Tuesday, January 12, 2010

Chapter Two_Getting our ducks in a row

In the first chapter you learned about spreadsheets. I hope you downloaded the spreadsheet and played with it. It will accurately track your day to day expenses. It will also track your income. Using these numbers, it will tell you how far into the black, or in the red, you are running your financial life.

You probably even made some surprising discoveries. I know that when I looked at my budget I immediately saw a couple of places where I could painlessly cut expenses if necessary. Having such a cushion, exit strategy you might say, makes one's financial life a little less scary.

The next step before we actually put together a portfolio, especially one for retirement, is to talk with a financial adviser. I am not a financial adviser. Reading this does not count.

The first experts with whom you should touch base are the ones who have written books on investing. I really liked Protect Your Nest Egg by Eric Kirzner and Richard Croft and The Portfolio Doctor by David Cruise and Alison Griffiths. I bought these.

Of course, the library has lots of good books on managing your investments. If you find one you like, buy it and add it to your personal library. Spend some time with these texts. You want to be somewhat knowledgeable for the next step - sitting down with a living, breathing financial adviser.

Many branches of Canadian banks have people on staff to assist investors and they also have associated businesses where they can send you for advice. I talked with folk at the ScotiaBank and at Scotia McLeod.

I then chatted with a fellow I had known for years at the TD Canada Trust branch where I banked. After quizzing me, he said, "Open a self-directed plan. You can manage your own portfolio. If you run into problems, I am always here."

I took my financial adviser's advice. I opened a self-directed RSP.

Thursday, January 7, 2010

What do you think of investing in . . . ? Fill in the blank.

I got an interesting call today. An American friend called to tell me that he had just bought some shares of Citigroup. It was a steal at under four bucks. He wanted to know if I thought he had done the right thing.

Now, this person has shown some smarts when it comes to stock picking and going against the prevailing wisdom. He bought some Ford stock when it hit a dollar. Mind you, this only averaged the book value of his Ford holdings down. He had bought lots earlier at a far higher cost.

So, what did I think. Nothing good. I confess that I have bought some stock. O.K., I confess that I have bought lots of stock. But looking back at how my stock picks have performed, I can't say that I have been brilliant - lucky maybe, but certainly not brilliant.

Stocks seem to be like potato chips: I bet you can't eat but one. And so if Citigroup and Ford perform well, chances are that something else in the stock portfolio won't do as well. For me, I've found that when all is said and done my index-based ETFs or mutual funds outperform my mix of stock picks.

Being that this fellow is in his early 50s and American, I would have gone online and checked the Vanguard - Retirement Insights page. There is lots to read and it is very clearly organized.

Then I would have checked out the Vanguard - Core funds. Why? With interest rates so low at the moment, I am not keen on having too much money in funds heavily into bonds. I'd take my chances with a mix of core funds with the intention of shifting more into bonds in a few years when interest rates have recovered. That is about the extent of my market timing action.

I looked up Citigroup (C-N) using GlobeInvestor. Its rating on a five star scale is one. One star!

Yet, despite its having but one lonely star, it does get a buy suggestion. (My rule is to wait for the strong buy suggestion. Too many stocks, in my estimation, get the buy flag waving.)

Cramer loves Citigroup and sees it as a great speculative play. But there is that word - speculative. And the last time I checked, Cramer does not do all that well when all his picks are considered. Indexes often beat Cramer. I know how he feels.

I wish my friend luck. He's probably made a good move, this time. Now, can he stick with but one.

Saturday, January 2, 2010

Lost decade? If I could only be so lucky in the next ten years.

The Globe called it "The Lost Decade for Investors." Hmmm.

At the beginning of the decade, if you had taken the advice of a lot of financial reporters and developed a financial plan based on a diversified portfolio with a carefully considered allocation of your investments, you might have developed a plan something like this. (This is based on my own portfolio breakdown but is not exactly how I am investing during retirement.)

  • 7% cash (Shove this in mostly in GICs with a little in a money market fund.)
  • 29% TD Canadian Index
  • 13.125% TD U.S. Index (Currency Neutral)
  • 13.125% TD International Index (Currency Neutral)
  • 22% TD Canadian Bond Fund (This is one of the rare funds that I would buy that is not an index.)
  • 15.75% TD Monthly Income

If you had taken $100,000 at the start of the decade and invested it as shown, and not put in another cent, your RSP would be worth more than $147,139.38 today. The reason it would be more is that I do not have a calculator for GIC investment growth handy and I have already made my point with the equity plus bond results.

So, if you are an investor who had a traditional plan and embraced rich diversification within in a carefully considered allocation model, you probably did alright.

...and yes I know that the TDMI is heavy with banks and also adds to my bond holdings. You can check the TDMI porfolio mix and blend it with your personal goals very easily. I did.

Always look below the hood when buying mutual funds or ETFs.

Friday, January 1, 2010

The Mean Decade: 2008 - When the financial world crumbled.

Sun Media reporter Thane Burnett has written a series on the past decade in which he found very little good to report. When it came to 2008, the article carried the headline, "The Mean Decade: 2008 - When the financial world crumbled."

Many of us, who have been saving for retirement and rode out the truly frightening 2008 correction of historic proportions, are kicking up our heels with glee. In the end, it was a good decade.

2008 was bad when you think about investments, but it was not anywhere near as bad as the media would have one believe. Everyone did not buy at the peak and dump their stock when all bottomed out. The story is far more complicated than that. Let  me give you an example.

If you had put $10,000 in a simple fund, say the TD Monthly Income on Jan. 1, 2000, you would have had $18,024.49 at the end of 2008. When growth like that is being achieved, saying the financial world crumbled as Burnett claimed, is the all-too-common shallow media response to a complex story.

If you had left the money in the TD MIF until the decade ended, you would have had $23,552.99 for an increase of 135.5% during the "mean decade." The financial story is not over but as the decade ended, the story was hitting some very positive notes.

I, by the way, owned a lot of TD MIF until early this year when I dumped about 75 percent of my holdings for CIBC Monthly Income. The CIBC offering has not performed as well as the TD one but it did not drag my portfolio down either, just put a gentle brake on its growth. A little less volatility offered the benefit of a better night's sleep. I'm not upset about my decision. This story is not over. I am still buying sleep with my CIBC purchase.

Like many investors, I found 2009 an amazing year, giving portfolio growth in the 30 percent range. If the 2008 crash chopped  a fast 20% to 25% off your balanced, diversified portfolio, 2009 may not have pulled you free of the financial hole dug a year earlier, but you are sitting in a very comfortable position.

A $100 thousand dollar RRSP portfolio could easily have been cut to a $75 thousand dollar portfolio in 2008. But that $75 thousand could easily have regain most of its losses in 2009. (100 X .75 X 1.3 = 97.5)

If you had had the nerve to buy into the market in the spring, there are lots of ETFs and inexpensive mutual funds that would have paid handsomely.

It is a rich, complex world. If someone tries lumping ten years together, a whole decade, one has to ask a few questions. The first question is, "Why is the Sun Media reporter not asking more questions?"

And they (Sun Media and other media folk) wonder why newspaper sales are slumping.