Saving for a future purchase is difficult today

I have a friend who saved some cash for the future. The problem is inflation. Hide $10,000 under your mattress and in five years it will have the buying power of $8,587.34 if inflation runs at as little as 3% annually.

Deposit the money in the bank and the interest paid helps to lessen the loss. But unless the interest paid is greater than the inflation rate, the buying power of the money still shrinks. It is tough protecting money from inflation. For many of us, it is impossible.

Which brings us to the stock market. Convert your savings into equities, stock, and, if you are lucky, when you cash out in five years you will have all your buying power intact plus a nice gain. If you are unlucky, and this may happen about a third of the time, you will will have vastly less money. It is not difficult to imagine a loss of 20% or more. A loss of 20% is so common that it even has a name: a bear market.

Clearly, the market often pays handsomely but it can also inflict great financial pain. The possibility of a handsome gain is the reward for taking on the risk. The aim of investing is to find ways to minimize risk while maximizing gain.

Does this mean one should stay clear of the stock market? For some folk, in a word, yes. If you cannot afford the loss, even temporarily, don't invest in the market. But if you are able to aim for a withdrawal window that spans a time frame up to three years, you simply do not sell your stock while the bear is roaming the market. You hold onto your stock, you enjoy the dividends if your stock pays dividends, and you wait until the bull market comes back. I like to plan for a three year recovery period.

Some important points to keep in mind when investing in the market:

• Buying stock is placing a bet on the health of our financial system.
• Investing in the market means you have converted your cash into stock. It is not money again till sold.
• The market is risky. Companies can and do go bankrupt. Losing all of one's investment is always a possibility. Think Northern Telecom or General Motors.

Remember the $10,000 placed under the mattress? It lost more than 14% of its buying power in five years. 

If that $10,000 had been converted to stock in the Bank of Nova Scotia five years ago, it might easily have gown to $11,362 today. Plus it paid a generous dividend greater than 4.5%. In total, one has more than $13,660 before factoring in inflation. 

If the market is down at the end of five years, one simply keeps the stock for up to three extra years and enjoys the extra dividends as the reward for patience.

It is worth noting that the top five Canadian banks have never cut their dividend. The Bank of Montreal is approaching 200 years without once missing its dividend payment. This is something to keep in mind when buying Canadian bank stock.

The rules guiding my investments

• I invest for income. Period. Except in those VERY rare cases when I don't. In the past, I insisted on at least a four percent dividend. Now, with the markets at all time highs, three percent is the new cutoff. When does the three percent rule not apply? A good example would be BAM.A. It does not pay a great dividend but it is such a great investment that I find it almost impossible not to include it in my portfolio. I'm adding it the first chance I get.
  

• I strive for diversity in my retirement portfolio. To this end, I have a spreadsheet that tracks my asset allocation. For instance, I try not to have more than 30% of my investments in the financial sector and no stock every commands more than 10% of my total portfolio. At the moment no one stock even breaks six percent.

• I believe there's safety in numbers but the number cannot be too great. I try to have at least two dozen different investments but never more than thirty investments total. This is a mix of mainly individual stocks with a small number of ETFs. My U.S. and international investments are always accomplished using ETFs. I like XUN or XUS for my U.S. exposure and VIU or VIDY for my international.

• I insist on having some exposure to REITs and utilities. I always have at least ten percent of my portfolio in REITs as a mix of two ETFs: RIT and ZRE. Because these two ETFs use different approaches to building the investment universe in which each one plays, owning the two gives a bit more diversity and RIT adds some exposure to the U.S. REIT market.  As for utilities, I own the standard players and ignore the utilities-based ETFs. I like Emera, Ontario Hydro, Fortis, Alta Gas (Yes, I consider this more utility than pipeline.) and Algonquin Power and Utilities. I like something in the order of 10% to 15% of my portfolio invested in the utility sector. (Note: I own AQN but it is not longer recommended.)
  

• I buy good quality companies with intentions of holding the investment for two years or more. In a perfect world, I'd hold each stock forever. Sadly, the world is not perfect. Still, it is not uncommon for me to have zero turnover in any given year. The top six Canadians banks or the major utility players or Bell or Telus in the telecom sector are all examples of stocks that pay a fine dividend and can be held indefinitely.
  

• I like to have one or more stocks under consideration. If these good bets fall onto hard times and lose 20% or more of their value, this is a buy signal with one warning: find out why the stock is out of favour. Recently Restaurant Brands was more than 20% off it high for the year. It was a buy. Algonquin Power was also off 20% but I worried that it will might lose more. Eventually I added AQN to my portfolio. I should have resisted buying AQN. AQN is having serious problems. As of today it is down more than 30%.  A 20% drop is entering bear market territory. A 10% drop, or a correction, is also a boundary that when breached should draw one's attention. Recently, TD was down about 8.5%. It wasn't correcting but it was on sale.

Today, after almost eleven full years of retirement and of withdrawals to live in retirement, my portfolio has more than doubled in value. As you can see, so far, my approach has been very successful in my retirement.

How I would invest $10,000

I have a friend with $10,000 to invest. This is money that they can afford to lock away for three or four years. There is no chance that even in an emergency they would require this money. This money is truly available for investing, no string attached.

I'd buy a stock selling at a discount to it's high for the past year and it must offer a decent dividend. I want a solid company as I like to sleep at night. I want a stock in a company I can trust, one in which I have faith. I don't want to have to be checking it's gains or losses too frequently. It should be a buy-it-and-forget-it stock. ENB (Enbridge), T (Telus) and TD all meet these criteria.

To decide how much of each stock I should own, I created a simple spreadsheet. See below. (It didn't copy and paste perfectly but you will get the idea.) I insist on a minimum yield of 4%. This mix yields 4.89% today.

					Invest	$10,000
Stock	Price Tdy	Dividend	Dividend	% to own	Quantity	Total Dividend	12-Month High	% Off Its High	Investment
TD	$82.20	$3.16	3.84%	33.00%	40	$126.40	$89.12	7.76%	$3,288.00
ENB	$50.42	$3.34	6.62%	34.00%	67	$223.78	$51.34	1.79%	$3,378.14
T	$28.72	$1.26	4.40%	33.00%	115	$145.45	$29.99	4.23%	$3,302.80
					Yearly	$495.63		Cash	$9,968.94
					Yield	4.96%		Balance	-$9,968.94

 

I opened a simulated portfolio using Portfolio Manager in TD WebBroker. This pseudo portfolio tracks the performance of the $10,000 portfolio suggested by the spreadsheet.

 Will my friend take my advice and go for the safety of diversity offered by investing in three areas of the market: financials, pipelines and telecoms? Will the attractive dividend income, almost 5%,  grab their attention and commitment? I'll have to call my friend tomorrow and discover what was decided.

   

• Sept. 22, 2021 -- $10,000 to invest
• Oct. 22, 2021 -- Value of Portfolio has climbed to $10,330  (Telus is the drag on the portfolio.)
  
• Sept. 24, 2021 -- $10,009.23 Portfolio balance at close.
• Nov. 5, 2021 -- $10,606.03
  

Does a retirement income portfolio have to be complicated?

A brochure from Fisher Investments Canada started me thinking about my retirement portfolio. 

My wife and I have been withdrawing more than Fisher claims is wise from our retirement funds for more than a decade. Could we be on the road to financial ruin?

Today, despite the annual withdrawals, our portfolio is much larger than when I retired. Are we just lucky or is it possible Fisher Investments Canada is wrong?

The brochure I was sent examines the different outcomes resulting from a range of withdrawal rates applied to a million dollar portfolio. I decided I'd create a million dollar demo portfolio. I wouldn't try to time the market. I would simply created a portfolio, track its performance and every month withdraw $3,330 to emulate the cash withdrawals one must make in retirement.

My withdrawal system works on the assumption that the retirement portfolio generates at least 4% annually in dividend income. With the portfolio growing so large so quickly, portfolio growth has outpaced dividend growth. For this reason, I rejigged my million dollar portfolio, adding a high dividend yielding ETF from the Bank of Montreal called ZPAY. Nevertheless, it is still necessary to withdraw some funds from cash to meet the 4% withdrawal demand.

Why did I add ZPAY? I did some research, ran some demo portfolios and checked historical returns. In each case, ZPAY performed as advertised. I even created a demo portfolio holding only ZPAY. The starting balance of the ZPAY portfolio equalled the value of the original portfolio at the time minus all expenses. 

The ZPAY portfolio is easily delivering more than 4% annually and today it is worth way more than a million dollars. Like my original portfolio, I make a monthly withdrawal of $3330 from the ZPAY portfolio. Still, the ZPAY portfolio is not growing at the same rate as the original portfolio. Owning a good mix of dividend paying stocks seems to be the way to go. Let's see what happens in 2022.

The big problem with a portfolio composed of only one ETF is just that; it is only one ETF. No one is going to invest like this even if it works. It sounds too risky. So, I created a three ETF portfolio that uses enough ZPAY to boost the dividend income to almost the full 4% yield. 

Next, I put 10% of the portfolio opening balance in the Vanguard Canadian High Dividend ETF VDY for exposure to Canadian equities while maintaining a high dividend yield. 

Lastly, I used the iShares ETF XEQT to give the portfolio global exposure. XEQT is weighted toward the U.S. but holds more than 9000 stocks from markets around the world including some from Canada. I named my three ETFs portfolio after its holdings and for the date it was created: XEQT VDY ZPAY 7 12 21.

I withdraw $1665 monthly form my 3-ETF portfolio as this portfolio was created with a $500,000 investment. This equates to an annual 4% withdrawal rate.

Lastly, a fellow, who runs an excellent blog on investing, suggests one could simply invest in the iShares total portfolio ETF XGRO. XGRO is similar to XEQT but XGRO holds about 20% in bonds. This makes XGRO a very traditional portfolio. I'm using the $500,000 XGRO portfolio as a benchmark. Can my three ETF portfolio do as well or maybe even better than the Couch Potato suggestion? Time will tell. 

Because XGRO only makes four dividend payments annually, the 4% withdrawal will be done at the end of December.

Have I learned anything? Yes. I am more confident in my investing. Every portfolio I have created has done well. And I have created more than just the ones listed here. Don't be greedy. Invest for the long haul and be prepared to weather any downturns. I've gone through a number of large retreats in the market since retiring but I have not been left permanently damaged financially. Markets may go down but this is often followed by a very strong bull market.When it comes to my dividend income, it has remained rock solid through thick and thin.

If my wife agrees, we will soon be investing some of our funds in ZPAY. We don't hold any bonds. Admittedly, bonds add a little stability to a portfolio making it a little less volatility. This is often a good thing. Most of us handle the roller coaster ride of investing very poorly. When the market is up we are delighted but when the market is down many of us panic. Some of us even sell at a loss.

 

Tracking Portfolio Values and Total Withdrawals (Jan. 14th Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Jan. 28, 2021      $1,000,000 Original Portfolio     $1,300,069          $46,770  

Jan. 28, 2021      $1,000,000 ZPAY Portfolio         $1,256,130          $46,770

Jan. 28, 2021      XEQT VDY ZPAY 7 12 21          $502,848             $10,115

Jan. 28, 2021      XGRO 7 12 21                            No longer following.

* The new monthly withdrawal amount for 2022 is $3480 for the million dollar portfolio and $1790 for the $500,000 portfolio. To get some idea of how XGRO does, try this LINK.

 

Tracking Portfolio Values and Total Withdrawals (Jan. 14th Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Jan. 14, 2021      $1,000,000 Original Portfolio     $1,324,223          $46,770  

Jan. 14, 2021      $1,000,000 ZPAY Portfolio         $1,256,532          $46,770

Jan. 14, 2021      XEQT VDY ZPAY 7 12 21          $509,250             $10,115

Jan. 14, 2021      XGRO 7 12 21                            No longer following.

* The new monthly withdrawal amount for 2022 is $3480 for the million dollar portfolio and $1790 for the $500,000 portfolio.

END OF YEAR

Tracking Portfolio Values and Total Withdrawals (Dec. 31st Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Dec. 31, 2021      $1,000,000 Original Portfolio     $1,319,325          $43,290  

Dec. 31, 2021      $1,000,000 ZPAY Portfolio         $1,285,814          $43,290

Dec. 31, 2021      XEQT VDY ZPAY 7 12 21          $518,612             $8325

Dec. 31, 2021      XGRO 7 12 21                            $514,964*            $8325*

* The 4% withdrawal for XGRO was be done at the end of December, 2021. With actual retirement portfolios it is not uncommon to wait until December to remove the funds that have accumulated during the preceding year.

 

Tracking Portfolio Values and Total Withdrawals (Dec. 17th Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Dec. 17, 2021      $1,000,000 Original Portfolio     $1,300,825          $43,290  

Dec. 17, 2021      $1,000,000 ZPAY Portfolio         $1,293,070          $43,290

Dec. 17, 2021      XEQT VDY ZPAY 7 12 21          $517,196             $8325

Dec. 17, 2021      XGRO 7 12 21                            $516,851*            $0*

* The 4% withdrawal for XGRO will be done at the end of December, 2021. With actual retirement portfolios it is not uncommon to wait until December to remove the funds that have accumulated during the preceding year.

 

Tracking Portfolio Values and Total Withdrawals (Dec. 12th Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Dec. 12, 2021      $1,000,000 Original Portfolio     $1,295,431          $43,290  

Dec. 12, 2021      $1,000,000 ZPAY Portfolio         $1,276,945          $43,290

Dec. 12, 2021      XEQT VDY ZPAY 7 12 21          $514,450             $8325

Dec. 12, 2021      XGRO 7 12 21                            $518,625*            $0*

* The 4% withdrawal for XGRO will be done at the end of December, 2021. With actual retirement portfolios it is not uncommon to wait until December to remove the funds that have accumulated during the preceding year. 

   

Tracking Portfolio Values and Total Withdrawals (Nov. 12th Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Nov. 12, 2021      $1,000,000 Original Portfolio     $1,296,685          $39,960  

Nov. 12, 2021      $1,000,000 ZPAY Portfolio         $1,261,730          $39,960

Nov. 12, 2021      XEQT VDY ZPAY 7 12 21          $513,521             $6660

Nov. 12, 2021      XGRO 7 12 21                            $523,555*            $0*

* The 4% withdrawal for XGRO will be done in December, 2021. With actual retirement portfolios it is not uncommon to wait until December to remove the funds that have accumulated during the preceding year.    

 

Tracking Portfolio Values and Total Withdrawals (Nov. 5th Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Nov. 5, 2021      $1,000,000 Original Portfolio     $1,295,053          $39,960**  

Nov. 5, 2021      $1,000,000 ZPAY Portfolio         $1,252,861          $39,960

Nov. 5, 2021     XEQT VDY ZPAY 7 12 21          $509,857             $6660

Nov. 5, 2021     XGRO 7 12 21                            $520,795*            $0*  

** Sold all the remaing IGM shares and bought 300 shares of QSR  

* The 4% withdrawal for XGRO will be done in December, 2021. With actual retirement portfolios it is not uncommon to wait until December to remove the funds that have accumulated during the preceding year.         

       

Tracking Portfolio Values and Total Withdrawals (Oct. 22nd Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Oct. 22, 2021      $1,000,000 Original Portfolio     $1,281,790          $36,630   

Oct. 22, 2021      $1,000,000 ZPAY Portfolio         $1,244,097          $36,630

Oct. 22, 2021     XEQT VDY ZPAY 7 12 21          $503,946             $4995

Oct. 22, 2021     XGRO 7 12 21                            $509,160*            $0*                                                     

 

Tracking Portfolio Values and Total Withdrawals (Oct. 15th Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Oct. 15, 2021      $1,000,000 Original Portfolio     $1,269,755          $36,630   

Oct. 15, 2021      $1,000,000 ZPAY Portfolio         $1,238,050          $36,630

Oct. 15, 2021     XEQT VDY ZPAY 7 12 21          $500,276             $4995

Oct. 15, 2021     XGRO 7 12 21                            $504,920*            $0*                                                    

 

Tracking Portfolio Values and Total Withdrawals (Oct. 2nd Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Oct. 2, 2021      $1,000,000 Original Portfolio     $1,244,204          $36,630   

Oct. 2, 2021      $1,000,000 ZPAY Portfolio         $1,252,160          $36,630

Oct. 2, 2021     XEQT VDY ZPAY 7 12 21          $500,989             $4995

Oct. 2, 2021     XGRO 7 12 21                            $500,090*            $0*                                                    

 

Tracking Portfolio Values and Total Withdrawals (Sept. 25th Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Sept. 25, 2021    $1,000,000 Original Portfolio     $1,260,907          $33,300   

Sept. 25, 2021    $1,000,000 ZPAY Portfolio         $1,269,600          $33,300

Sept. 25, 2021    XEQT VDY ZPAY 7 12 21          $509,519             $3330

Sept. 25, 2021    XGRO 7 12 21                            $508,963*            $0*                                                     

 

Tracking Portfolio Values and Total Withdrawals (Sept. 18th Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Sept. 18, 2021    $1,000,000 Original Portfolio     $1,263,289          $33,300   

Sept. 18, 2021    $1,000,000 ZPAY Portfolio         $1,272,018          $33,300

Sept. 18, 2021    XEQT VDY ZPAY 7 12 21          $510,951             $3330

Sept. 18, 2021    XGRO 7 12 21                            $512,019*            $0*                                                     

 

Tracking Portfolio Values and Total Withdrawals (Sept. 1st Balances)

Date                Portfolio                                      Value Today       Withdrawals*

Sept. 1, 2021    $1,000,000 Original Portfolio     $1,264,197          $33,300   

Sept. 1, 2021    $1,000,000 ZPAY Portfolio         $1,261,335          $33,300

Sept. 1, 2021    XEQT VDY ZPAY 7 12 21          $509,150             $3330

Sept. 1, 2021    XGRO 7 12 21                            $515,076*            $0*                                                     

* The 4% withdrawal for XGRO will be done in December, 2021. With actual retirement portfolios it is not uncommon to wait until December to remove the funds that have accumulated during the preceding year. 

The cash withdrawal is in addition to the withdrawals stipulated by the government for RIFs and LIFs. I try to withdraw dividend cash to cover living expenses. To satisfy government withdrawal demands, I transfer ETF units or stock holdings (in-kind withdrawals) to either my TFSA or a non-registered account. I try to maximize my in-kind withdrawals without selling the dividend paying equities.

The value of the portfolios and the withdrawal amounts are updated at least once a month.

Background links:

3 ETF retirement portfolio allows 4% withdrawal annually

ZPAY vs original Million Dollar Portfolio

Does ZPAY act an an alternative investment?

Fisher Investments Canada 15-Minute Retirement Plan

I need an editor. As I am a photographer and not a writer, or journalist, I do my best but I make mistakes now and then. If you notice anything that you believe is amiss, let me know. I'd appreciate it.