Monday, August 19, 2013

Tough problem, easy answer, mixed outcome

I haven't blogged about money for some time. I suffered an ICD storm — my implantable cardioverter-defibrillator delivered four full-power jolts in eight hours, stopping a number of life-threatening arrhythmia events. The experience left me shaken but alive and in the hospital emergency ward. Since then I've been busy seeing doctors about my health, lawyers about my will and bankers and financial advisers about what happens to my portfolio in the event of my death.

The portfolio I have been managing during retirement is divided evenly between my wife and me. Retiring at the very bottom of the global financial meltdown, I've done quite nicely. Even though I remove $30,000 or so every year to live, the portfolio has grown by more than half in just four years and some months. Some years I have made more in retirement than I ever made while working.

Am I a financial wizard? No, of course not. I'm simply enjoying a damn fine streak of luck. Anyone bragging about their great investment results over the past four years is either a blowhard or a financial adviser.

Let's look at just one of my investments: ScotiaBank. As an investment it is a no-brainer. I put a big chunk of money into BNS at the time of my retirement. The shares were trading for less than $30. Today my shares have more than doubled in value.

Brilliant? No. If I were brilliant, I'd still hold my Inter Pipeline shares. When IPL.UN doubled in value, I sold. Bad move. Today those shares are selling for triple what they did when I retired. (In my defence, both the Cathedral Energy shares and the Sun Life Financial shares I bought have done very nicely and both are paying a fine dividend.)

I have been investing in the market since I was a boy and the one thing I've learned is that when times are good the market is good. A rising tide lifts all boats, as they say. When times are poor, the market can be tough for the timid. A falling tide strands many boats, leaving them high and dry. The trick to making money is not just having success during the years of feast, the trick is not losing one's shirt during the years of famine. It takes a long time to make up the lost financial ground.

Which brings us to the focus of today's post and to the advice I have for my wife (and for a friend, BM, puzzling over how to run his retirement portfolio.)

First, have an investment philosophy. Mine is: Invest in dividend paying stocks. Stock prices go up and stock prices come down. Dividends boost the climb higher and cushion the inevitable fall.

Next, invest in a balanced portfolio. A mixture of stocks and bonds is important. I found this hard to believe but I've seen study after study showing this is essentially always the case when a long enough investment period is considered — we're talking more than a decade.

My third rule is keep costs down. This generally rules out a lot of mutual funds.

There's more to successful investing than the above but in the past simply following the above guidelines would have resulted in one fine retirement portfolio. If you need proof, click on the image posted below.

The TD Monthly Income fund (TDB622) is a balanced fund presently holding about 58 percent equities, 36 percent bonds and 6 percent cash. The mix changes over time but it is always an equity/bond mix with the accent on equities.

As a monthly income fund, TDB622 is by necessity heavy on dividend paying equities. Despite being a mutual fund, it has a reasonable MER: 1.48 percent the last time I checked.

If a retiree had parked $500,000 of RSP savings in TDB622 in January 2000 and removed 4 percent at the end of every year, 4 percent being the traditional rule-of-thumb safe withdrawal rate, today that retiree would have removed $260,000. Yet the investment in TDB622 would now be worth $1,058,269.94. Wow!

If that that retiree had not demanded dividends but had been content with simply buying a balanced fund, like the TD Balanced Index, they would have less than half as much — and this despite the much lower MER of an index fund.

Do a little research yourself, here is a link to the TD Asset Management fund calculator. Pick the TD Monthly Income-I fund from the Balanced funds, click on Prices and Performance and then click on Advanced Graph Growth. This brings up the calculator. I believe all fields are open to modification.

Now for some caveats:

Dividends can be too good, too high. Outrageously high dividends are a red warning flag. This caveat applies to stocks, funds and ETFs. Read: When fund yields are too good to be true. My two personal picks in the monthly income fund arena are the TD offering and the one from the Royal Bank. Unfortunately, the RY monthly income fund is closed to RSP investors. There are some ETFs that compete but they do not have the long histories of the mutual funds.

Another caveat is buying a bond fund or a bond ETF is not the same as buying actual bonds. Google this problem and learn the difference. And read the article Is Your Bond Fund Really Losing Money posted on the Canadian Couch Potato. This article may keep you from panicking when bond funds and ETFs are losing value.

I've always liked the Canadian Couch Potato philosophy but I've never actually followed it. I've tried but I always get side-tracked. Now, with my health problems, it is time to simplify my holdings. It may not pay as well but it will definitely be easier for my wife to manage. When I have my new portfolio ready for launch, I'll post my findings.

Till then, cheers!

p.s. If you like crunching numbers, try and find a Canadian Couch Potato portfolio that would have beaten the TD Monthly Income Fund over the past decade. My guess is the TDB622 fund will do very nicely despite its higher MER.

To compare historic market returns of funds other than TD offerings, go to The Globe and Mail, Globe Investor: Funds page.


  1. could not agree more with your tips on being a solid investor. You are smart guy... I get this comment allot... but I always tell people... really it all has to do with common sense.

    Let's review your investment philosophy and may I add a little to it.

    1) Have an investment philosophy: even if you think you don't have one... you do, just think it through and you'll discover it. Maybe pay a free for service advisor to help you out. This is YOUR foundation for investing and should be your guiding light throughout your life... it is that important.

    Mine is:
    1) Capital Perservation
    2) Yield
    3) Capital Growth
    4) Rebalance

    Once you have your investment philosophy and you really buy into it... stay true to it... it will guide you through many rough periods.

    Control the things you can control... worry less about the things you cannot. No matter how hard you try, you'll never control the markets (deal with it), but you can control how much market exposure you have (risk). Find what you are comfortable with and stay disciplined to those areas. Again, if you need help, ask an advisor to help you, but there are some good risk tolerant questionnaires on the web.

    As you have said...try to always minimize loses... as regaining losses is always harder than taking profits. I had this discussion with a client today. Her fund was up over 35% in the last 12 months and I said ok.. it's time to trim our position... of course she said "if this has done so well, why are we selling some of it"... luckily her husband understood and said because we do not know what will happen tomorrow. She understood.

    Depending on the size our your account, rebalance at least yearly.

    Yield (or dividends) should form part of everyone's equity position (IMO). If we look at all developed markets in the last 50 yrs, all (without exception) dividends have made up well over 50% of total return... learn from that... this time is very likely no different.

    Increasing dividend yields without adding risk is arbitrage and the best one can hope for (be careful read the fine print)

    Don't pay extra for investments. If the fees on your account (balanced account) are above 2.4% (which is the average balanced mutual fund in Canada... you are paying too much... ask your advisor about your fees... this is a fair question. The reports show over and over again that higher fees do not translate into higher performance... so why buy higher fees? Any advisor that backs away from the fee question... that should be a warning sign!

  2. As an aside... the idea of having a formalized investment philosophy (for me) can from your favorite person I saw speak some 5 years ago... Kevin O'Leary. He was actually a good speaker and for me helped me understand the importance of a formalized investment philosophy... I always had one, but never documented it.

    I have since became an advocate that all financial advisors should have to disclose their philosophy as this obviously can have a significant influence on someone's portfolio....need a say..... LEVERAGE!!!

    I know you'll say my 2.4% fees is a high number... I would agree... all our accounts come in under 2%, but let's at least start with reducing the average from 2.4% to something lower... Seg funds at over 3% for a conservative portfolio is both ridiculous and highway robbery IMO.

    I think I've mention before... I had a client (or prospect) that had $500,000 AUMs... and was entirely in seg funds (DSC of course) paying over 3.5% for his capital guarantees... so I asked him why do you like the guarantees and why are they important for you? He said (you guessed it) what are you talking about? He is single, no kids and has no other real retirement savings.

    We quickly adjusted his account and saved him over 1.5%... which translated into over $7500 per year in extra costs. We thought he may prefer to have that money work for him and grow his AUMs.... he agreed.

    I see your health has become again a problem... wish you all the best.