Tuesday, October 21, 2014

Taking a breather from the corrrection

If that was a bear, it has gone back into hibernation. My retirement portfolio has gained thousands in the past few trading days. It looks quite likely that despite having to remove dividend money to live, my retirement portfolio will end the year with a nice gain.

I like my portfolio to make enough, at the very minimum, to end the year with the same amount it started plus enough to neutralize the effects of inflation. This, of course, is after I have removed some money to cover living expenses in retirement.

The rule-of-thumb governing withdrawals is: Only remove four percent per year if you want your portfolio to last. Good rule but almost impossible to follow. When my wife turns 71 we will both be forced to convert our RSPs into RIFs and remove a legislated amount each year. The very first year we must remove 7.38 percent this withdrawal rate will climb higher with every passing year. The government does not want RIFs to be going strong when folks are hitting 90. The government forces seniors to bleed retirement accounts until they wither away.

I'm trying to move as much money as possible into my wife's and my Tax Free Savings Plans. The money that one removes from either an RSP or a RIF counts as income and can trigger the old age security claw back if one has almost any company pension at all. Earn more than about $70,000 in retirement and you are in claw back territory. For many this is easier than you may think.

The Guaranteed Income Supplement (GIS) is paid to low-income Canadians age 65 or older. Like OAS, GIS may also be reduced, or even totally eliminated, by income generated by removal of funds from either an RSP or RIF.

For some people, paying income tax up front and sticking their retirement savings in a Tax Free Savings Plan rather than an RSP is a better way to save for retirement. I wish these had existed when I was saving for retirement.

As I said earlier, it is not too late to start building a TFSP. My wife's plan, is up more than 12 percent in just more than a year despite the recent pullback. It is a small plan and all the money is invested in one stock: D.UN. As the dividends come in, I immediately move the funds into a TD Investment Savings Account (TDB8150). Fully 12% of the plan is now in cash earning 1.25 percent. As the cash pours in the volatility of the plan drops, as well as the yield. Today the total plan is delivering more than seven percent. Nice.

Soon I will move the cash into the highest paying GIC I can find. This will kick the yield up a small notch. And folk say you can't get a good yield today. I'm happy. With time, this plan will get less and less volatile as the cash component grows with monthly dividend income.

Just a side note. Some are calling for D.UN to hit $35. It is at $28.48 as I write this. I'm in no hurry to sell. I can wait for this stock to gain in value. When it does, my wife will make out like the proverbial bandit.

Saturday, October 18, 2014

Do you feel lucky, punk?

It is not quite the quote from Dirty Harry but it does capture the feel. And sometimes, I feel that this somewhat addled version of Harry Callahan's question can be applied quite nicely to investing in the stock market.

A friend, who I can only describe as wise, told me he didn't see this recent market correction coming. He was blind-sided. I have nothing to add other than I didn't see Thursday's and Friday's pop in my portfolio value coming either. I may yet end the year in the black, even after my withdrawals to supplement my retirement income.

Which brings me to the subject of today's post: Barbell portfolios.

A barbell approach to investing puts a whack of one's money in something risky and balances that risk with a whack of money in something with a more solid financial footing. At the start of the year I devised what I felt might very well prove to be a great portfolio for 2014. My imaginary portfolio looked like this:

  • 10% MORL
  • 20% REM
  • 40% XMI
  • 10% XSB
  • 10% VSX
  • 5% XRB 
  • 5% cash placed in TDB8150 earning 1.25%

My imaginary portfolio opened the year with $800,000. Today this has grown to $896,507.30. Very nice and this is after the recent correction put many of my other imaginary portfolios into the red. Many of those others were index-based portfolios using ETFs and came highly recommended by financial bloggers.

I checked the Barbell portfolio figures and they are slightly in error. In reality such a portfolio would be worth a little bit more. The interest paid by the TD Investment Savings Account did not enter into the portfolio software calculations. 


Click on image to enlarge. Five percent cash would not fit on screen grab.

What make this portfolio interesting is that I attended a number of investing lunch-time seminars at the main TD Canada Trust branch in downtown London. Some of these seminars examined ETFs and how to determine which ones gave indications of being winners. 

I tried to question the speakers on REM and MORL, mostly focusing on REM. I've owned REM for years and it has rewarded me handsomely. Not one of the investment experts knew anything about REM or about MORL. I find it difficult to believe they knew nothing about mREITs. Heck, mREITs are discussed on the Business News Network (BNN). Both REM and MORL are based on mREITs. REM is an ETF amd MORL is an ETN. An ETN is an exchange-traded note. ETFs are exchange-traded funds.

Come January, I'm going to rejig this portfolio. It will be interesting to see how the 2015 portfolio performs. Being imaginary, I will take another bold approach. And, if REM every takes a dive, I may pick up some on the dip. REM is said to be a low risk ETF and slowly I am beginning to believe this just might be true despite the lack of a blessing from the financial high priesthood.

Friday, October 17, 2014

Correction? Bear Market? What to do?

I keep all my portfolio/investment records on an Excel spreadsheet. When I get to seeing the past with rose coloured glasses, I can quickly look back and see that all was not a smooth ride to the top. For instance, I had a year when I ended those 12 months with about 22 thousand less dollars than I had begun the year.

That year I had removed about thirty thousand to live. If I hadn't made that withdrawal, I would have ended the year in black like all the others. But I do have to live, maybe not as well as I did, but removing money from a retirement account in retirement is not just expected but demanded.

So far this year I have removed about 25 thousand from my portfolio in order to cover living expenses. Even with that big draw down, my portfolio is still up today by some eight thousand dollars. Yesterday alone it recovered about $1800 from its recent low.

Will I remove more from my RSP before year's end. I don't know. If such a move puts my portfolio in the red, I probably won't. I'll leave the money invested and possibly invest much of the available cash.

At times like this it is good to have some stocks on one's investment radar. I am following:

BEP.UN (Brookfield Renewable Energy Partners LP) Up 2.8% today, yielding 5.1%
BPY.UN (Brookfield Property Partners LP) Up two thirds of a percent today, yielding 4.6%
CPG (Crescent Point Energy Corp) Up 3.9% today, yielding 7.2%
EMA (Emera Inc.) Up half a percent today, yielding 4.4%
FTS (Fortis) Up half a percent today, yielding 3.7%
HR.UN (H&R REIT) Up a quarter of a percent today, yielding 6.3%
SJR.B (Shaw Communications Inc.) Down a quarter percent today, yielding 4.1%
XUT (iShares S&P/TSX Capped Utilities Index ETF) Up a quarter percent today, yielding 6.3%
WCP (Whitecap Resources Inc.) Up more than half a percent today, yielding 4.9%

If the market takes another big dip, I'll buy more good stock and enjoy the increased dividend payments in the coming years. If the market recovers, I'll remove more cash to cover living expenses and take my lovely wife out for dinner and a movie.

Wednesday, October 15, 2014

Is it about time to buy?

The Globe and Mail headlines said it all:
TSX suffers another harrowing day, takes triple-digit dive.

A related article sported the headline:
The (slow) rise and (gut-wrenching) fall of the TSX.

The headlines said it all but all was about the Canadian market. My portfolio actually gained today. I ended the day with almost a thousand more bucks than I started. I'm still in the black for the year. Maybe, just maybe, this bear will run out of steam before I run out of profits to feed the damn beast.

Is it about time to buy? Maybe. I think I'll pick up a little something conservative. But, I'm keeping what powder I have dry in anticipation of more and bigger bargains.

Tax Free Savings Plan still in black

When I sold my Morgan Roadster I put $15,000 from the sale into a tax free savings plan for my wife. I promptly bought 500 shares of D.UN, now known as Dream Office REIT. The remaining cash I later moved into a TD Investment Savings Account: TDB8150.

Now, in a little less than a year, her plan looks like this: a $39.71 loss on the REIT holdings but an overall gain of $899.92 for the total plan. My wife's TFSP remains up 6 percent in a falling market.

How is this possible? Simple. D.UN pays $93.33 every month. In ten months she has made $933.30 on D.UN alone.

Do I think this plan will remain in the black? In this collapsing market, I have my fears but I know that almost $2000 is sitting in oh-so-safe cash and this is enough money cover one month's income shortfall. My wife an I are retired and our retirement income needs an infusion of about $2000 each money to balance our books.

If the the markets descent into bear territory, my wife and I will probably be bold and put that money to work in the market rather than tapping it for day to day expenses. Whatever we buy will a dividend paying stock.

And D.UN is not alone in the Canadian REIT world at having offered a relatively safe haven for one's investment dollar. A few months ago I picked up 1300 shares of Chartwell Retirement Residences REIT. Today that holding is still in the black by $572 or up by 4.21 percent.

Chartwell doesn't pay what Dream does but it does deliver a nice monthly dividend. I see $58.50 each month from this investment.

I find that in a shrinking market holding equities like D.UN and CSH.UN help me weather the financial storm. And I am very curious to see how my American ETF, REM, based on mREITs, will hold up with this downturn. Today REM is still up about 5 percent from my entry point and is yielding more than 13 percent annually.

As long as my dividends are not slashed, life will continue unaffected by the market turmoil.

Sunday, October 12, 2014

TD Monthly Income beats couch potato portfolios


While still a young man back in the late '60s, I bought a two-seater English roadster, a Morgan. Sadly, recently I had to sell my lovely little car. Doctor's orders. But, I have kept many of the friends I made while driving the beautiful heritage sports car. Yesterday I bumped into a couple of those friends and we got to talking about our investments and our portfolios.

We should have kept our talk to cars and not stocks. Cars like Morgans are proving a better investment than equities at the moment. My friend confessed his portfolio has given back all the gains accrued since last April.

He said he was still considering going the "couch potato" route when it comes to investing. He has read a lot about the Canadian Couch Potato approach and the claims are enticing. Invest and forget. Keep management fees low and maximize profits.

I told him I'd been looking at the couch potato approach for years, too. I've even owned some of the recommended ETFs. I have not been impressed. Last January I went so far as to set up some imaginary portfolios using software offered by TD Waterhouse. Today not one of those ETF based portfolios is besting my personal portfolio, a mix of mostly equities with a few ETFs and a couple of mutual funds.

Let's take a look at the Canadian Couch Potato. If you click the link, you will discover that Option 1 of the couch potato approach is not a mix of ETFs but a single mutual fund: Tangerine Balanced Portfolio (INI220). With an MER of only 1.07% this low cost fund closely mimics the portfolio allocation of the couch potato portfolios.

If you had put $10,000 into INI220 at its inception, Jan. 10, 2008, you'd have $13524 today (Oct. 12/2014). Not bad but not great either. If you'd have put your ten grand in the TD Monthly Income fund (TDB622) you would have a thousand extra dollars according to figures provided by the Globe and Mail.

So much for Option 1. You saved money on the management fee but it was a costly savings. In this situation, spending approximately an extra half a percent would have put an extra grand in your pocket.

Let's move on tho Option 2 which suggests using TD bank e-funds to create a low maintenance cost portfolio. A mix of 20% each of TDB900 (Cdn. Idx), TDB902 (U.S. Idx), TDB911 (Int'l Idx) plus 40% of the Canadian bond fund TDB909 is the couch potato recommended portfolio. In this case your ten thousand would have grown to $13484.19. For all the ballyhoo about index funds, the Tangerine Balanced Portfolio fund bested this mix of index funds and, of course, the TD Monthly Income mutual fund beat both.

So much for Option 2. It was beaten by two mutual funds: Tangerine Balanced Portfolio and TD Monthly Income fund. It seems saving money on management fees does not always translate into greater investment success.

How, did the other options do? I don't know. I haven't done the calculations. That said, the Complete Couch Potato puts 10% of the portfolio into real estate in the form of the ZRE ETF from the Bank of Montreal. I am familiar with ZRE and I am not impressed. Why? It takes an equal weighted approach to investing in REITs and there are REITs I personally don't want to own. Buy an ETF like ZRE and you may own some stuff you don't want to own.

If you are going to insist on buying an ETF for your REITs exposure, I like the iShares product XRE. XRE has climbed from $15.10 to $16.10 in the same period. An increase of 6.62% compared to 6.4% for ZRE -- essentially a wash -- and both ETFs yield approximately 5%. So why do I like XRE better, iShares take a market weighted approach rather than an equal weighted one. Less of the investments I don't want to own are hidden in XRE.

I am not putting all my money in either ETF. I am buying some REITs directly. More bang for the investment buck. The extra volatility is offset, for me, by the increased potential for capital gain and increased monthly income. Dream Office REIT at its present price looks good to me as does Chartwell Retirement Residences. H&R Real Estate Investment Trust is anther REIT, I believe, is worth a look.

I dislike ZUT, the utilities ETF from the Bank of Montreal, for much the same reason that I dislike ZRE. The equal weighted investment approach. I don't want to own even one share of Just Energy. Yet, if a buy ZUT with its equal weighted approach I'd get more Just Energy stock than I would ever want in my portfolio.

Ten years ago, Just Energy was at $16. Five years ago it was at $13.60. Today it has dropped to $4.98. I feel the high dividend of Just Energy comes at a very steep price. In March of this year ZUT had 9.6 percent of its money in Just Energy and only 8.4 percent in Fortis. That allocation is just nuts, in my humble opinion.

Why? Well, ten years ago Fortis closed at $15.63. Today it is hitting $35.37. The Fortis dividend can be counted upon and should grow over time. I'd suggest one could do better dividing one's utility money between Fortis, Emera and a couple of other strong utility stocks and leaving it at. This is one case where I see the ETFs offering increased risk because of the myriad number of holdings in the ETF. Buy a sampling of the strong utility companies and leave the remainder to others.

If you really must have an ETF, I'd go with XUT. About a full 20 percent of the iShares utilities ETF is invested in Fortis. Check out the top holdings in XUT. I think you may be pleasantly surprised by how heavily weighted it is toward the hight quality utility equities. I may still buy a XUT if I'm feeling a wee bit lazy.

Do you recall the Money Sense Classic Couch Potato portfolio? It was an equal mix of XIU, XSP and XBB. If you had put a hundred grand in this ten years ago, you would have $143,179.38. Not bad but if you had instead put you money into the TD Monthly Income fund you would have $144,411.50. Not a big difference but I can do a lot with $1200 plus dollars.

If I did the calculations for all the different permutations of no-brainer portfolios, I'm sure some of them would come out ahead but there is no promise that they will continue their winning streaks. And some of them have been modified over the years. Clearly, even the folk behind these portfolios have modified their approach with time.

My portfolio is very volatile. When the markets are falling, I am sure it falls farther the TDB622. This is not the time to sell my stock and move to the TD Monthly Income fund. When the markets recover, my volatile portfolio will climb and then it will be time to rethink investing more in TDB622. I am leaning toward increasing my TDB622 allocation and upping my portfolio exposure to REITs and utilities with some equity holdings in the hopes of kicking up the dividend payout while staying away from extreme volatility.

Maybe I'll get a chance to blog more on this later but for now I'm going to post this and get it up early even if only half written. I want to partially answer some of the questions raised by my Morgan-owning friend.

p.s. In doing my last calculations I made sure that I was NOT reinvesting the monthly dividends from the TD mutual fund. That would give the fund an unfair advantage. If you are interested, if the monthly payments had been reinvested using DRIP (dividend reinvestment plan), today that original $100,000 would be worth almost double at $198,491.30. Amazing.

And if you had retired early and were taking 4% ($4000) out of the plan annually, after removing $40,000 in the last decade you would still have $143,886.13 in the plan.

Monday, October 6, 2014

What the TD Monthly Income Fund teaches us

The TD Monthly Income Fund inception date is June 29, 1998. I was already 51 at that point and had been saving for retirement for more than two decades. I can't say for sure how much I had saved by 1998 but let's be conservative and guess I had been putting two and a half thousand aside for 22 years. I think it is safe to say that I would have stashed away more than $80 thousand by mid 1998.

If I had moved all my RSP savings into new TDB622 mutual fund at that time and upped my monthly contribution to $270.84 or $3250 annually, I would have had about $220,000 when I took early retirement back in 2009.

With early retirement came a cut in my company pension and a big cut to both my CPP retirement payments and to my wife's as well. We had to claim early and accept the cuts if we were going to be able to live at all in retirement. Lessening the financial pain was a nice buyout package. A lot of that money was deposited immediately into my RSPs.

Today, I'd have about $455,000 in my RSPs and that is after removing $12,500 annually since retiring in order to live -- and it gets better. Today I'd feel comfortable upping my withdrawal to $14,500 annually.

When my wife and I turn 71 and we must begin withdrawing money from our retirement savings at the enormous rates insisted upon by the government. If my money were in the TD Monthly Income, I would have something in the order of $530,000 in accumulated RSP savings. And remember, that is after upping my withdrawal amount to $14,500 annually.

So, what do I take away from this: A balanced portfolio works very well. A balanced allocation is a great way to play the investment game and something like the TDB622 is an easy way to achieve a good, balanced portfolio. It is a little expensive but only a little. Historically, it has delivered good value for the money with the MER a little less than 1.5 percent.

I know a lot of investors are quite enamored with using ETFs to enjoy a low fee entry into monthly income territory. For this reason, I designed a number of  ETF portfolios to mimic TDB622 and let my investment software track the performance. Nothing walloped the TD Monthly Income fund.

One of these well known inexpensive investment approaches uses the TD e-funds. These index funds charge a MER of about .55 percent. In this chap's portfolio, 20% goes into each of the following: TDB900, TDB902 and TDB911. 40% is placed in TDB909.

An $800,000 portfolio invested in January 2014 using the above mix would be worth $848,400 today. The same investment in the TD Monthly Income fund would be worth $869,520. The above easy/cheap portfolio performed very well -- better than many that I put together. Yet, it failed to beat the TD Monthly Income fund by a solid margin.

Come up with your own easy/cheap portfolio mix and back-test it. You may be amazed. For another view on monthly income funds here is a link: My Own Advisor blog.

Personally, I am no longer quite so enamored with ETFs and their ilk. I still like 'em but I don't bad mouth all mutual funds nor take offence at paying a smallish fee when a very nice return is delivered with solid consistency.