to 28 percent before I even break a sweat. I have built up a solid buffer over the past three years. My Excel retirement spreadsheet calculates what my present balance would be if I had realized an annual gain of seven percent while removing 5.8 percent to live. (My original goal was to remove no more than four percent but I have done so well that I am living high on the dividend hog for the time being.) In reality, I am enough ahead of that spreadsheet number to accept a 28 percent loss before my investment numbers return to earth.

With a 28 percent loss I would lose my buffer. The value of my actual holdings would be in sync with my spreadsheet calculation. In such an environment, my dividends might be cut a little but I don't see a big haircut. If, or should I say when, the market falls, I'm prepared to tread water for awhile while waiting for the rebound. I have some fat in my budget that can be cut in an emergency.

Here, I should confess that my original portfolio allocation included some bonds. I have deviated from my original allocation model for the reasons given earlier. When interest rates return to historic norms, I will buy some bonds. In such a financial environment, I will probably have some stock ETFs yielding less than XSB. It will the right time to get back a balanced portfolio.

In the interests of full disclosure, I must confess that I have some hidden bond exposure. If you look carefully at my holdings, you will find some bonds in my TD and the CIBC Monthly Income funds. Thanks to these two mutual funds, about 11 percent of my portfolio is in bonds. I also own some units of a Claymore preferred shares ETF. CPD makes up about three percent of my portfolio today. Preferred shares are not bonds but they perform more like bonds than equities in a portfolio.

Let's give the last word to the U.S. Securities and Exchange Commission:

"When it comes to investing, risk and reward are inextricably entwined. You've probably heard the phrase "no pain, no gain" - those words come close to summing up the relationship between risk and reward. Don't let anyone tell you otherwise: All investments involve some degree of risk. If you intend to purchases securities - such as stocks, bonds, or mutual funds - it's important that you understand before you invest that you could lose some or all of your money."

Addendum: I found a calculator on the Globe and Mail site that compares the performance of a balanced portfolio to a pure stock portfolio during the biggest bear markets going all the way back to December 1968. I plugged in a balanced portfolio with a 60/40 stocks/bonds split. The balanced portfolio performed better more times but the stock portfolio had some amazing recoveries. In the end the stock market portfolio performed slightly better. Considering how much easier it would have been to sleep with the stock/bond mix, as soon as I can get some bonds back in my portfolio I will. The sooner the better.

I'm willing to give this one to the financial advisers.

It's too bad but I distrust advisers, Too Bad.

An important add to this post: As I say in the following article, this piece was inspired by a conversation with a financial adviser who took offence at my take on Freedom 55. If you read his comments that follow my original post you will meet an adviser you can trust. He seems like a decent fellow. A good adviser will not always make you money, sometimes the investment world just isn't cooperating, but a good adviser can help you sleep and that is worth something.
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Some years ago I wrote a piece called: "Freedom Fund down 71 percent puts mattress up 345 percent." Although it is an old post, it continues to bring in hits. Recently I have been in a back and forth exchange over that old post with a reader going by the moniker "Too bad."

This person seems knowledgeable and they know the investment community jargon. I believe this person works in the investment business. Possibly, they are an adviser as they have indicated. I am writing this post partially as a reply to Too bad, and if TB wishes to comment, they can. I will not add my two cents worth. I will respect their position and let it stand unchallenged.

From June 30, 2009 London Life statement.

When I blogged about my Freedom 55 experience, I posted a chart which was part of an investment update from London Life. I am rerunning that chart today. As you can see, my investment in Freedom 55 tanked.(Three and half years later, it is still down by more than two thousand dollars.)

Too bad's first reaction was: "Yes, this guy thinks that he deposits $4196.71 over apparently 9 yrs and expects to retire a millionaire. Wow what a genius."

In a later exchange Too bad (TB) told me: " I could list many funds that over that same time have under-performed . . . some of them amongst the biggest funds in the industry . . . most not under the LL umbrella."

I know that TB sees this as a defence of  Freedom Fund. He seems to be saying, "Hey your investment didn't perform THAT badly, lots of funds do badly and bigger funds than yours." My mother called this "damning with faint praise."

When lots of funds are underperforming the mattress, something is wrong. When folk investing for their retirement lose big time, you can be sure the majority of fund managers made out just fine. TB likes to point out that some of my responses compared, as they say, apples and oranges. I say, O.K., let's take away the apple, let's examine the other fruit. I believe we'll find we have a lemon and not an orange. (In TB's defence he does point out that my original fund may well have been a lemon that even London Life acknowledged by dumping the fund from their offerings.) 

I decided to google: "how much value do advisers add to a portfolio." I learned from an article posted on the CBC News site that the Canadian Foundation for Advancement of Investor Rights, FAIR Canada, supports moves to have better performance information provided to investors.

"Many investors find after 10 years that they're no further ahead than when they started, but the financial adviser has generated large fees." — Ermanno Pascutto, FAIR.

Ilana Singer, Deputy Director at FAIR Canada, notes governments and employers are gradually shifting the burden of providing for retirement onto the shoulders of individual Canadians, who must rely more and more on their own savings to get them through their retirement years. If your savings are with a financial adviser, it is more important than ever that your adviser understands the great responsibility placed on the shoulders of those providing financial advice.

One investor interviewed for a Globe and Mail article, written by Barrie McKenna, complained that “[advisers are] making money, whether we’re losing money or making money.”
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One expense I've faced in retirement is travel. I love touring in my Morgan.

If you take the value of my portfolio today and subtract its worth when I retired in Jan. 2009, you will find that I have about 45 percent more money today. This does not take into account the money removed each year in order to live.

I have been fairly open about my investments – some are conservative, the TD Monthly Income fund, some are risky but promise high yield – DRW, REM, lots are ETFs – AUSE, SDY, XIC, XRE and some are plain stock plays – CPG, IPL.UN, PWT. When I feel there is a dip in the market, I tend to buy. That was how I picked up my BNS, RY and ZUT and my latest purchase of PRQ.

I blogged about buying PRQ if it hit $10. Anyone who followed my hunch can now sell and will have made a quick ten percent profit after their trading fees are subtracted. Note: I share hunches; I don't give out investment advice.

A fellow I worked with at the newspaper uses an investment adviser. When the market wilted a few months ago, his adviser got him out of the market. Me? I scrambled to buy. One thing I did, was buy a hundred shares of RY at $45 for my Tax Free Savings Account.

My TFSA is up more than 20 percent in a few months. And the chap from work, I don't know if he got back into the market in time to benefit from the recovery. He hasn't told me.

I still like Progress Energy (PRQ)

Progress Energy, nearly a pure natural gas play, is still on my like-to-buy list. As the price of natural gas tumbles it is dragging the price of stock in companies like Progress Energy down into the basement. I'm feeling hopeful that I will get a chance to pick up some PRQ for $10 or less.

If it drops that low, the yield will be a tidy 4 percent. The big question is: Can PRQ hold the dividend or may the yield have to be cut? If the dividend suffers a 25 percent chop, it will still be paying 3 percent. I can live with that yield if I believe there is a lot of capital gain to made --- and I do.

If I were much younger, and I was still saving for retirement, I'd put $5000 or $10,000 into Progress Energy and the wait. Read the article After the gold rush: A perspective on future U.S. natural gas supply and price.

If Arthur Berman is correct, President Obama is grossly overestimating the American natural gas supplies. Rather that a hundred years worth of gas, Berman argues there may be a quarter of that. Even if there is more, it isn't going to hit the century mark. Berman writes:

"The notion of long-term natural gas abundance and cheap gas [is] an illusion. The good news is that this . . . will lead to higher gas prices in a future less distant than most believe."

I'm with Berman and I'm willing to put my money where my keyboard fingers are taking me, to a greater exposure to PRQ and natural gas production in the Canadian West.

For another article on the situation for natural gas producers, see this linked story in The Globe and Mail.