Tuesday, November 4, 2014

Stepping up to the imaginary plate

As you may know, I'm retired. I started saving for retirement in my mid-twenties and over the years I fooled around with many investing approaches. Looking back, I didn't do all that well. I retired with but a fraction of my early goal.

I tried GICs, mutual funds, ETFs and the stock market. All had pluses and minuses. GICs were stable but the returns were unremarkable. Mutual funds, for the most part, were too expensive for what they delivered -- except for one little mutual fund, the TD Monthly Income. ETFs were good but in the end they failed to beat the little TD fund that I continued to hold. Stocks were great but then I was very lucky. I always entered the market at the very moment a bull was charging into the financial arena.

In 2009 I retired. I took a buyout. On the downside, I took about a 25 percent cut in my pension and an almost equally big cut to my CPP income. To make ends meet, my wife had to file early for her CPP and thus she also took a huge cut in her monthly payments.

The only bright spot in all this was the buyout. I was able to put a nice chunk into the markets, Canadian and U.S., right at almost the perfect moment. Now, approaching the sixth year in retirement, I've made some missteps and I'm wondering how long until the gravy train goes off the rails.

In the coming year I'm going to track an imaginary portfolio I created using software offered to TD WebBroker clients. Create a portfolio and then sit back and see how it would have done. It is a fine way to test one's investment theories without risking any real money.

Based on the belief that one cannot time the market, I devised my allocation late last week and created my experimental portfolio. I bought 11 stocks, five ETFs and two mutual funds. There is a small amount in a cash account. When the dividends begin rolling in I will move the cash to a TD Investment Savings Account. I don't have the necessary cash for opening such an account at the moment.

So, what stocks did I buy? I bought 11 stocks choosing from both the Active Buy List posted by TD and from the group of stocks ScotiaBank analysts rate Outperform. The 11 stocks are:

  1. Ag Growth International Inc (AFN)
  2. Baytex Energy Corp (BTE)
  3. Glentel Inc (GLN)
  4. Mullen Group Ltd (MTL)
  5. Norbord Inc (NBD)
  6. Northland Power Inc (NPI)
  7. PHX Energy Services Corporation (PHX)
  8. Rogers Sugar Inc (RSI)
  9. Savanna Energy Services Corp (SVY)
  10. Teck Resources Ltd (TCK.B)
  11. Whitecap Resources Inc (WCP)

I put a maximum of about 1.8 percent of my portfolio into each stock, buying each stock in even lots without going over my 1.8 percent limit. For this reason, the actual portfolio percentage invested in each stock varies somewhat.

The five ETFs I purchased and the percentage of the portfolio were:

  • iShares International Select Dividend ETF (IDV) -- 7.5 percent
  • First Trust Morningstar Dividend Leaders Index Fund (FDL) -- 7.5 percent
  • iShares Select Dividend ETF (DVY) -- 7.5 percent
  • iShares Mortgage Real Estate Capped ETF (REM) -- 1.8 percent
  • UBS ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MORL) [Actually, an Exchanged Traded Note: an ETN.] -- half a percent

I have owned all of these ETFs in the past except for MORL. IDV gives me international exposure less the States. FDL and DVY give me exposure to American stocks. REM and MORL are mREIT-based investments. Both pay handsome dividends but come with big caveats. For this reason, I put a limited amount in each. And what do I mean by handsome? MORL is paying a 20 percent yield today. REM pays approximately half that. I've owned REM for years and have never lost money on the investment.

The reminder of the portfolio I divided between two mutual funds:

  • TD Monthly Income fund (TDB622)
  • CIBC Monthly Income fund (CIB512)

The way I divided the investment between the two funds was rather interesting and gave me a chance to use my high school algebra. I wanted the dividend income from the two funds to equal four percent. The TD fund pays less than two percent. The CIBC fund yield percent is about three times that. Knowing how much I had to invest, what amount of money I would remove annually and what dividend yield I could expect from each fund, I created an equation and solved for 'x'.

Using what I had learned, I googled the problem and found a site that explains the math very clearly. Here's the link: Purplemath.

Why would I use two mutual funds rather than readily available ETFs? The MER is about 1.48 percent with each of these funds. This is more than many investors want to pay, including me. So, why did I do it? My earlier experimental portfolios based on well respected, lazy-investor ETF-based investments were easily bested by the TD Monthly Income fund The high MER did not stop TDB622 from staying ahead of the competition.

So, why CIB512? Two reasons: One, it gives more money back. This may not be good if you are young, but for a retiree who wants equity exposure, bond exposure, cash to spend and all in a package that historically resists the ravages of a bear market, the monthly money is very appealing.

And how have I done? It is a little early to say but I confess I am down $5610 since markets opened Monday. Come back in a month and I'll post an update. (And if this interested you, please read my next post.)
One thing this experience has confirmed, building imaginary portfolios to test one's ideas before putting them into practice is a fine idea. 

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