Tuesday, November 22, 2011

Investing for retirement: Have a goal, have fun

The other night a friend asked about investing. This young woman is already thinking about retirement and is considering a self-guided portfolio inside an RSP as one way to realize her goals. The following advice is for her, but I think it is worth a post.

As I write this, the financial world is in turmoil and possibly heading for another incredible dive along the lines of 2008 and 2009, this promises be a great time to build a solid portfolio for future growth.

The first step in building a good portfolio is to make your first step a small step. Pick up some books on investing and retirement and read them. Your local library will have a slew of these. I especially liked Protect Your Nest Egg by Eric Kirzner and Richard Croft and The Portfolio Doctor by David Cruise and Alison Griffiths. I found both at the library but later bought my own copies. I figured the authors had earned my respect and my money.

At this point you might like to open an online portfolio tracking account with The Globe and Mail, Globe Investor. The basic portfolio tracker is a free service, free being a nice bonus. Build an imaginary portfolio and watch the imaginary profits pour in. If you have dividend paying stocks, the dividends will appear in your imaginary cash balance. This service may be free but it is sophisticated.

Another free feature offered by Globe Investor is the Watchlist. This is handy for tracking stocks in which you have an interest. The Watchlist even tracks dividends. Very slick. (Click on the image below to see my Watchlist at an easy to read onscreen size.)

A partial view of my Globe Investor Watchlist.

I have mentioned dividends a few times now. I am a firm believer in the rewards of dividend investing. Given enough time, dividend paying stocks can dig themselves out of a financial hole. Often investors with a long time frame will put their money in "growth stocks" or mutual funds that promise "growth."

If a mutual fund openly promises lots of upward potential by putting growth in its name, it is also --- but not so openly --- admitting it has lots of downward potential. A dividend strategy vs. a growth strategy is often a contest between the turtle and the hare. The growth stocks will surge ahead at times but then lose momentum and stall; They will probably lose a lot of their value now and then. At the end of decades of investing, the fitful growth of these stocks is often surpassed by dividend investments. Dividend investments will also wax and wane with bull and bear markets, but their losses are cushioned by the steady flow of dividends.

To see this effect in action try playing with this TD Asset Management mutual fund graphing tool.
In my example, I compared the TD Monthly Income mutual fund --- one of my favourites --- to the TD FundSmart Managed Maximum Equity Growth (Premium Series). Over the period tracked, the turtle wins. (Again, click on the image below for an easy to read onscreen size.)

TD Monthly Income delivers $7727.88 more in this example.

I like the TD Monthly Income mutual fund but it is a bit of an anomaly. Generally, I don't like mutual funds. I've owned some good ones over the years but generally I prefer ETFs or even owning stock outright. The fees charged by mutual funds put them behind before the investing race has even begun. Some mutual funds charge from two and a half to three percent for the honour of having them manage your investment. Those charges can make it very difficult for the mutual fund to outperform a competing ETF, which often charge investors only half a percent or less.

So, get some books, do some reading, understand your goals, work out your asset allocation and play with some imaginary investments using Globe Fund. The final step is to talk with a financial adviser. I am not a financial adviser. Reading this does not count.

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 also chatted with an adviser I had known for years at the TD Canada Trust branch where I do some banking.

I have self-directed RSP accounts with both TD Canada Trust and ScotiaBank. There are things that I like about both. TD Canada Trust gets the nod from a lot of sources over ScotiaBank but I have found that both have their strengths and weaknesses. As I am not a trader, I am happy with both. I have no strong feelings favoring either one.

To get you started, here is a list of some of my investments:
Bank of Nova Scotia (BNS)
BMO Equal Weight Utilities Index (ZUT)
Claymore S&P/TSX Canadian Preferred Shares / Units (CPD)
Crescent Point Energy Corp. (CPG)
Inter Pipeline Fund (IPL.UN)
iShares MSCI Singapore Index Fund (EWS)
iShares Capped REIT Index (XRE)
WisdomTree Trust Australia Dividend (AUSE)

An average risk investment with higher than average yield.

Lastly, only invest if you are comfortable with losing money, lots of money, in the short term --- and maybe the long term. The financial world is very uncertain today. It is unlike anything in my lifetime. Keep your investments within your comfort range.

I was lucky. I retired at the depths of the recent stock market crash. As the market has been trending lower and lower recently, I have been feeling luckier and luckier. If you find a crashing market encouraging, you may be a natural investor with the nerves to ride out financial storms.

Cheers and good luck!

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