Thursday, April 7, 2016

Luck, opportunity and successful investing

I'm retired and doing quite nicely. But, and it is a big but, how much of my solid financial position is simply luck and how much is based on my decision making ability? I bought  a lot of my bank stock when it was in the $20s at the depths of the market crash six or seven years ago. It was a good decision made at an opportune time.

As I think about it, good luck teamed with a great opportunity may be interwoven into the fabric of my investment life. Overall the market has been good since I was born in the latter years of the 1940s. This wasn't always the case. The market has not always been good to investors. The folk who invested in 1928 got burned. I understand it may have taken some of those people some two decades to recover financially. Many would have died before the market fully recovered.

For that reason, I am loath to give out solid advice such as do this because it worked for me. As they say, "Past performance is not an indicator of future growth." Often the word used is results in place of growth but you get the idea.

Last night I stumbled upon a site, Financial Planning Association (FPA), that appears to contain a treasure trove of solid advice when it comes to managing one's finances in retirement. Today I got an e-mail linked to that site. The topic? Risks in retirement. (And yes, I signed up for the e-mail updates. It was not a spam mailing.)

The letter discussed the usual suspects when it comes to investment risk, unforeseen major expenses, etc., but it mentioned one risk that is often ignored. It is the elephant in the room, so to speak: declining cognitive ability in one's senior years.

My retirement approach, which has a complex, personally-developed , Excel spread sheet as a major tool, is in trouble if I'm out of commission for any reason. If I had a stroke and was unable to manage our retirement finances, my wife would have her financial hands full.

Maximizing my wife and my income in retirement may be taking up too large a part of my time. My goal of coming up with a stand alone, self-regulating, income strategy may be of far more importance to a successful retirement strategy than I have been willing to admit.

Sunday, April 3, 2016

Do I make a sacrifice for less volatility?

As is clear from the posted graph, my TFSA (the solid purple line) has outperformed both the S&P/TSX Comp. TR Index (broken blue line) and the S&P 500 TR Index (dotted red line) over recent months. That said, look at the volatility. My portfolio sinks to extreme lows and then soars to dizziness-inducing heights. It has been, and promises to continue to be, a wild ride.

My actual portfolio is the solid purple line.

From the above graph, it is clear my investments made a couple of big dips but almost immediately recovered. When all is said and done, it appears at first glance that after all the drama I have simply returned to the level at which I started. Not true. In late 2015 I made my annual RIF withdrawals. I removed a chunk of cash to cover living expenses in retirement. By simply not losing value, my portfolio is performing adequately.

But, and it is a big but, my portfolio doesn't simply hold its own. The balance is constantly fluctuating up and down. I have confidence my portfolio will perform well in the end but it can be tense. I confess I am bothered more by the volatility than my wife. She has nerves of steel.

I would love to find another approach to investing -- one that generates the dividends needed to live while not suffering the deep dips of my present approach. I ask myself, "Would a portfolio containing just a few index funds or ETFs work just as well but with less volatility?"

Seeking an answer, I created ten phantom portfolios last January 1st (2016). Two were based on the excellent work done by the chap behind the Canadian Couch Potato blog.

The Couch Potato TD e-Series assertive portfolio contains:

  • 25% TD Canadian Bond Index Fund - e (TDB909)
  • 25% TD Canadian Index Fund - e (TDB900)
  • 25%  TD U.S. Index Fund - e (TDB902)
  • 25%  TD International Index Fund - e (TDB911)

The Couch Potato Vanguard  ETFs assertive portfolio contains:

  • 25% Vanguard Canadian Aggregate Bond Index ETF (VAB)
  • 25% Vanguard FTSE Canada All Cap Index ETF (VCN)
  • 50% Vanguard FTSE Canada All Cap Index ETF (VXC)

The last time I compared my portfolio to the Couch Potato approach, my portfolio pulled into the lead and stayed there for years until the American market took off and my portfolio was caught completely off base. With inadequate exposure to the States, it got torched. For that reason, I am not going to allow myself to get too smug about my present winning position. Never diss Couch Potato portfolios. These portfolios have earned the in the investment community for good reason: Over time, they perform well.

As much as I admire the Couch Potato approach, there are other approaches to successful investing that I also find attractive. One of these other approaches is simply sticking money in the TD Monthly Income fund. Over time this fund has done quite well while pumping out a steady stream of monthly payments. Since I began following this fund, the annual yield has dropped but I see this as good. I believe I am seeing less return of principal hidden in the yield.

A few months ago, TD brought out a D-series version of the monthly income fund. I considered the lower MER of a D-fund a clear bonus and made the switch based on my past good experience with TDB622.

I've created a no-brainer ghost portfolio using two D-series monthly income funds:

  • 70% TDB3085 (D-series Canadian monthly income fund)
  • 30% TDB3085 (D-series U.S. monthly income fund)
In the coming weeks I will talk about my other seven ghost portfolios but today I will stop with the three I have mentioned in this post. How have these no-brainer portfolios on automatic performed? Not badly but not as well as my oh-so-messy real portfolio. Since January 1, 2016 the results are as follows:

My portfolio is up 1.4% YTD. It is important to note, in mid-January I withdrew 3.2% to cover annual living expenses. If I hadn't made that withdrawal, my portfolio would be up 4.6% YTD. With the withdrawal amount factored in, not one of the portfolios-on-automatic is in the black. Both of the assertive Couch Potato portfolios plus my D-series ghost portfolio are off the winning pace at this moment. This may change, of course.

There are a few things that must be noted. As I removed a five figure amount from my actual portfolio to cover living expenses, I have removed a similar amount from the value of the ghost portfolios. Doing this introduces a small error. When the market is up, the ghost portfolios benefit. When the market is down, the ghost portfolios suffer a little.

And two, it is too early to make any meaningful judgments. That is why I shied away from giving out any hard numbers or revealing which ghost portfolio is in second place, which is in third, etc. I will wait until the end of the year before revealing all.

At the end of December I will know which ghost portfolios delivered the yield necessary to cover my annual income shortfall. Right now, I know my actual portfolio will get me through the year. Of this, I am certain.

One last note: In mid-December, I will withdraw all the accumulated dividends from my TFSA and ask my wife to do the same. This money will help cover the extra expenses that accompany Christmas. A December TFSA withdrawal increases January TFSA deposit headroom.