Thursday, April 7, 2016

Luck, opportunity and successful investing

I'm retired and doing quite nicely. But, and it is a big but, how much of my solid financial position is simply luck and how much is based on my decision making ability? I bought  a lot of my bank stock when it was in the $20s at the depths of the market crash six or seven years ago. It was a good decision made at an opportune time.

As I think about it, good luck teamed with a great opportunity may be interwoven into the fabric of my investment life. Overall the market has been good since I was born in the latter years of the 1940s. This wasn't always the case. The market has not always been good to investors. The folk who invested in 1928 got burned. I understand it may have taken some of those people some two decades to recover financially. Many would have died before the market fully recovered.

For that reason, I am loath to give out solid advice such as do this because it worked for me. As they say, "Past performance is not an indicator of future growth." Often the word used is results in place of growth but you get the idea.

Last night I stumbled upon a site, Financial Planning Association (FPA), that appears to contain a treasure trove of solid advice when it comes to managing one's finances in retirement. Today I got an e-mail linked to that site. The topic? Risks in retirement. (And yes, I signed up for the e-mail updates. It was not a spam mailing.)

The letter discussed the usual suspects when it comes to investment risk, unforeseen major expenses, etc., but it mentioned one risk that is often ignored. It is the elephant in the room, so to speak: declining cognitive ability in one's senior years.

My retirement approach, which has a complex, personally-developed , Excel spread sheet as a major tool, is in trouble if I'm out of commission for any reason. If I had a stroke and was unable to manage our retirement finances, my wife would have her financial hands full.

Maximizing my wife and my income in retirement may be taking up too large a part of my time. My goal of coming up with a stand alone, self-regulating, income strategy may be of far more importance to a successful retirement strategy than I have been willing to admit.

Sunday, April 3, 2016

Do I make a sacrifice for less volatility?

As is clear from the posted graph, my TFSA (the solid purple line) has outperformed both the S&P/TSX Comp. TR Index (broken blue line) and the S&P 500 TR Index (dotted red line) over recent months. That said, look at the volatility. My portfolio sinks to extreme lows and then soars to dizziness-inducing heights. It has been, and promises to continue to be, a wild ride.

My actual portfolio is the solid purple line.


From the above graph, it is clear my investments made a couple of big dips but almost immediately recovered. When all is said and done, it appears at first glance that after all the drama I have simply returned to the level at which I started. Not true. In late 2015 I made my annual RIF withdrawals. I removed a chunk of cash to cover living expenses in retirement. By simply not losing value, my portfolio is performing adequately.

But, and it is a big but, my portfolio doesn't simply hold its own. The balance is constantly fluctuating up and down. I have confidence my portfolio will perform well in the end but it can be tense. I confess I am bothered more by the volatility than my wife. She has nerves of steel.

I would love to find another approach to investing -- one that generates the dividends needed to live while not suffering the deep dips of my present approach. I ask myself, "Would a portfolio containing just a few index funds or ETFs work just as well but with less volatility?"

Seeking an answer, I created ten phantom portfolios last January 1st (2016). Two were based on the excellent work done by the chap behind the Canadian Couch Potato blog.


The Couch Potato TD e-Series assertive portfolio contains:

  • 25% TD Canadian Bond Index Fund - e (TDB909)
  • 25% TD Canadian Index Fund - e (TDB900)
  • 25%  TD U.S. Index Fund - e (TDB902)
  • 25%  TD International Index Fund - e (TDB911)

The Couch Potato Vanguard  ETFs assertive portfolio contains:

  • 25% Vanguard Canadian Aggregate Bond Index ETF (VAB)
  • 25% Vanguard FTSE Canada All Cap Index ETF (VCN)
  • 50% Vanguard FTSE Canada All Cap Index ETF (VXC)

The last time I compared my portfolio to the Couch Potato approach, my portfolio pulled into the lead and stayed there for years until the American market took off and my portfolio was caught completely off base. With inadequate exposure to the States, it got torched. For that reason, I am not going to allow myself to get too smug about my present winning position. Never diss Couch Potato portfolios. These portfolios have earned the in the investment community for good reason: Over time, they perform well.

As much as I admire the Couch Potato approach, there are other approaches to successful investing that I also find attractive. One of these other approaches is simply sticking money in the TD Monthly Income fund. Over time this fund has done quite well while pumping out a steady stream of monthly payments. Since I began following this fund, the annual yield has dropped but I see this as good. I believe I am seeing less return of principal hidden in the yield.

A few months ago, TD brought out a D-series version of the monthly income fund. I considered the lower MER of a D-fund a clear bonus and made the switch based on my past good experience with TDB622.

I've created a no-brainer ghost portfolio using two D-series monthly income funds:

  • 70% TDB3085 (D-series Canadian monthly income fund)
  • 30% TDB3085 (D-series U.S. monthly income fund)
In the coming weeks I will talk about my other seven ghost portfolios but today I will stop with the three I have mentioned in this post. How have these no-brainer portfolios on automatic performed? Not badly but not as well as my oh-so-messy real portfolio. Since January 1, 2016 the results are as follows:

My portfolio is up 1.4% YTD. It is important to note, in mid-January I withdrew 3.2% to cover annual living expenses. If I hadn't made that withdrawal, my portfolio would be up 4.6% YTD. With the withdrawal amount factored in, not one of the portfolios-on-automatic is in the black. Both of the assertive Couch Potato portfolios plus my D-series ghost portfolio are off the winning pace at this moment. This may change, of course.

There are a few things that must be noted. As I removed a five figure amount from my actual portfolio to cover living expenses, I have removed a similar amount from the value of the ghost portfolios. Doing this introduces a small error. When the market is up, the ghost portfolios benefit. When the market is down, the ghost portfolios suffer a little.

And two, it is too early to make any meaningful judgments. That is why I shied away from giving out any hard numbers or revealing which ghost portfolio is in second place, which is in third, etc. I will wait until the end of the year before revealing all.

At the end of December I will know which ghost portfolios delivered the yield necessary to cover my annual income shortfall. Right now, I know my actual portfolio will get me through the year. Of this, I am certain.

One last note: In mid-December, I will withdraw all the accumulated dividends from my TFSA and ask my wife to do the same. This money will help cover the extra expenses that accompany Christmas. A December TFSA withdrawal increases January TFSA deposit headroom.

Tuesday, March 29, 2016

AHF suspends its dividend

Aston Hill Financial (AHF) has suspended its dividend. Ouch.

I bought some AHF after reading a positive review posted by one of the big Canadian banks. I had an investment that was managed by AHF and it had done quite nicely over the years.

My investment started out as BTH.UN, an ETF from Barclay's, and then its ownership changed and changed again. Eventually it ended up in the AHF stable.

AHF seemed like a good company, my investment had always done well. AHF seemed to know what they were doing. I decided to invest directly in the company. I cashed in my investment managed by AHF and bought some stock in the company itself. Bad move.

AHF climbed briefly and then hit the skids. It is now but a fraction of what it was when I bought my stock. And now, the dividend has been suspended. It had already been cut. Now, the dividend is gone.

Will AHF regain its footing. I hope so. As it wilted my other investments have grown. I am still making more than four percent on my investments and I'm still able to live quite nicely on the income. But one never likes to see an investment go sour. That said, I'm not sweetening the pot by adding any more money to my AHF investment. I'll slide AHF to the side and wait patiently to see how this game unwinds.

Wednesday, March 9, 2016

Why I am in the market and not annuities

When I retired a lot of financial advisers tried to steer my wife and me towards annuities. Money for life, was their claim. Less and less money for life was my worry. Most annuities do not increase the payment with inflation. I was concerned that if my wife lived to be 90, as she well might, she might be forced to get by on an income providing half the buying power of our present income. Of course, if inflation raged during a few of those intervening years the outcome could be much, much worse.

I put my money and my faith in the stock market. I didn't see this as betting on capitalism, as one friend has accused me of doing, I saw this as having faith in the strength of our overall economy - or at least the overall direction of our economy.

I retired with a small sum of money. The sum was no where near what one is told one needs to retire but it provided a solid base for investing. As of today, I have withdrawn an amount equal to about forty percent of the funds held at retirement. I was forced to remove this money in order to live. Living in retirement presents a steady drain on one's wealth.

Today I have forty percent more money than I had in 2009 at the time of my retirement. The market carried my portfolio up and the market carried it down but I have ignored the wild gyrations and I held to my invest strategy. Let the investments themselves roll and live off the dividends, if at all possible. So far, it has been possible.

The talk is that the bull market is getting old, long in the tooth. I'm surprised. I've suffered losses that I would have placed squarely on the shoulders of a big bear but I appear to be wrong. That was no bear; that was a retreating bull that gored me, I've been told. Hmmm. It sure looked like a bear to me.

Whatever, I'm going to let my excess dividends gather, I am going to sell the stuff that no longer delivers the dividends I demand. And I will sell those low dividend delivering stocks at a profit, I might add. I'm going to try and sit on a small war chest and when the advertised bear arrives, I will rejig my portfolio and invest a little more into the stock market and the bond market.

And my next kick at the investing-can may involve no more than four or five investments -- all ETFs. I'm planning an extensive overhaul of my portfolio and I'm looking at a new allocation model. I'm leaning towards the KISS philosophy: Keep It Simple Stupid.
_______________________________________________

This is an add from just days later -- March 11th, to be exact. Moments after the market opened, my portfolio climbed into the black for the year. It is important to keep in mind that in early January I removed more than twenty-two thousand from my portfolio in order to pay the bills for much of the coming year. Despite the withdrawal, my portfolio is in positive territory.

Lobsters were on sale. My wife and I bought two for dinner.
I think of the editorial I read in my local paper about the impossibility of getting good returns today and how retirees are being adversely affected. The writer decried the low interest rates and whined about retirees being forced to consider eating pet food in retirement.

If GICs are not paying enough to cover inflation, don't put your money there. If GICs are a guaranteed losing proposition, be bold, take a gamble. I did and so far dog food is not on the menu.

Monday, March 7, 2016

Volatility: a hard mare to ride

I like to say that I can ride out volatility. I like to claim that the rises and dips mean nothing to me. But I may be overstating my position. Putting too positive a spin on the reality of my fears. Look at the following chart.



The purple line is my TFSA portfolio. In just the last month it has recovered from being down about 7.5 percent to climbing well into the black. It is now approaching a gain of 10 percent.

I confess: When my investments are down so far that I must look up to see the bottom of almost every other benchmark that I follow, I feel uneasy. It is tough holding firm while one's investments are tanking. I admit it. I don't like it.

The main reason I am able to hang on while navigating the deep troughs of my oh-so-rough financial seas is my wife. She has nerves of steel. She worked for stock brokers twice when she was young and she learned firsthand that markets go up and down. She also learned that the smart money sells a little when the market is soaring and buys a little, or maybe a lot, when the market is tanking.

One reason my portfolio is so volatile is that it is almost devoid of bonds. The only bonds I hold are contained in the monthly income funds I own. I don't own near enough bonds to cushion my falls or dampen my peaks. I'm on a wild ride and considering this is my retirement income, it is a wee bit disconcerting.

Then again, I do get a rush from hitting the peaks. But, and this is a big but, but some of the benchmarks I follow have absolutely soared by my peaking portfolio. I don't have enough exposure to the U.S. and when the market in the States takes off, I get left somewhat behind.

I've decided to give some thought to switching my investments from my oh-so-messy present portfolio to one based on a fund of funds ETF: an ETF wrap. My idea is to find a good fund of funds that approximates my personal portfolio allocation and then bring it into line with my goals by adding a little here and there. I will personalize the fund of funds.

I made a crude attempt at investigating this approach at the first of the year. I set up a faux porfolio based on the iShares Balanced Income Core Portfolio (CBD). I added some XRE and XUT and I believe I should eventually add some extra U.S. equity exposure.

As the fixed income portion of CBD is 43.81 percent today, I can let this percentage shrink as I add more ETFs to my holdings. I do not believe I'll have to shore up the fixed income exposure as I this is already more than I wish to allocate.

The CBD/XRE/XUT faut portfolio is first bar on the graph above. My portfolio is the last bar on the graph. As of today, the two bars are almost equal. The nice thing about the three-ETF-portfolio is that it not only does not exhibit the same volatility as my present portfolio but that it pumps out enough dividend income to cover my expenses in retirement without selling my income producing investments.

I even have hopes that there will be times when the faux portfolio will surpass my own portfolio. I see the fund of funds possibly being propelled forward by its larger exposure to the States and to international markets.

Thursday, March 3, 2016

Still holding Dream Office REIT plus buying on dips

Info from WebBroker states that Dream Office REIT is back on the TD Action Buy List. I'm not surprised. The bank likes the latest business plan released by the large Canadian REIT. And the market seems to like it too. The moment D.UN cut the dividend the stock bounced up and has not made any serious move to stage a retreat.

The yield is still good. I'm still paying my bills with the income. And better yet, I've got my average price down to just above $20. I'm still in the red but not by much.

If D.UN takes a tumble that I cannot explain, I'll probably buy more. The yield is attractive and the potential for a capital gain remains a strong promise.

Continuing to hold Norbord (OSB)

Norbord has made some changes since I began buying the stock on dips and selling a little on the bounce. For one thing, Norbord has grown. The company absorbed a competitor, Ainsworth Lumber, in a three quarters of a billion dollars deal. Norbord and Ainsworth both had plants spread out across North America producing the particle board panels used in building construction.

As a side note, I believe both Norbord and Ainsworth were controlled by Brookfield Asset Management and Norbord still is. It is no surprise the merger was friendly and not hostile.

With the increased debt load, Norbord cut its dividend. The double digit yield is now less than two percent. This was not unexpected and was not a cause for concern. In fact, it seemed like a sensible business decision and in keeping with past moves by the large, Canadian company. As the demand for oriented strand board increases, the increased debt will disappear from the books. The dividend may be increased.

Norbord has even changed its stock market symbol. It is now a cutesy OSB, oriented strand board, rather  NBD.

With Norbord now heading for $25, I am nicely in the black with this investment. I could sell and pocket a nice profit but I'm going to  hold. I believe Norbord could easily hit $30 in the third quarter of this year with the estimated earnings hitting 47-cents per share. The low estimate is 21-cents and the high is 67-cents.

If Norbord doesn't hit the highs, I believe a dividend increase might well be in the cards. My gut feeling is that Brookfield Asset Management likes to see cash flow from its holdings. An increased dividend will benefit the majority stockholder while not putting Norbord under any financial stress. All the little investors get to ride the profitable coattails of Brookfield.

If I did sell, what would I buy? I might look at Brookfield Asset Management.