What is risk? And do bonds lessen risk?

If you try talking to bank reps about investing for the long haul, creating a portfolio that will provide adequate income while not being too risky, the bank rep will immediately launch into a discussion of buying bonds to lowering risk. Huh?

Let's say you have $100,000 at retirement and you were to need $6000 annually to balance your books. What do you do. Back in March,  I told a friend who had this exact problem to buy the top five Canadian banks in equal amounts. At the time do this would have provided a yield greater than 7%.

If one did this, one could remove $500 a month for 20 years while increasing the amount removed by the rate of inflation. I used 2% as the annual inflation rate and at the end of the 20 years I calculated that you would still have a balance of $90,189.79. It would take until the 15th year before the portfolio balance dropped below the original balance value of $100,000.

To assume that during those 15 years the five banks would never increase their dividends is crazy. Most likely the dividends would slowly climb and your withdrawal would never reach the point of decreasing the balance. At the end of 20 years you would still have your complete balance, quite likely more.

Two concerns must be addressed:

Is it possible the dividend income will be cut? Possible? Yes, but unlikely. There is some risk but very little. If there is a dividend cut, chances are only one bank will be involved. Remember, the Bank of Montreal has gone almost 200 years without cutting its dividend. The top five Canadian banks prefer to issue more equity rather than reducing the dividend yield.

Is it likely the value of the bank stock will fall? Yes. That is probably not so much a risk as a given. But who cares? It is the dividend income that you need. The value of the stock itself is not the concern. And with a 20 year time frame, the chance is very, very slim that the bank stock will be worth less than when purchased.

Now, what happens when you buy bonds paying .95%? In your 15th year, the money runs out.

Oh, the interest paid by bonds may go up but no one knows when this will happen nor by how much the rate will climb.

Talk about risk. It seems to me the more bonds you buy, the more risk you assume. The world is a risky place. No investment is totally risk free but as you can see buying stocks may be as good a bet as one can make. If I'm wrong, I will let the bank reps have the last word. I doubt I'll hear from any.

Let me add, I have all my retirement funds in equities. I have done quite nicely over the past 11 years. If I'd have stayed with bonds, I would not be doing as well. Yet, the bank reps insist that I should own some bonds. Why?

I wish I had more of these stocks.

ALA: AltaGas

I have owned AltaGas off and on for sometime. Right now I own some and I'm glad I do. It is up 52% and it pays a damn fine dividend as well: 5.5%. It is in the $17 range today and many see it going as high as a $22. On the low end, its target is still higher than where it is selling today but not by even a buck. If the market pulls back, and it always does, I'm buying more.

 NTR: Nutrien

Another stock I like, and this one I own as much as I am willing to hold in my portfolio, is Nutrien. It is a Canada-based producer and distributor of potash, nitrogen and phosphate for agricultural, industrial and feed customers worldwide. Its dividend isn't all that great but at 4.8% it is enough to pay me to hold and wait. As I won't be needing my capital for years and so for me this as an almost risk-free investment.

Now, there are investments with which I wish I had less involvement. REITs for instance. But, I cannot time the market and I cannot tell the future. Unless all becomes very clear and without the requirement of a crystal ball, I will continue to hold my BPY.UN, XRE and ZRE and enjoy the dividends. BPY.UN is paying 11.5%, XRE 6.2% and ZRE 5.35%. If you are an investor, you have to learn to look on the bright side. Sometime, that can be hard. Practise! (That said, some would say accept the losses, cash out and run. If you wait, it will get worse. They might be right. We'll see. Come back in a couple of years.)

Luck has a big role in investing

I feel that I am still a newbie when it comes to investing. Oh, I hit a lot right but I feel I benefit more from luck more than smarts.

I got out of the market in March as although I agree that one cannot time the market, I believe one can time a fast approaching virus.

COVID-19 was a clear threat and I took cover. It was, for me, a no brainer. This decision was based on what I believed to have been common sense. And in retrospect, I appear to have been right. My portfolios are doing wonderfully.

Do I have any advice? Oh, I'd say, if you are a Canadian investor, check out the Morningstar Canadian Income Portfolio that is updated monthy on TD WebBroker. It has been the one source of advice that I have found to be of generally excellent quality. A lot of my portfolio falls in line with the Morningstar suggestions and most of my most successful stock buys can be found in the Morningstar portfolio.