Tuesday, July 5, 2016

The search for the "easy" retirement portfolio

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 Both my wife and I are retired. I have a defined benefit pension. My wife doesn't. Because I took a buyout and retired early, I was forced to accept about a 25 percent cut in my pension. I also had to file for my CPP early, as did my wife. We were desperate, we needed that money to live, and for that reason we both took double digits cuts to our CPPs.

Thankfully, we were both savers and have lived our lives relatively frugally. We both had RRSPs to supplement our retirement income. We bought banks stocks, REITs, and some oil patch companies that paid nice dividends. We also bought some ETFs and three mutual funds.

Today, our portfolio is a real dog's breakfast. When we retired, I had an allocation plan based on a mix of equity and bond ETFs. It was nicely diversified with Canadian, American and International investments. First, I lost confidence in bonds and dumped our holdings. Then the Yanks looked like they might renege on their country's debts and I sold off the bulk of my American investments. The remaining portfolio is but a shadow of its former diversified self.

I was proud of our portfolio when I retired but today I am embarrassed. I've got to do better. I've got to work out an allocation and adhere to it. To that end I set up ten research portfolios using the portfolio manager software supplied by TD Waterhouse. It comes as part of the self-directed investor package.

Today my dog's breakfast portfolio is up Year To Date (YTD) 5.93%. If it keeps this pace for the remainder of the year, I will be up 11.63% and that's after removing 4.4% of the value of our portfolio at retirement to cover living expenses. We need that annual withdrawal. The money from our portfolio is what keeps the wolf away from our door.

I must confess that I have already scrapped one of the portfolio approaches I was investigating. It was created using screener software designed to pick stocks based on your personal investment goals. The pure stock portfolio that resulted was way too volatile. There is simply no way I could own such a wild beast.

The four portfolios in which I have the most interest are the following:

  • One: composed of just three ETFs: CBD, XRE and XUT
  • Two: composed of just two TD D-series funds: TDB3085, TDB3086
  • Three: composed of just four TD e-funds: TDB909, TDB900, TDB911, TDB902
  • Four: composed of just three Vanguard ETFs: VAB, VNC, VXC

  • The first portfolio is mostly a fund of funds, also called a wrap, with its yield supplemented by a couple of traditional, income paying ETFs.
  • The second portfolio is a mix of two TD D-series monthly income funds. One is Canadian and the other U.S. The TD D-series funds have slightly lower MERs than the comparable non-D-series funds.
  • The third and fourth porfolios are based on assertive portfolios found on the Couch Potato Website. The fellow behind the Couch Potato style of investing is quite knowledgeable. I am quite in awe of this chap. He knows his stuff. Anyone looking at running their own portfolio would be wise to visit his site and read his posts.

And now, without further ado, here is how the four portfolios mentioned are doing half way through the year. And remember, I took a big chunk of money out of each portfolio, an amount in the five digits, to meet living expenses.

  1. Portfolio One is up 5.1%.
  2. Portfolio Two is up almost 1.0%.
  3. Portfolio Three is down by 3.1%.
  4. Portfolio Four is down almost 2%.

It is still too early to say much about the results but there are some interesting things going on. One, the fund-of-funds anchored portfolio is doing quite nicely. CBN, iShares Balanced Income CorePortfolio Index ETF, is an entire portfolio in one ETF. Lots of experts in the financial investment community mock the fund of funds approach and from some back testing I've done, I can understand their doubts about the strategy. Yet, it, with a little help, is besting the other test portfolios.

Two, the portfolio based on two mutual funds is in the black while the ETF based portfolio is in the red. There seems to be almost universal agreement among savvy investment advisors that one should never pay the high fees charged by mutual funds. The high MERs are portfolio killers, it is said. I have always questioned this as funds like the TD Monthly Income have enviable track records. I have always theorized that one could do a lot worse than simply investing in the TD Monthly Income fund. It's mix of bonds and equity has been a proven winner with relatively low volatility over the years that I have owned it.

The two assertive Couch Potato portfolios are both in the red. I'm sure some would argue that using assertive portfolios in this inquiry is an error and they'd be right. Assertive portfolios are not designed for the retired. But, and I see it as a big but, my own assertive portfolio, my dog's breakfast composed of almost all equities, is the leader at the moment.

My goal? I want a simple retirement portfolio that is a little on the assertive side, delivers enough in dividends to help me pay my bills, and doesn't suffer from undo volatility. I don't think I'm asking too much.

Six months into this experiment is not enough time to say much. Come back at the start of 2017 and I may post more complete information on my test portfolios. If I feel I have learned enough, I may tell you that I am selling all and reinvesting in my "easy" retirement portfolio.

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