Wednesday, February 29, 2012

I distrust financial advisers.

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.

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.”

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.

Wednesday, February 8, 2012

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.

Tuesday, February 7, 2012

Newspaper editorial on retirement spreads fear

If your retirement graph looks like this, I have some homework for you.

The headline read, " It's not just baby boomers who have pension worries."

The first warning that this was a quick and flippant look at retirement, and the accompanying financial concerns, was the reference to baby boomers — a group that in Canada takes in everyone born in 1946 all the way to those born 19 years later in 1965. I prefer my sample populations in smaller chunks.

A recent poll, conducted by Harris/Decima for CIBC, found only 31 percent of respondents aged 55 to 64 said they were not financially ready for their retirement. The same poll also reported that among Canadians who said they have a long-term plan for retirement, 76 per cent felt they'd be financially prepared when they hit their retirement years.

Yet, the newspaper tells us:

"While the boomers panic, the post boomers are on the path toward living their golden years doing without," we are told.

 "It’s becoming clearer that only those who are prepared for the worst — or those who are the richest — are facing a secure old age."

Panic? Live without? Prepared for the worst? It can be a nasty, brutish world out there, I admit. But don't go to bed worrying about your financial future. It is just too uncertain — like much of life.

My feeling is that the editorial writer is in a panic. They have to calm down. Mellow out. Face a few facts. For instance, no matter how hard they try, no matter how well they plan, they cannot always be prepared for the worst. The worst has a way of being worse than anything imagined. Who saw the crash of 2008/2009 coming. Who had a retirement planning graph preparing them in 2000 for the huge dip in the markets eight years into the millennium?

In the end, all we can do is be prepared to batten down the financial hatches and ride out the financial storm if it hits. If the writer hasn't noticed, we are riding out a doozy right now. If your mantra is "buy low" this Great Recession is a wonderful buying opportunity. (Although, it could be a great opportunity to lose almost all . . . like I said, no one knows the future with certainty.)

The writer of this piece is middle aged. They have a good job and a working spouse, I believe. They have been saving for retirement for some years. From the way this piece is written, I assume they have a financial adviser. If so, they should know that the investment world has been absolutely mind-blowing great for the past two or three years. Surely, the writer has been making out like the proverbial bandit. If they haven't been, they need a new adviser — or learn to go it alone.

My investment in Inter Pipeline is up 132.5 percent and it pays a dividend of 5.7 percent today. My Crescent Point Energy is up about 100 percent and it too pays a nice dividend of 6.0 percent at today's stock price. Even some of my recent purchases, like the BMO Equal Weight Utilities Index ETF, are up nicely. (My ZUT units are up 7.47 percent, if you're interested, and they yield 5.25 percent.)

Over the past three years my portfolio is up about 43 percent, today's figures, and that is after taking money out every year in order to live. Will the next three years be as good? I don't know, but I highly doubt it.

I have one piece of advice for this editorial writer, if your financial planner guarantees any percent return over the lifetime of your plan, walk away. This is nonsense. There are few things that we know for sure, but one is that no portfolio will return a neat 5 percent annual return.

I strongly advise finding a Monte Carlo calculator you trust, google Gummy Stuff Monte Carlo calculator. Gummy, I believe, is the former head of the math department at the University of Waterloo. I use his calculator and find it quite reassuring. No wild promises. Another couple of good calculators can be found on the Money Chimp website: Risky Retirement Calculator and Monte Carlo Retirement Calculator.

If any of this doesn't make sense to you, then read about volatility on the Money Chimp.

This graph is a more accurate attempt at foreseeing your retirement future.

Oh, and the answer to my earlier question (Who had a retirement planning graph prepared for them in 2000 that showed a huge dip eight years into the new millennium?): Those folk using a Monte Carlo calculator. They had potential disastrous dips occurring every year.

Saturday, February 4, 2012

A falling barbell can crush you

Finally, I have a name for how I approach my investments. It's the risk barbell approach. I saw the term used in an article in The Globe and Mail. Rob Carrick talked with Sheldon Dong, vice-president of income strategy at TD Waterhouse, about how he managed his own retirement portfolio. He confessed he uses the risk barbell strategy.

“I do the extreme risk barbell,” he said. “I don’t recommend that for the average client, but you get the idea.”

Mr. Dong describes his risk barbell as a simple, if decidedly non-traditional, alternative. He’s careful to offer the warning that “what I’m preaching is not what the firm [TD] is preaching.” But if you’re desperate to wring better returns from your portfolio without a massive spike higher in risk levels, the barbell is worth investigating. 

I like this fellow's attitude.

I don't have any investment directly in bonds, the yields are simply too low. If I had to live in retirement on the return from bonds, I'd be in deep doo-doo immediately. I do have almost 30 percent of my money in two monthly income funds: the TD and the CIBC monthly income funds. These two mutual funds have a good chunk of their money in bonds and so I, too, have some bond exposure.

I also have a lot of blue chips investments. Plus, I have some money in utilities and the energy industry. I have great confidence in all the above. They may dip but they will always, in my estimation, come back and while one is waiting for the upward bounce there are the dividends to comfort the investor.

But, these "safe" investments are not enough to yield the return that I need. This is where I enter the risk barbell territory. I own some REM and some DRW and some other high yielding ETFs. I see high yield as almost synonymis with increased risk. This is not always the case but often enough that it is a pretty good rule.

Can I afford to lose the money invested in my high yielding ETFs? Yes. Oh, it would not be comfortable but I'd survive. I can mentally handle the risk. In fact, I have slept better at night since my retirement knowing that I had that income than I would have if was just squeaking by financially.

Come up with your own risk barbell. But be aware, a falling barbell can crush you.