Monday, November 24, 2014

TD Monthly Income_Answers to e-mail questions

Hi Sir,

Love your blog on investments.

Have a few quick questions on TD Monthly Income, for which you have a soft corner. I was hoping if you could clarify them for me.

The MER is 1.48%, but are there are any hidden costs that we are not aware of?
Also the return it shows of 8-9%, is that after deducting the MER?
The average return of 8 - 9 % of TD Monthly Income, is this coming from the TD website? Is there any chance that you have independently calculated the returns from your own investments in TD Monthly Income and do they match the return posted by TD?

I also like TD Monthly Income but want to verify the returns independently from you.

Would appreciate your input.

Regards,
Sam
___________________________________________

Dear Sam:
First, let me make it clear that I am NOT a financial adviser. I am a retired newspaper photographer. I am sharing my feelings about investing and hoping to hear from others who are attempting to run their own self-directed portfolios.

Fund Facts posted by TD contains a lot of the answers to your questions. Follow the link. Or follow this link: TD Helps.

To summarize what you will find:
  • This is a no load fund. There is no charge to buy or sell. But, read on. Note the following:
  • If you cash the fund within 30 days of purchase, you may pay up a 2% early redemption fee. Similarly, there may be a 2% fund switch fee if you switch out of TDB622 too quickly.
  • The MER (Management Expense Ratio) is 1.48%.
  • There is also a TER (Trading Expense Ratio) of .01%.
  • There is an ongoing trailing commission but this is folded into the MER. It is essentially invisible to the investor.
I believed the posted YTD return did NOT include the monthly dividend. A TD rep confirmed this. Here is a link: TD Help. In backing testing this fund I found most years it is best to make use of the offered DRIP, Dividend ReInvestment Plan. Let the dividends accumulate and compound. If you must make a withdrawal, do so at the end of the year.

You may have noticed that the dividend is a little low compared to those paid by other monthly income funds. The reason is that TDB622 has no Return of Capital component hidden within its monthly payouts. I see this as a plus. Follow these links to learn more:
And yes, my calculations based on my investment in TDB622 agree nicely with the numbers provided by the bank.

As a retired fellow, I find this fund very attractive. YTD it has returned about 10.7%. The distribution yield is 1.87%. It is a nicely balanced fund with some 53% invested in Canadian common equities and 37% invested in bonds, mostly Canadian bonds in a mix of government and private issues. The fund has something in the order of 371 investments. Another big plus is the low annual portfolio turnover of only 10.72%. Buy this one fund and buy a great mix of investments at a low cost.

I have found that this fund often outperforms many highly praised index-based ETF portfolios.

Tuesday, November 11, 2014

Patience is a virtue, sometimes.

Patience, it is said, is a virtue. When investing in the stock market this can be a double edged sword. Sell good stocks that are suffering a temporary setback and one locks in one's losses. Be patient and a good stock eventually recovers and one can move on financially intact.

But patiently waiting for a dying stock to reverse course and head for the stars is a fool's game. More and more good money disappears with each passing day. Nortel immediately comes to mind or Yellow Pages or Bre-X Minerals. Even ETF buyers got burned by the Nortel meltdown. Some TSX index funds in reflecting the make-up of the exchange held a lot of Nortel. When it totally disintegrated, these index funds took a huge hit. Nortel is the reason I prefer XIC over XIU. I like the cap limiting holdings, hence the 'C' in XIC.

So, today I sit licking my wounds. I've had a good run. Since getting back into the market some years ago, I've done quite nicely. But this year I lost my footing. I've made some small mistakes, like buying Labrador Iron Mines (LIM), and some big ones, like holding onto PennWest (PWT) and even adding to my position. LIM was a small mistake. I didn't invest much. PWT was a big mistake. I should have sold when I was originally dragged kicking and screaming into the PWT fold of investors.

Years ago I bought junior oil company Canetic Resources. PennWest then bought Canetic in a $3.6 billion deal. I could have sold my Canetic at a profit and moved on. I didn't like PWT. It seemed too eager to grow by acquisition. This can make for a messy financial sheet. If you can't understand it, don't own it. I should have immediately jumped the PWT ship.

At one time PennWest was a $30 plus stock. Today it is struggling to climb back to $5. I calculate that I paid more than $17 a share for the stock I own. I don't see much chance of it ever getting back to that number. That said, if the present reorganization is successful the stock may hit $6 or $7 sometime in the new year. That would give me a 20 to 40 percent gain. All this assumes PWT doesn't find it necessary to cut its dividend again. That would drive the price down even lower.

Thanks to the present low stock price, the dividend is now yielding better than 10 percent. This has analysts worried. David Dyck, the company's chief financial officer,  has tried to calm investor fears by stating that the company "remains confident in its ability to fund its capital expenditure programs and continue to pay a dividend." Is "a dividend" different that "the dividend"?

Should I dump PWT and move on or hold and hope. I'm voting for holding, hoping and re-evaluating. PWT now has decent management. A good broom was taken to the former management. I'd like to see PWT recover to ten dollars or maybe even $12. Good management teamed with a return to $90 or better oil and all my dreams for PennWest may become reality.

Some of my other duds, yes there are still more lead weights dragging down my portfolio, are stocks like Norbord. Norbord is a successful company in a cyclical business. It will come back. I have no doubt. Norbord is a success story just waiting to be told. I just got onboard Norbord too early.

It is looking as if I will end the year easily in the black, even after all my withdrawals. And it looks, to the ever optimistic me, like I have some stocks well positioned to make some nice gains in either 2015 or 2016. I may yet beat the index funds again.

But, I must be patient.

Latest portfolio showing promise

It is too early to tell, but my most recent foray into the world of imaginary portfolios appears to be  a winning allocation but one that may benefit from a little tweaking.

Only opened at the start of the month, two stocks have already been dropped. Both brought in a small profit but both seemed poor choices for a retirement portfolio. One, Norbord, has too many questions swirling about it. Will it cut its dividend? Will the price drop with such a cut? Will housing rebound in the States in 2015. The other, Tech Resources, is a mining operation which is now enduring a strike at a South American mine.

I have added one company to my portfolio with some of the free cash: Precision Drilling. The dividend yield is a little low at 3.1 percent, but the payout ratio is also low. I get worried when the payout ratio climbs above 100 percent. No concern here.

A solid company, in my estimation, it has been on my radar for a long time. The price now is depressed compared to historic values. It may drop farther but it still seemed like a fair time to add a little exposure. I've done well with drillers in the past and this one looks better than some of those others that I owned.

Read more about this latest portfolio and its allocation: Stepping Up to the Imaginary Plate.


Keeping up with the TSX but with less volatility. I'll keep fine tuning.
The present portfolio mix is as follows:

Stocks (about 1.8 or 1.9 percent in each):

  • Ag Growth International Inc (AFN)
  • Baytex Energy Corp (BTE)
  • Dream Office REIT (D.UN)
  • Glentel Inc (GLN)
  • Mullen Group Ltd (MTL)
  • Northland Power Inc (NPI)
  • PHX Energy Services Corporation (PHX)
  • Precision Drilling (PD)
  • Rogers Sugar Inc (RSI)
  • Savanna Energy Services Corp (SVY)
  • Whitecap Resources Inc (WCP)
ETFs
  • 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
Mutual Funds (balance divided between two funds for a four percent annual yield):
  • TD Monthly Income fund (TDB622)
  • CIBC Monthly Income fund (CIB512)
The cash balance is presently $2012.52. The goal is to have enough free cash in a year that one could safely make a withdrawal in retirement and not affect the actual investment holdings themselves.

Performance

The new performance graphing software now offered by TD WebBroker is a great way of getting a handle on a portfolio's volatility. I have an account with WebBroker that I feel has done quite nicely and a check of the performance chart tells the story. It has been a steady performer without any volatility except for one brief dip.

I can compare this steady performance with that of the TSX. When I do, I find that the TSX fell into a deep trough at the time my portfolio was simply suffering a little downward blip. Big falls are hard to stomach. Little ones, not so much.

The TSX recovered fairly quickly and moved above my portfolio on the chart and stayed there for months. Come November the TSX hit another rough patch and fell to just below my portfolio graph line. The TSX has again recovered again but I'm sure I happier with my solid, straight-arrow performance than with the roller-coaster ride offered by the market.

At present, I'm down compared to the TSX but with much less volatility.

Monday, November 10, 2014

Revisiting my imaginary portfolios

Would I have done better investing in ETFs rather than using my present approach -- a mix of stocks, ETFs and mutual funds. To get a handle on this question I designed a number of imaginary portfolios using software available to users of WebBroker.

For a good part of the year, I did quite nicely. But I have had some setbacks. There were two big ones that did a lot to deflate my investment balloon. One was actually made late last year. I sold most of my American holdings: a big mistake. One must adhere closely to one's portfolio allocation. That investment blueprint, carefully worked out, should not be changed on a whim or a fear. I feared what financial havoc the Republicans might cause if they shutdown the U.S. government as threatened. I was snookered by their bluff.

A wise financial adviser at the TD Bank once told me to always have some money in the American market. It dwarfs the Canadian market. Its size and success is not to be ignored. I ignored his advice and I ignored the U.S. market and I missed some remarkable gains.

The other killer was my investment in PennWest. I've never liked PWT. Years ago I liked a junior oil company called Canetic. Unfortunately, PWT also liked Canetic and bought it and I ended up with some PennWest stock when the dust settled. I should have sold those shares immediately. I didn't. I held them, watched them lose value and when they seemed to have reached a bottom, I bought more. I caught the falling knife, as they say.

When the news broke that PWT had problems with its past bookkeeping practices, I began reading about lawyers and lawsuits. I watched the price tumble even farther. That stock has hit lows that were unimaginable just a few months ago.

Never buy a company that seems bent on growing by acquisition. It is too complicated a game. It is no wonder there were problems with the books. Now, I am holding on, hoping the new management will be successful at getting PennWest back on track. There are still a lot of questions surrounding this company. How this will play out is anyone guess. On the bright side there is new management in place and this company may yet become a winner.

So, what was the best investment approach? Drum roll, please. And the winner is:

TD Monthly Income fund (TDB622): A+

Yes, the TD Monthly Income fund easily outpaced the entire field. Despite a MER of 1.48 percent and no American exposure or international investments to speak of, TDB622 won. It had a gain of  9.7 percent.

This soundly trounced the FPX Income benchmark which is up 8.2 percent for the year (Nov. 10, 2014).
 

Canadian Pension Strategy: A-

While I was still working, one of the editors at the paper gave me a book on investing in retirement. Using that book as a guide I devised a portfolio allocation for retirement:
  • XIC - 10 percent
  • XSP - 10 percent
  • XIN - 10 percent
  • XSB - 20 percent
  • XRB - 25 percent
  • XRE - 20 percent
  • Cash - 5 percent
The big whallop of REITs and the inclusion of real return bonds are what sets this portfolio apart. The cash is shelved in an investment savings account paying 1.25 percent annually. Here I uncovered the first weakness to the imaginary portfolio software. It calculates stock and ETF market increases and adds the correct dividends but it does not calculate the interest earned by cash stashed in an investment savings account like TDB8150. This mean that this portfolio actually earned a few hundred dollars more than the software recorded.

The money weighted return for this portfolio is shown as 8.1 percent. Compared to the FPX Income Index which delivered 8.2 percent YTD, it was almost a photo-finish. A damn fine showing earning an A-. One thing I appreciated about this portfolio was the larger than usual dividend payouts. The XRE holding was responsible for this, I believe.

TD e-Funds Portfolio: B+

In truth, this is not an ETF-based portfolio but a mutual fund-based one. One must have an online self-directed account with TD in order to buy e-funds which have very low, almost ETF-low, MERs.
  • TDB909 - 40 percent (Bonds)
  • TDB900 - 32.5 percent (Canadian Equity Index fund)
  • TDB904 - 15 percent (U.S. Equity Index fund)
  • TDB905 - 7.5 percent (International Equity Index fund)
  • Cash - 5 percent
The money weighted return for this portfolio is 7.8 percent. This fund missed the benchmark by almost half a percent. For this, I dropped the grade to a B+.
 

Classic ETF Portfolio: B

This ETF-based portfolio was  inspired by investment advice I read some years ago. It required investing in just three ETFs:
  • XIC - 40 percent
  • XSP - 20 percent
  • XSB - 40 percent
Not shown, is the cash. There was a small amount of remaining cash which was placed in an investment savings account (TDB8150).

The money weighted return for this portfolio is 7.5 percent. I dropped the grade to a B+. Still, I hate to admit it, but the Classic is even beating my portfolio. This year is not going to go down as one of my best when it comes to investing. My missteps were few but my PennWest one was a doozie.

I tested some other ETF mixes I but they didn't perform nearly as well as the ones mentioned.


Am I going to immediately dump my approach and buy the TD Monthly Income fund. Maybe I should, but I'm going to wait a year and see if PennWest recovers somewhat. Even a small recovery would go a long way to putting my portfolio back into the game.

In the meantime, I'll test a few other ETF portfolios posted on the Net. A lazy-man's portfolio that holds an American ETF like SDY would be fun to chart. American ETFs were driven higher by the market and the collapsing Canadian dollar. It was a win-win situation for ETFs like SDY and others like it.

I'll keep you posted.





Sunday, November 9, 2014

Norbord: Buy Sell or Hold

I bought some Norbord a short while ago, just before the market began collapsing. At first I had a nice pop and then the stock price weakened. It fell below my entry point and has never climbed back. It hasn't gotten even close.

Now, some analysts are pulling their buy recommendation and replacing it with a hold. When I see the letters h-o-l-d, I read sell. Should I? Should I take the loss and move on. Is there really nothing to see here?

I confess, I like Norbord. One of the biggest producers of oriented strand board (OSB) in the world with 11 operating plants in Canada, the U.S. and Europe, Norbord can pump out 5 billion square feet of OSB a year. Norbord also manufactures medium density fibreboard (MDF), particleboard and furniture. If the market for OSB should strengthen, Norbord has mothballed capacity that it can bring online relatively quickly.

Its announced earning for each quarter this year have surpassed estimates but the spread has been narrowing. Last quarter only a penny separated the estimate from what the company actually earned. The dividend of 10.5 percent, $2.40 annually, is being questioned and a cut to the dividend is anticipated in 2015. Revenue for the past year has been remarkably flat.

My gut tells me the present stock price is under threat. If I sell now, I can buy back at a lower entry point. But, my gut has often been wrong. I need more than just a gut feeling to dump my NBD and move on. I need to know that wherever I temporarily put that money, it will perform better than if I had simply left it alone.

If I have doubts about the dividend, I'm sure many others share my concern. A lot of the damage resulting from a dividend cut may be priced into the NBD stock already. If the fall isn't too great, say five or ten percent, and the dividend is only halved, I will still earn a tidy sum on which to live in retirement. I can ride out the storm.

A look at the fundamentals (key stats, cash flow, income statements) appear to indicate NBD is a successful, well run company in a cyclical market and the cycle is near a bottom. Only the retained earnings number gives me pause. Slashing the dividend should improve this.

Will U.S. housing starts rebound in 2015? Until recently, many thought a recovery was immanent. Now, analysts are tempering their positive positions. If I held a lot of NBD I think I would sell. There should be better places to park my money.

But as I don't hold a lot, I'm going to hold tight. If the price of NBD should collapse, I will give the company fundamentals another look. If all is in the black but under pressure, I may buy a few more shares to push my exposure back to where it was when I first bought the stock. I have no doubt that someday I will sell for a nice profit and in the meantime I hope to be paid for my patience.

(Be warned. I believe NBD has cut its dividend completely in the past. This is a company that appears to have no qualms about touching the dividend.)
_____________________________________________

One last thing that I should mention: I hold NBD in an account that is presently up 18.25 percent. I hold 32 percent of the portfolio in cash paying 1.25 percent. I'm waiting patiently for a buying opportunity. The bank stock in this account is up about 80 percent at the moment. I am well positioned to be able to buffer any anticipated loss from a drop in the Norbord share price. I can take a 10 percent correction in my bank stock and 20 percent bear attack on my Norbord and still have a profit in the four digits and an annual yield able to meet my retirement needs. There is no reason for a fire sale.

Friday, November 7, 2014

Too Early to Call but a Cushion is Forming

At the very end of last month I created an imaginary portfolio using software found on my WebBroker account site. Being imaginary, I followed my heart and gut instincts honed over the past few years of investing in retirement. So far today my imaginary portfolio is up $3249.

What goes up can also come down. And I have no illusions about this sad fact. Still, being up $3249 means now I have to fall by that amount before I drop into the red. I see this $3249 as a small, but nice, cushion to ease the pain of any coming correction. Unfortunately, such a small amount won't be much of comfort in a true bear market -- one losing 20 percent or more in value.

The big gainers so far today have been:
  • Glentel Inc (GLN) - up $1430
  • Ag Growth International Inc (AFN) - up $1367
  • Whitecap Resources Inc (WCP) - up $1120 [I actually own this stock.]
  • Rogers Sugar Inc (RSI) - up $1112 
  • Teck Resources Ltd (TCK.B)- up $750
  • Even Norbord Inc (NBD) is up $324 [I actually own this stock.]

The biggest losers so far today are:
  • CIBC Monthly Income (CIB512) - down $1190
  • iShares International Select Dividend ETF (IDV) - down $822
At first I was surprised that it was the CIBC fund leading the retreat. This was bought for stability, to minimize volatility. And then I realized that I have a lot more invested in CIB512 than in any one of the other investments. A small change causes a much larger gain or loss because of the size of the CIB512 holding. By the end of the day both monthly income funds were in the black.

Norbord continued to climb. I sold. I locked in the profits and put the money in Dream Office REIT. I believe at today's stock prices, D.UN has more potential. If I'm right, there will be time in the coming year to get back into Norbord. I'm guessing it will cut the dividend and this will cause a temporary drop in the stock price.

I find it interesting that I continue to hold my Norbord in my real account. Why? That is a good question. There is a dividend coming in December and I believe it will pay me a very handsome dividend. I also think there might be more upward potential in the stock. I'd like to have the dividend in my pocket before selling on a bump.

I seem to be more optimistic with my real money and more conservative with my imaginary money. I may learn something about myself and about investing from my imaginary portfolio.

And how did I end the day. My imaginary portfolio was up $4953.

Thursday, November 6, 2014

Whitecap Resources May Be A Core Holding

I like Whitecap Resources. I have the same feel good feeling about WCP that I had years ago for Crescent Point Energy. With the price of oil depressed at the moment, my guess is that this is a fine time to buy a few shares of some solid junior oil companies. And I believe WCP is a solid company. (But be warned: I've been wrong with this call in the past.)

Crescent Point is well off its highs of the past few months and was trading today for as little as $35.25. WCP had a nice little pop today closing at $15.14 as it distances itself from its recent lows. I wish I had added to my position in CPG. I'm waiting for another retreat by WCP before possibly buying more.

The nice thing about having a conservative position in both is that if the price does not retreat, one can take solace in the fact one owns some shares in a fine company. If the price does drop, a conservative position allows one to buy more without taking on too much risk.

With CPG said to be aiming for a $50 share price some day in the future and WCP said by many analysts to be a stock to watch, both dividend paying oil plays will be core holdings for some time to come. (Be warned: Some believe CPG's dividend may be a little too rich, too good to be true. Do a little research on this matter before jumping in with both feet.)

Imaginary portfolio recovers; Now in the black

In my last post I blogged about creating a fictional portfolio to test my thoughts on a suitable portfolio for a retired couple in today's investment environment. I kept bonds to a minimum thinking rising interest rates in the future will play havoc with both ETF and mutual funds that are based solely on bonds.

The first thing to happen to my imaginary portfolio was that it lost five grand of imaginary money. But today it has recovered and is now nicely in the black. I knew this portfolio would be volatile. It is much easier to have the stomach for volatility when there is no real skin in the game.

  • Ag Growth International Inc (AFN) is up $1247
  • Glentel Inc (GLN) is up $1130
  • Whitecap Resources Inc (WCP) is up $450. A real surprise.

There are other positive holdings and some that are still lingering in the red. The worst performer, thus far, is an ETF: IDV. The iShares International Select Dividend fund is underwater by $783 U.S.

The entire portfolio is now up more than $900, no thanks to IDV.

It is going to be an interesting year watching both my imaginary money and my oh-so-very-real retirement money ride the ups and downs of the market.

Wednesday, November 5, 2014

Retiring Without An Annuity

Work, save, retire. Buy an annuity and enjoy. Maybe.

When I started saving for retirement I was in my mid twenties. At some point between then and now, I talked with a financial advisor about what to do with my RSP funds when I turned 65. The answer: buy an annuity. I was told, my RSP should pay about $750 for every $100,000 saved. I was going to be wealthy in retirement. Not!

By the time I retired, interest rates had collapsed. The last quote I received, late last year, said $100,000 would buy a joint life annuity of about $475 monthly. I thought taking a cut of 25 percent in my pension was bad. This is a cut of about 37 percent from what I had been told to expect.

I admit I was financially naive. And I understand that today I may still be holding lots of erroneous beliefs. When one is 40 and holds erroneous ideas about retirement, the disaster is 25 years in the future. A lot can happen in 25 years to avert the coming disaster.

But when one is wrong and retired, the problems are immediate and may well affect the remainder of one's life. I cannot undo what I did in the first years of my retirement. But what I do today, or don't do, is still in my control. And so far, I am taking my retirement funds and investing them in the market, in good, dividend-paying stocks.

Do I have more money available each month than if I had simply tossed all my savings to an insurance company or bank and converted everything into an annuity? No. Even a payment of $475 a month is a return of 5.7%. That is more immediate cash than my portfolio is generating. (That said, the portfolio itself is growing quite smartly. I am up more than 60 percent since I retired in 2009.)

On the downside, and there is a downside, that payment of $475 would remain the same until the day when both my wife and I were dead. With each passing day, our income would be shrinking. According to the Bank of Canada, what I could buy for $475 when I retired would cost $521 today. That's a lot of shrinkage in just a few short years.

Returning to the B of C calculator, someone retiring 30 years ago with an annuity paying $750 annually would now need $1550 in order to have the same buying power. The annuity shrank in in buying power by almost two and half percent each year.

If in 2009, at the start of my retirement, I had invested $100,000 in a joint and last survivor annuity paying say $500 a month or $6000 a year, today I would find I need $6580 to enjoy the same buying power.

If instead I had put $100,000 in the TD Monthly Income fund and removed an amount equal to the annuity payout that first year but increased the withdrawals lock-step with inflation, today I would be drawing about $550 monthly or $6600 annually. Amazingly my portfolio would have grown to approximately $140,166 after withdrawals. (Note: I am removing more than the dividend payments from the TD fund.)

In retrospect, it is clear not buying an annuity when I retired was the right decision. The growth of my actual portfolio after years of withdrawals makes this immediately clear. I don't have to look to graphs on the Internet. I am far better off today than I was when I retired. I was lucky.

The big question is: What will the future hold? Is it time to lock in some of the profits accumulated over the past few years? Is it time to buy an annuity?

Which brings me to the post before this one. Can I put my money into the market in a mix of the bold and the conservative and generate enough money to live while leaving a nice inheritance to my children and grandchildren? Should I simply buy the TD Monthly Income fund? It has been a winner for most of the past 15 years.

Whatever I decide, I am sure at its very core the decision will be a gamble.

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.)
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One thing this experience has confirmed, building imaginary portfolios to test one's ideas before putting them into practice is a fine idea.