Don't lose sleep over an approaching bear

I'm a natural worrier. I think many of us are. When times are good, I worry how long until they turn bad. When times are bad, I worry how long until times get really get bad. But, to others, I often present a positive face, a person confident-in-the-future.

Whenever I have stopped to examine these conflicting feelings, I have come to the conclusion that one must keep emotions in check. Stay focused on the problem at hand, the stock market. React with thought, THINK, don't let fear be the driver.

How likely is a bear market? Not very. How often does the market correct? Fairly frequently. For the record, a correction is a drop in the market's value from the high reached in the past year by a minimum of 10% but less than 20%. When the losses pass 20%, the market is officially in bear market territory.

According to Investopedia:

Between 1926 and 2017, there have been only eight bear markets, ranging in length from six months to 2.8 years, and in severity from an 83.4% drop in the S&P 500 to a modest decline of only 21.8%. It should be mentioned that the correlation between these bear markets and recessions is imperfect.

The Stock Market Crash of 1929 was the central event in a  bear market that lasted 2.8 years and at its worst sliced 83.4% off the value of the S&P 500. 

Sounds awful but I was left wondering what happened to dividend income? According to my grandfather, the crash wasn't as bad as many today claim. I believe many of his stocks continued to pay dividends throughout the Great Depression, although the payments may have been reduced. But the cut in dividend income may have been softened by the deflation of the time.

I discovered that Mark Hulbert, writing for The New York Times, claimed dividends during the Great Depression averaged a 14% yield. I can understand that. The value of a stock collapses but the dividend is not cut, or is not reduced to the same extent. The math causes the dividend yield to skyrocket. Many would argue, this is a good time to buy.

Hulbert has argued that an average investor could have fully recovered from the 1929 crash in only four-and-one-half years. Many investors would have benefited from the fact that within the broader market there were some quick-recovery stocks. There were other forces at work as well. Think deflation again. The total recovery time when all stocks are considered was arguably 12 years. A long time but nowhere near as long as many claim.

Presently I have 12% of my portfolio in cash. I've kept lots of powder dry, as they say. My dividends today completely cover my income needs. In fact, my dividends presently supply me with 8% more dividend income than I need to live. If the market crashed but dividends were not cut drastically, I could live quite nicely on my remaining dividend income.

If my dividend income was slashed by a third, it would take about 11 years or so for me to exhaust my stash of cash. By that time there is a good chance my portfolio would have completely recovered, my dividend income would again cover all my expenses and then some and all would be fine.

In other words, don't panic. A bear market is not the end of the world for a well positioned retired senior with a solid, portfolio. It may look bad but looks can be deceiving. My advice, crunch some numbers and satisfy yourself that you too can survive a worst case scenario. I can but I don't expect that I will ever find myself in that position. Even I am not that negative.

In researching this, I came across the following posted by Invesco:

On planning and sticking to the plan -- for years!

 https://www.quora.com/Why-are-stock-investors-unable-to-beat-the-S-P-in-the-long-run

Christopher Welsh

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Updated May 5

Attorney

Why are stock investors unable to beat the S&P in the long run?

Originally Answered: Why do stock investors not able to beat S&P in long run?

Here is a great chart we show our clients that was done by JP Morgan:

This shows the average annualized return had you bought and held an asset for 20 years.

Do you notice what the WORST performer is? The average investor.

Put your hands up….how many people out there developed an investing plan and stuck to it for 20 years? Or did you constantly change as you tried to find something “better”?

There is a gigantic difference between investment return and INVESTOR return. It is not hard to design a portfolio that should perform very well over a long period of time (e.g. 20 years or so), even when compared to the S&P 500 . But it is IMPOSSIBLE to get a client or individual to stick to that plan.

Click on the link and read the whole story in Quora.

Building a portfolio with stocks and/or ETFs

To recap:

• First: Understand your finances.
• Next: Open a self-directed investment account. For most of us, this will be an RRSP account but in some cases it will be a TFSA. Try and avoid paying an annual $100 administrative fee.
  
• Lastly: buy some stocks or ETFs to begin the actual process of investing.

Buying stock and ETFs is both hard and easy. If you insist on doing all the research yourself, it can be very time consuming. As a novice investor, why bother? Find some good guidance, follow it and as you gain experience and confidence, break out on your own.

One of the easiest ways to quickly build a complete portfolio is by following the advice found on the Canadian Couch Potato site. I have had Couch Potato portfolios and I've been very pleased with the results.

Click the first link, sit back with your notebook or iPad and read. I cannot say enough good things for the Couch Potato site. It is just chock full of good information.

Then click on this link and go to the 2020 portfolios, all based on various ETFs. This is index investing and it works. 

Warren Buffet, the Wizard of Omaha, has said most average, long-term investors are best served by investing in low-cost index funds. Following his famous recommendation to buy the S&P index, simply buy an ETF tracking the S&P 500, such XUS or VFV.

Pretty cool, right? Buy one ETF and you are done. If you like the idea on buying just one ETF but you'd like a little more diversity in your portfolio, buy a portfolio in an ETF like ZGRO from the Bank of Montreal. If you want less volatility, then move to a more balanced portfolio like ZBAL. iShares and Vanguard Canada also have portfolios in an ETF. All are quite similar.

The nice thing about going this route is that you will have exposure to all the best places to put a little money. For instance, XGRO has about 35% exposure to the S&P 500. The S&P was Buffet's fave.

It will take a few years, but eventually you will have sufficient money to make buying individual stocks an attractive option. Today, I'd simply consult the Morningstar Canadian Portfolio recommendations. Sooner or later one or more of the suggested stocks will dip in price, if the dip brings it into 5* territory according to Morningstar rules, buy. I try to keep each individual stock I own to no more than 5% of my entire portfolio value. Even good stocks can get into big trouble. Think Nortel. I don't want to face that risk.

To see a stock-based portfolio, click this link: 15-Minute Retirement Plan.

Why would one want a stock-based portfolio? When I think about this logically, I have to admit that I am not too sure why. It does give one the feeling of having control but so what? I have not checked but my guess is that most folk would do better just putting all their money into ZGRO and leaving it there.

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Writing this made me decide to run an experiment. Friday I started tracking the performance of my Million Dollar Portfolio.

Originally, I wasn't posting anything for a couple of months. But, this Monday my Million Dollar Portfolio took a big jump as the market responded to an announced possible COVID-19 vaccine. The election win by Biden in the U.S. presidential race seems to have been positive as well.

My Million Dollar Portfolio hit $1,031,461.54. I'm posting this because of what it says about volatility. Money invested in the market is volatile. It is far more volatile than you may think. Its leaps, both up and down, leaving you breathless. Be prepared. Always keep in mind that a bear market can easily diminish a portfolio value by a full 20% or more. Refrain from gloating when the market goes up and keep your finger off the sell button when the market crashes. Volatility is normal.

Fisher Investments Canada 15-Minute Retirement Plan

CLOSED - CLOSED - CLOSED - CLOSED

On Sat., July 31th, my Million Dollar Portfolio DEMO sat at $1,237,441. This is after making PAPER monthly withdrawals totalling $29,970. $3,330 was withdrawn monthly to cover living expenses in retirement.

 

The screen grab below shows the balance as of Saturday, June 26th.

Fisher Investments Canada sent me its 15-Minute Retirement Plan. It was a very informative brochure. The well respected investment management firm examined various investment and withdrawal strategies appropriate for retired seniors. 

I was surprised the strategy I am using was not among those that Fisher examined. Why the surprise? A fellow at TD told me that he had other clients using the same withdrawal approach. He considered my approach a reasonable withdrawal strategy for a RRIF holder.

My strategy? I meet the mandatory withdrawal rules by transferring investments in-kind from my RIFs and LIF into TFSAs and non-registered accounts. I never sell equities or ETFs to meet the annual mandatory withdrawal requirements. As these in-kind transfers are made to cover mandatory withdrawal demands, there is no immediate withholding tax. But note, the tax must be paid the following year. 

To cover living expenses in retirement, I withdraw dividend income. I have 30% withheld on these cash withdrawals. By making these tax payments quite generous, the withdrawals essentially cover the future income tax due on both the cash withdrawals and in-kind transfers.

I have used this RIF and LIF withdrawal approach with success for over a dozen years in retirement.

Fisher Investments Canada warns, "One of the biggest risks an investor faces is running out of money in retirement." I agree. As the Fisher brochure points out, someone who is 65 years old can reasonably expect to hit 85. A 65-year-old must plan for the retirement portfolio to last two full decades. More would be nice. Fisher Investments Canada is offering some good advice here. No argument.

Fisher looked at five scenarios but I was interested in only one. The first two scenarios were too generous as Fisher itself pointed out. Fisher calculated that if one withdraws 10% annually, or even just 7% annually, the money will not last. The third scenario used a 5% withdrawal rate but even at 5% the Fisher portfolio could be depleted before the passing of two decades.

For a safe withdrawal rate, Fisher Investments Canada seems to be recommending 3%. With a million dollar portfolio at retirement that would mean one is only allowed a withdrawal of $30,000 a year. I could not get by on such an amount and I don't. And I don't have a million dollar portfolio either.

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Here, I am inserting my latest feelings on the 3% withdrawal rate recommended by Fisher Investments Canada. The percent one can withdraw, before one must sell some equities, varies. If one is lucky enough to buy when the market is down, removing 4% or more may be quite reasonable. If the market is roaring to new highs with equities fully valued and then some, even a 3% withdrawal rate can be tough to achieve if one is just entering the market.

When I retired, my dividend paying investments were, for the most part, all yielding well above 4%. After more than a dozen years in retirement, my portfolio has grown and although the income has also grown in absolute numbers, my dividend income has not grown enough to maintain the 4% yield. My yield today is 3.3%

Does this mean it impossible to design a portfolio today to support a 4% withdrawal rate? It may be harder but it is not impossible. The telecoms are still paying better than 4%. Telus yields 4.07%, BCE yields 5.39%. Pipelines are another place to find yield. Enbridge yields 6.14% and TC Energy yields 5.3%. The REITS are another good source for yield. I like two ETFs: XRE and RIT. Both yield more than 4% today. A few Canadian banks are still yielding more than 4%. CIBC delivers 4.53%. Some utilities also meet out 4% yield requirement. For instance, Emera is yielding 4.27% today. Toss in an ETF like XUS for some exposure to the American market and you might have a workable portfolio.

Companies like Fisher seem to know their stuff. No argument. Still, I am happy not paying a financial advisor. My gut tells me the cost of a financial advisor would be a big burden on my retirement portfolio. Only time will tell.

 And now to return to my original post . . .

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I decided to try my hand at investing a million dollars with the goal of growing the portfolio while simultaneously providing income throughout the retirement years. I created a demo portfolio using TD WebBroker software. I took two cracks at doing this with the second attempt using a more diverse selection of stocks. I looked carefully at my own holdings to create my posted Million Dollar Portfolio. I tracked this demo portfolio for more than a year before software glitches caused me to stop.

My Million Dollar Portfolio had no bonds. Interest rates were simply too low. I didn't have bonds in my personal portfolio and I didn't miss them. My personal retirement portfolio is a mix of stocks and ETFs and it is larger today than when I retired eleven years ago. This is despite my having withdrawn cash every year to cover living expense in retirement. 

To clarify what I wrote earlier, I withdrew all the dividend income up to a maximum of 4%. I also met my mandatory withdrawals from my RIFs and LIFs by making in-kind withdrawals with the transfers going to either a TFSA or a non-registered self-directed account. Because these are mandatory withdrawals, no tax is withheld but the tax must still be paid in the following year.

The goal of making these in-kind withdrawals/transfers is to deplete the RIFs and RLIFs while retaining all the investments: equities and ETFs.

Up until recently, my portfolio had no problem delivering more than 4% in annual dividend income Not today. A $50 stock that a few years ago which was paying a $3 annual dividend for a yield of 6% is today selling for $100. The $3 dividend now yields 3%. The dividend income remained constant in dollars but as yield expressed as a percentage it shrunk.

Thus far, this constant dollar income has not caused me any problems. For one thing, because I transfer so much to my TFSA annually, I have an annually increasing tax-free income. The same income goes farther and farther with each passing year. 

Both Telus and BCE have announced dividend increases and Fortis is likely to up its dividend. These little bumps in dividend income help when it comes to income in retirement but these do not neutralize the effect skyrocketing equities values have on my portfolio.

I was able to validate some of Fisher's claims. It may be true that slavishly withdrawing a full 4% annually from a retirement portfolio could threaten its very existence over time. I prefer to focus on the amount to be withdrawn from the portfolio.

I retired in 2009. Today I withdraw more money from my portfolio than I did when I retired but the percentage number has shrunk. Yes, that's right. My withdrawal in dollars has climbed while the percentage withdrawn has slid.

Now, without further adieu, a drum roll please, I present my Million Dollar portfolio with the annual yields expected as it existed in June 2021.

• 1940 shares ALA. Annual yield: $1862.40
• 410 shares BMO. Annual yield: $1738.40
  
• 150 shares BNS. Annual yield: $540
• 810 shares BCE. Annual yield: $2835
• 330 shares CM. Annual yield: $1927.20
  
• 615 shares EMA. Annual yield: $1568.25
  
• 925 shares ENB. Annual yield: $2997
  
• 620 shares FTS. Annual yield: $1252.40
• 1135 shares H. Annual yield: $1146.35
  
• 275 shares IGM. Annual yield: $618.75
• 500 shares NA. Annual yield: $1420
• 640 shares NTR. Annual yield: $1540
• 350 shares RY. Annual yield: $1512
• 655 shares TRP. Annual yield: $2122.20
• 1420 shares T. Annual yield: $1661.40
  
• 565 shares TD. Annual yield: $1785.40
  
• 2400 shares ZDJ. Annual yield: $2112
• 1000 shares ZPAY. Annual yield: $1920
  
• 3870 shares XUS. Annual yield: $3908.70
  
• 2500 shares VIU. Annual yield: $1600

• Plus there's more than $90,000 in cash. It's good to have some cash for unseen disasters.
• Anticipated Annual Dividend Income: $36,067.45. (Yield is 3.6% on original million dollars.)

Thanks to the cash balance, when I must, I can withdraw close to the 4% amount.

Let me point out that as funds are transferred to the TFSA, more and more future withdrawals become tax free income. A nice perk. When the in-kind withdrawals must go into a non-registered portfolio, the withdrawals will be taxed but as dividend income from Canadian companies. There may be some tax benefits.

Warning: One must be prepared for volatility. A correction is a fall value of 10% or more. A bear market kicks in when the market drops 20% or more in value. Corrections and bear markets are expected. Relax. You're an investor and not a speculator or gambler. You realize money is only lost when one sells. Your goal is to live on the dividends.

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If you've gotten this far, here's a financial advisor site that seems to offer a lot: Bellwether Investment Management. I liked the retirement calculator. And for another view on retirement, an absolutely excellent book is Retirement Income for Life by Frederick Vettese. He was the Chief Actuary at Morneau Shepell. His approach is different than mine but, unlike Fisher, he also sees four or even five percent withdrawals as possible.

I like Vettese and I may modify my own retirement plans based on his views. His argument for buying an annuity at some point, no later than the age of 80, is very persuasive.

Self-directed investing with TFSAs or RRSPs

I'm not familiar with all the options for running a self-directed investment account. I know many banks charge an annual fee that can be as much as $100 annually. 

But once the portfolio value exceeds $25,000, the annual fee is often waived. This cutoff point is not etched in stone. Pay close attention to the fee schedule when pricing out all the costs

For instance, CIBC Investor's Edge self-directed TFSA and RESP accounts have no annual administrative fee. Investor's Edge also charges $3 less than many others for each online equity trade. That may not a lot but the $3 is better in your pocket than the bank's.

I understand Questrade charges no annual administrative fee for RRSP and TFSA accounts. Familiarize yourself with the rules governing TFSAs and RRSPs. As a new investor, you may find opening a TFSA is your best option. 

The last time I checked, one could contribute up to $6000 annually to one's TFSA but there is a possibility that you can contribute much more. Read what the Motley Fool said in January of 2020:

Here’s the catch: the annual TFSA contribution limit may not apply to you. That’s because the lifetime TFSA contribution is the number that really matters.

Unused contribution room rolls over from year to year. So if you didn’t max out your contributions in past years, that room is added to this year’s maximum.

For example, if you started a TFSA today and had yet to make a single contribution, you could potentially contribute $69,500, the sum of each year’s contribution maximum since the TFSA was first launched.

So, if your finances allow, make sure to hit the 2020 contribution maximum of $6,000. But if you left contribution room in past years, you may be able to contribute even more.

The other option is an RRSP. Funds contributed to an RRSP are not subject to income tax. The tax is not waived forever but only put on hold until the funds are withdrawn. If withdrawn in retirement, your tax rate may well be lower than that paid during your working years.

When retired, you may find you need three portfolios: an RRSP, converted to an RIF at 71, plus both a TFSA and a non-registered account. I can envision situations where this could be advantageous for younger investors as well.

To recap:

• Maintain a personal budget to know the state of your finances
• Open either a TFSA or an RRSP
• Manage your saved funds with a self-directed investment account. Use the lowest-cost provider. This may be CIBC or  Questrade.

If you don't know how to check your TFSA contribution room, Wealthsimple has a clear explanation. The entire article is worth a look but here is the core of their advice.

1. Go to the CRA My Account login

2. Log in with your preferred method. If you've set up your bank as a sign-in partner, this is the simplest way to access your CRA account.

3. Under the tabbed header, navigate to "RRSP and TFSA"

4. Click "Tax-Free Savings Account (TFSA)"

5. Click "Contribution Room"

6. Click "Next" at the disclaimer

7. I understand this value does not reflect any contributions or withdrawals made in the present year.