Read the not so fine print

Banks are not out to bamboozle you. That said, the English language as used by financial institutions does not always mean what you may think. Growth can mean increased risk and a managed income portfolio fund can be a warning to look carefully. It may be heavily weighted towards bonds.

The above graph shows the growth of two similar investments made in early 2013. The green line represents an investment in the simple, relatively inexpensive fund: TD Monthly Income fund (TDB622). The original investment can be as little as $100.

The purple line shows the growth of the TD Managed Income Portfolio. An investor in this fund had to make a minimum $150,000 initial investment. As can be seen from the above graph the TD Monthly Income fund is up 34% today. The fund that points out that it is managed, aren't most mutual funds in one way or another, and insists on an initial deposit of $150,000, is up only 22% over the same time period. Why? Bonds. The managed fund contains far more bonds. 

The names are similar but these funds are not comparable.

Does this mean one should own TDB622? I think not. I'd look for something that doesn't hold a lot of bonds, something like XEQT. This iShares ETF holds only equities, and it's a good mix of equities with U.S., International and Canadian companies all represented.

 If you insist on holding some bonds, I'd be more inclined to put a small amount in a GIC or even in a cash account where it could await a correction and be available for immediate redeployment back into the market at fire sale prices. 

There are some extremely short term bond ETFs for die hard bond fans. Let me suggest looking at XSQ, the iShares Short Term High Quality Canadian Bond Index. It is yielding 2.19% today. (In the interest of full disclosure, I once owned XBB and was satisfied with its performance. Today XBB is yielding 2.81%. XBB is more volatile than XSQ but it is nowhere near as volatile as equities.

It's still a good time to open a self-directed investment account

GICs are not safe. The amount they earn in interest does not match the rate of inflation. Buy a GIC, keep it for a year and when you cash it it will have lost buying power. This is almost guaranteed.

My answer: accept a bit more risk, open a self-directed portfolio account and invest with care. All the big North American markets are at all time highs. A correction is likely. At the very least, a pullback from the recent highs is likely.

My answer, buy enough good, dividend-paying investments to get you by and keep the balance of your money in an investment savings account mutual fund with absolutely zero fees.

I'm tracking a demo portfolio to show a friend exactly what I mean. They can show this post to the bank at their next meeting.

Total amount of money to invest: $60,000.

• Invest $25,000 immediately. Do not try to time the market. I have the following in my demo account:
• 46 shares of Canadian Imperial Bank of Commerce (a bank)
  
• 192 shares of Emera Inc. (a utility)
• 88 shares of Enbridge Inc. (a pipeline)
• 252 units of  iShares Core Growth ETF Portfolio
• The balance, $35,000, is in TDB8150, an investment savings account mutual fund with absolutely zero fees and paying a small amount of interest that accrues daily and is paid monthly.

• This portfolio delivers 2.09% annual dividend income calculated on the original $60,000 investment.
• This dividend income amounts to $1255.96 annually.
  

Even in a severe bear market, I expect this self-directed account to retain more than 85% of its value. And in a bear market is the best time to get into the market, one can immediately invest the balance. The cash is not tied up, out of reach, in a GIC. (In reality, I'd invest half the balance and then invest the other half when I felt confident that I knew where the market was heading: rebounding or testing new lows. I'd be hoping for another drop. I like stocks that are not only on sale but ones that carry Further Reduced red tags.)

When the market rebounds out of correction territory, I'd sell a little, converting a minimum of 5% into cash which I would put in a An example would be TDB8150. I once thought of TDB8150 as a money market fund. I was wrong. TDB8150 is an investment savings account mutual fund with absolutely zero fees.

And how is my demo account doing? I'm in the black and I'm collecting dividends. If this demo was the real deal, I'd be happy.

Look before you leap

The chart above is a little difficult to read but if you click on it it should enlarge.

Now, I like ETFs and I am not alone. That said, lots of folk are still buying mutual funds. To be honest, some mutual funds do just fine. One must do their homework and stay away from the funds that show signs of being dogs. For instance, with interest rates where they are I'd minimize my exposure to bonds. In the above chart, the bright purple line at the bottom is tracking a bond fund.

Is there anything positive one can say about such a flat line? Yes. It's flat. It shows minimal volatility. When equity based mutual funds are crashing, the bond funds hold their value. This lack of volatility is the reason many mutual funds contain bonds. The bonds in the fund prevent the fund from losing too much in a down market. Sadly, the bonds also limit the upside potential.

Historically, the U.S. market outperforms the Toronto Stock Exchange. The green line at the top of the chart tracks the performance of TDB3091 - a U.S. blue chip equity fund. It holds no bonds. Mutual funds that do exceedingly well in comparison to other funds often contain lots of exposure to U.S. equities and hold few, if any, bonds.

Doing better than the bonds but not as well as the U.S. based fund are a couple of Canadian funds: the Mackenzie Canadian Growth Fund and the Manulife Dividend Income Fund.

So, when investing in funds, check the holdings of the funds you are considering. A generous exposure to U.S. equities, a minimal exposure to bonds and a middling amount of exposure to Canadian high quality dividend stocks is my preferred mix.

One warning: A five star mutual fund bragging that it has done better than any other fund this year may well be a mutual fund to ignore. A solid four or five star fund is often a much better choice. Why? Funds rarely get to first place because of brilliance. The funds occupying the top rung are there because someone made a very bold and very lucky move. It is almost impossible to repeat such a feat two years in a row. It not uncommon for the year's best performing fund to get buried in the pack in the following year.

Spreadsheets are cool!

I call spreadsheets cool. My wife, when she me hears me say this, calls me a nerd, an old, slightly senile nerd.

I track my investments using a spreadsheet linked to my online self-directed accounts. Why? Because numbers, once moved to a spreadsheet, just beg to do more. Let me give you an example.

Recently I lightened my investments. The market was awfully high and my spreadsheet indicated that rebalancing for increased cash would be in keeping with my goals. Also, my wife agreed that selling was a good idea. I might ignore the spreadsheet but never the wife.

After selling, the market climbed and then it started its decline. My spreadsheet has fields that can be programmed to turn red when the price of a stock falls lower than its recent sale price. So far, only four stocks have triggered the switch in colour. This is not a signal for me to take any action. The increasing number of red rectangles simply alerts me to the falling values.

If the price falls into bear territory, another colour is triggered. Whether I buy more or not is my decision but my spreadsheet alerts me to the stocks-are-on-sale situation. (I've defined a bear market as a price 20 percent less than the stock's highest price in the past 12 months. I'm tempted to move the alert moment to 25% less but for now I'll leave the alter boundary unchanged.)

Almost everyone has Microsoft Excel. It often comes preinstalled on computers. If your version of Excel has expired, I suggest taking a look at LibreOffice shareware. I use it and like it.

You can't time the market but can you time luck?

I'm very big on investing in solid companies delivering great dividends. As tempting as it can be, don't put too much in any one company. No matter how good, one cannot see the future. Even good companies fail. Think of Nortel.

My first rule: diversify.

My second rule: don't try to time the market. Do it once or twice and you may succeed. Why? Mostly luck. But do it with any consistency and you will likely lose as often as you win.

In mid November I created a Million Dollar Portfolio demo. It is up more than seven percent. A few weeks ago I created another demo portfolio. It is down something approaching two percent. 

Why the difference? Luck. I had no idea that the market would climb during the last weeks of 2020 and I had no idea that the market would tumble near the end of January.

I named my second portfolio for a niece of mine who is very wise when it comes to her money. I set up a demo portfolio to show her what can be done with retirement savings. I wasn't planning on showing her that it could be lost, even if  just temporarily. Oops!

But let's be honest. Temporary losses can last three years and can amount to a loss of more than 30 percent of your overall portfolio value. Losses hurt. But if you are in good, solid companies paying great dividends, the pain is more mental than real. Equities are far more volatile than dividends. The portfolio may lose 35% of its value but the income will not drop even half that amount. That is pretty well guaranteed.

Which brings us to our third rule: Buy low. As the market dips, continue to invest. You cannot time the market. Don't feel badly when it continues to drop after your purchase. That often happens.

Check out the graph of the TSX since the beginning of the century. Anyone investing in 2007 was in for a rough ride. These unfortunate investors were not back in the black for about two years and that didn't last. It was another two years before they climbed out of the charted financial valley.

Which bring us to our fourth rule: One in, stay the course. 

Staying the course is tough. I'll admit it. If it were not for Judy and her steely nerves, we would not have done anywhere near as well as we have. I've learned a lot from that woman.

Cheers! (With all the markets hitting new historical highs recently, a pullback seems almost certain. Keep those seatbelts fastened. 2021 could be an interesting ride.)

Saving for retirement: Company pensions

I'm not a financial advisor. I'm simply a retired photographer. Yet, I've done well in retirement. My portfolio is much larger today than it was when I retired. And I've pulled off this magic trick despite having to withdraw money annually to live in retirement. How has this been possible? Luck!

I retired in early 2009 in the middle of the one of the worst market crashes in history. I put every penny into the market. It was the best move I've have ever made. The luck was not in investing. That is rarely a bad move, especially if you have a long time horizon. No, the luck was having the market at an historic low. One cannot plan for events like that but only take advantage of them if given a chance.

My financial luck has burnished my reputation as a knowledgeable investor. I do my best but take my thoughts with a grain of salt, as they say. I'm a retired photographer, not a financial advisor, and never forget it. 

Now, to get down to the reason for this post: to give a well-loved grand niece some financial advice on how best to save for retirement. Because this post is directed to one person, some of the stuff touched upon will be very specific.

First: my niece has a company pension. What kind of plan is it? She must find out. Is it a DB (defined benefit) plan or a DC (defined contribution) plan? The Government of Canada has a page examining both approaches. Here is a link: Employer pension plans.

The important thing to remember is that a defined benefit pension is predictable. It is not directly subject to stock market volatility. When the pension begins, monthly payment is pre-determined. On the other hand, a defined contribution pension has contributions that go into mutual funds. Those mutual funds are subject to stock and bond market fluctuations, the investments will rise and fall in value. The pension’s eventual payments will depend on how the investments performed over the years. Read this article in MoneySense: Understanding your company pension plan.

My gut feeling is my niece has a defined contribution plan to which the company matches my niece's contributions up to a maximum of 1% of her gross income but with one caveat; the company's contribution is not to exceed $1000 annually. The 1% contribution is the minimum allowed by law.

In most cases like this, the employee should take full advantage of the company's matching contribution offer. To do less is leaving money on the table, as they say. Take all the company money and double your retirement savings instantly, but that's not all one can do.

Most defined contribution plans are a mix of mutual funds: Canadian, U.S. equity funds plus international equity funds and bond funds. Ideally, the mix of mutual funds will match your investment risk profile. Often plan members are encouraged to select a mix of investments that match their investment temperament and goals. 

My wife, a very bold lady, was a member of a DC plan. She picked the mutual fund mix that offered the greatest growth at the most risk. This meant it was equity heavy and bond deficient. One must make sure that the investment mix accurately reflects their stomach for risk. 

Investments go up and investment go down. Bonds tend to even out the ride. Bold investors choose an 80 (equity) and 20 (bond) mix. More conservative investors like a 60:40 split. Me? I have no bonds. None. But I may be going to 90:10 mix in the future.

There is a maximum amount a person can tuck away in an RRSP. If, after contributing to the company plan, one has more money to invest, money over and above that matched by company, many believe it is will do best put into a bank-offered RRSP. Why? The management expense ratio (MER) or investment management fees (IMF) should be much, much lower.

Most company pension plans are run by large financial institutions occasionally charging as much as 3% for the institution's expertise. That's a lot. I believe my relative may be paying around 2.75% in management fees. I'd wager she almost certainly is paying more than 1.5%. She should look into this. If her management fees are at 1% or below, she can leave her plan untouched and just modify the bond component to get better growth (with more risk.). Compare this to a complete portfolio in one ETF like XGRO. It has a MER charge of only .2%.

I like XGRO but there is also a similar asset allocation ETF from Vanguard, VGRO, and one from the Bank of Montreal, ZGRO. If the growth aspect frightens you. There are other portfolio mixes. Some are more balanced, others try to be even more conservative and still others are weighted toward dividends.

The problem with ETFs is that one needs a self-directed plan to buy these. The ET stands for exchange traded. Furthermore, unless one has a minimum of $15,000 to $25,000, depending on the bank, there is a quarterly plan charge. This fee reduces the advantage of low management fees. Many ETFs today can be purchased trading fee free.

Mutual funds, on the other hand, can simply be purchased at the bank. On the downside, the MERs are higher than those for ETFs. My advice? Put retirement money in mutual funds held inside an RRSP until one has enough to open a self-directed investment account large enough to escape paying the quarterly charges. Fees are portfolio growth killers.

I don't know of any complete portfolios in one mutual fund but since there is no fee for buying many mutual funds building a complete portfolio is not all that difficult. Here is my attempt. I have created a demo portfolio and will begin tracking it as of last Friday. The MER charges with this mix is in the .85 range.

My withdrawal method: an answer inspired by Wayne

 

I've been posting and tweeting about my approach to managing my savings in retirement. I've been hoping a curious financial pages reporter would contact me and take an in-depth look at my approach. No interest. I've also hoped someone might read my tweets and posts and help me polish my approach. Here, I have had some luck.

 

Wayne asks an excellent question which recalls an issue raised by Frederick Vettese in Retirement Income for Life. As we age, many of us will lose mental acumen - the ability to make good judgments and quick, well-thought out decisions.

His answer? An annuity at age 75 or 80. But Vettese warns, do not put the purchase off too long. To learn more, read his book. It is a good read.

Now, to answer Wayne's question. A self-directed investment account is not as difficult to direct as one might think. But, he's right to worry. I'm going to act on his question and have a serious talk with both my youngest daughter and my wife. I think my daughter could manage my self-directed account if I were unable and I know my wife could but won't. (And as I write this response, I am beginning to appreciate how very right Wayne was.)

The rest of this post is what I will have to address in the meeting with daughter and wife: 

I use TD WebBroker but there are lots of choices. I'll tell them to spend some time looking around if they don't like WebBroker. They might find something they like better. They can take their time. They can google it.

Originally, my portfolio was my own design. Today, it is almost a mirror image of the Morningstar Canadian Income Portfolio. Morningstar updates its recommendations monthly. TD, BMO and others carry the Morningstar suggested portfolio report.

If Morningstar were to halt its monthly updates, then a dividend weighted ETF would be a good alternative. I'd buy a Canadian one, an American one and one ex-North America one. Vanguard, iShares and some Canadian banks offer suitable ETFs. Again, I'd sayGoogle it. And I'd check out the Canadian Couch Potato.

TD will post the mandatory SD RIF withdrawal early every January. This is the amount I transfer in-kind, as equities and not cash, to my TFSA. If there is not enough contribution room in the TFSA, the remaining balance is transferred, again in-kind, to my non-registered account.

TD also posts the Projected Income for each SD account. This is the amount to be withdrawn in cash annually to live. With any luck, this should be more than four percent of the SD account. I always withhold 30 percent for possible income tax charges. Why so much. Because the mandatory withdrawal does not have income tax withheld. This charge comes due in the following hear. The 30 percent withholding cushions future financial shocks. I transfer the dividend income from my RIF to my bank account annually in early January. (Note: the Projected Income is the income expected to be realized in the coming year. It is a future looking number. But, if there have not been a lot of changes in the portfolio, I find the amount shown works just fine. I usually have the cash available.)

I find I must call TD and deal with a WebBroker rep. directly in order to make the equity transfers from my RIF to my TFSA. My wife was at my side this year as I did this. I hope she learned a little.

When talking with the TD rep, I keep my computer handy and a spreadsheet on the screen. I tell the TD rep what equity I want to transfer, they tell me the value of the shares at the moment and I key this value into my spreadsheet. They tell me how many shares they are transferring and how much cash and my spreadsheet confirms their calculations. With both of us in agreement, the transfers are made. (If this blog ever takes off, I'll find a way of posting my spreadsheet for all to download.)

When it comes to the cash withdrawals, no assistance is needed. This can easily be done online. Making a cash withdrawal is very straight forward. Neither my daughter nor my wife would find this difficult.

 Here are instuctions in bullet form:

• Open an SD RIF account.
• Buy stock or ETFs. I follow the Morningstar Canadian Income Portfolio plan. Aim for an investment mix that yields more than four percent.
• In early January annually, find the posted mandatory SD RIF withdrawal.
• Find and/or calculate you TFSA contribution headroom. Go to My CRA for this information.
• Call TD WebBroker and transfer in-kind an amount equal to your RIF mandatory withdrawal or TFSA contribution headroom from your RIF to your TFSA. Use whichever amount is less. You do not want to over-contribute to your TFSA.
• Any remaining mandatory withdrawal balance is transferred in-kind to an SD Non-registered account.
• Finally withdraw an amount equal to the annual dividend income. If it is too much more than four percent, don't feel pressured to remove the maximum if it is not necessary. Transfer the cash from the RIF to a bank account. This can be done without assistance. The TD WebBroker site makes this very easy.

Please read this carefully. I am only a retired photojournalist trying to share my thoughts on living in retirement. This is how I am my retirement savings and it has worked for me for almost twelve full years. Will it continue to work? That is a good question and I am hoping others may find my posts interesting and comment. We all might learn something.

What will I do if the market drops?

What will I do if the market drops? Hold on for dear life. Look to my wife for strength. She has nerves of steel. Vanguard has an excellent site looking at this situation: Remember, this has happened before.

Vanguard agrees with me: ". . . do nothing. This may seem to fly in the face of reason . . . (but) this is great news for those of us who are saving for retirement . . . " Never ever forget that when the market drops stocks are on sale. Buy. You are getting a great deal.

Vanguard Retirement Nest Egg Calculator

Vanguard Retirement Nest Egg Calculator

The longer you can run your retirement portfolio successfully, the longer your money will last according to the Monte Carlo calculators I have consulted. This one, posted by Vanguard, indicates I am actually much better off today in my 70s than I was more than a decade ago in my early 60s. 

My portfolio is almost twice its size today as compared to its size at my retirement. And although I have more funds, these funds do not have to last anywhere near as long. As time passes, it looks more and more like my wife and I will make it through our retirement years without running out of money.

Take a look at the calculator and see what it tells you.

Why so much financial advice leaves me shaking my head.

 Read the following story. It was published as part of a Canadian bank's presentation explaining investing to newbies.

 

Meet Lisa… - she is 64 and wants to retire next year. She recently inherited 80 thousand dollars, She has average knowledge of investing and she also has 50 thousand dollars saved in her RSP Lisa runs through these questions before she sets out to create her portfolio… 

How much money does she need? And how often does she need it? After going through her budget, she estimates that she needs an extra 500 dollars a month on top of her pension. How long does she need this income? She thinks her lifestyle and budget won't change over the next ten years. How much does she have to invest right now? She will invest the inheritance of 80 thousand dollars, plus the 50 thousand dollars in her RSP. 

How much risk can she tolerate? Lisa needs this income because she is retired but she also wants to minimize losses to what she has now. Because of this her risk tolerance is low. What are the implications to her income taxes? Lisa is also in a low-income tax bracket. She decides that the amount of money she receives from her investments is more important than how the income is taxed. 

Since her risk tolerance is low, she rules out investing in stocks for dividends. She decides that she will focus on different bond and cash products instead. This income investment strategy may be ideal for Lisa . . . 

 

Did you read the bank-posted story and say, "Whoa!" This lady needs $500 a month or $6000 a year. She has some $130,000 in cash. She could divide her investment among six stocks and keep $10,000 in cash to get her past the rough spots. 

She could easily make 5.0% in dividends or $6000 in cash. This just gets her by. Bonds and GICs are clearly out. Stock ownership is the only way for Lisa to go. The bank must explain this to Lisa, hold her hand during the rough spots and nurse her along. An acceptance of low risk tolerance will not pay the bills.

BCE (Bell) yields 6.08% today.

ENB (Enbridge) yields 8.10% today.

CM (CIBC) yields 5.29% today.

EMA (Emera) yields 4.73% today.

T (Telus) yields 4.87% today.

ALA (AltaGas) 5.34% today.

The above portfolio should give Lisa 5.72% yield on her stock holdings or $6864 annual income or $572 per month. Her $10,000 can be put in a cash account yielding about .75% and her extra cash income from her dividends can be saved, as well. Her cash reserves will grow by about $939 or 9.4% on her $10,000 in cash savings. (Some of this will disappear to pay some income tax fees. The exact amount to be determined by Lisa's tax bracket.)

 

 

Withdrawal Strategies to Avoid

I posted a take on a Million Dollar Portfolio Demo I set up in response to a brochure from Fisher Investments Canada. You can read that post HERE. I based my piece on the approach I am using to withdraw funds from my own RRIF.  I had hoped to hear from Fisher but I didn't. 

Though I did find a semi-critique of my method in the book Retirement Income for Life by Frederick Vettese, the former chief actuary at Morneau Shepell. Vettese knows his stuff. In a chapter entitled Strategies to Avoid he discusses the Withdrawing Only the Interest strategy.

He writes that spending only the investment income might make some sense for the lucky retirees with six-figure investment income but that is not me. Still, it appears I am not alone in pursing this strategy. Vettese calls the approach "popular" and a crude form of risk management.

Vettese writes the withdrawing-only-the-interest strategy looks better in theory than it does in practice. He makes it very clear this strategy is not one of his preferred approaches. To read about these, buy his book. I did and I consider it money well spent.

That said, I'm sticking with my variation on the withdraw-only-the-interest approach. It has worked for me for more than a decade. Although I have to admit to being worried that one success is not an adquate test. Am I being fooled by randomness? I did retire in 2009, near the depths of an historic stock market retreat. One couldn't ask for a better time to be entering the market with oodles of fresh "buyout" cash.

So, how does my approach work exactly?

• At 71 you convert your RRSP to an RRIF.
• There is no minimum withdrawal in the first year. This mean any and all fund withdrawn in the first year are subject to withholding tax. 
  
• At 72 one withdraws the minimum amount in-kind by transferring equities from the RRIF to a TFSA. If there is not enough contribution headroom in the TFSA, the excess funds are deposited as in-kind transfers into a non registered account. There is no withholding tax on minimum withdrawals. But be aware that tax must be paid in the following year.
  
• Next, four percent of the RRIF value is withdrawn in cash. Knowing this cash would be needed, dividend income was allowed to collect in the RRIF. As my dividends at the moment yield more than four percent annually, there is always adequate cash in the RRIF for the withdrawals. These funds, which are over the minimum, are fully exposed to withholding tax. I have the maximum, 30 percent, withheld.
  
• The goal is to lower the value of the RRIF in anticipation of the approaching higher and higher withdrawal demands of the government. A side benefit is the rapid increase in the value of one's TFSA. All dividends removed from TFSAs are tax-free: a nice bonus. As dividend cash is removed, contribution room is created in the TFSA to be used in the following year. 

My big question is: Can this method, with all RRIF funds in equities except for the approximately 10 percent in cash, survive the ups and downs, especially the downs, corrections and bears, encountered by stock market investors? All I can say is that so far it has worked well for me for eleven years. 

I'm optimistic. Why? Check the chart below. Bulls tend to be stronger and longer lasting than bears. If one can ride out the bad times, I believe one can survive the downturns. This is one reason I have a maximum of ten percent or a little more in cash. That cash, plus my dividends, should protect my equity holdings from any forced liquidation. (I have my fingers crossed.)

What extremes has the TSX hit since the mid '50s?

I need an editor. My original post was riddled with math errors and bull/bear confusion. If you read this post and find an error, please comment. I don't mind criticism. Thank you.

The average bear market decline between1956 and October 31, 2008 was a drop of 28%. The worst decline was 46% between September 2000 and July 2002. It was a bear with a run of a month shy of two full years.

Two bear market tied for the weakest bear market position with falls of only 17%. One lasted only seven months and the other lasted eight. But, these two were not close to the shortest bear markets. That achievement belongs to a three month long bear market that ran from August to October of 1987. It was short but the decline hit 31%.

A bear market is inevitably followed by a bull market. The best bull (before our recent record run) ran for 48 months from December 1976 to November 1980 and reached a gain of 161%.  The November 1990 to April 1998 bull had a gain that was almost as good at 160% but it took 90 months to hit this peak. One can take comfort in the knowledge that the average bull market sports an impressive gain of 79%.

If you play with the numbers you will find that a few bad, deep bears interspersed with weak bulls could leave one with a severely weakened portfolio. The whole success of the portfolio would come down to the dividends. If a lot of the dividends got reduced, one could be in serious trouble. But, many of the stocks in my million dollar portfolio demo are famous for weathering bad bears without cutting the dividends.

The three longest bear markets in Canada lasted  23, 19 and 17 months. Not a one lasted even two full years! Bears tend to be on the short side. On the other hand, the longest bull markets in Canada went for 90, 64 and 48 months. The three shortest bull markets went on for 5, 16 and 18 and 18 and 18 months. Yes, there were three bulls of the same duration: 18 months. Timewise, bulls tend to outlast bears. Bulls historically have had more staying power.

I cannot tell the future. No one can. But, it is reasonable to believe that there is a fair chance a million dollar portfolio with a yield approaching five percent would last a person through their retirement, no matter how long they lived.

My Million Dollar Portfolio Demo has about $60,000 in cash. That cash is unaffected by bear declines. Only the equity portion of the portfolio suffers from the bear drop. The cash holds its value and even grows a little thanks to dividends.

That cash, when considered in tandem with the dividend income, should guarantee, well pretty much guarantee, that no equities would face fire-sale liquidations. That small amount of cash in a million dollar portfolio plays an important role that is all out of proportion to its small value.

Bull and Bear Markets in Canada since 1956

Increasing TFSA contribution headroom in anticipation of 2021

It is late November. It is time for me to withdraw all the cash dividends earned in 2020 by my TFSA. I have adequate cash in my account to withdraw in advance any dividends being paid in December.

I don't like to make my last withdrawal in December. Although this is allowed, I prefer to keep December as a buffer between the last withdrawal of 2020 and the beginning of the new, fresh year of 2021.

If I don't need the money now, why make the withdrawal now? Why not wait until 2021? The money withdrawn in one year from a TFSA can be returned, recontributed, to the plan the following year. The withdrawal from one year become additional contribution headroom in the following year. It augments the $6000 of headroom added this Jan. 1st following government rules.

I want as much contribution headroom as possible to facilitate the maximum in-kind transfer from my RRIF to my TFSA. Any over-flow that I am unable to transfer to my TFSA goes to my non-registered account.

Income tax must be paid on the in-kind withdrawal but as the amount transferred meets the minimum withdrawal criteria, there is no withholding tax. The tax itself does not become due until the following year when the tax must be paid in full.

My best posts are my last ones

I think my posts discussing how best to withdraw cash-to-live from a RRIF in retirement are my best posts thus far. They certainly have attracted more attention than usual. The most popular one is the post looking at how much can safely be withdrawn from a RRIF. 

I'm running a demo portfolio based loosely on my own portfolio. The big difference is in total investment. I'm not a millionaire. But, I am withdrawing a full four percent. So far, this withdrawal rate has worked for me for eleven years and now we'll see if the magic will come through again. So far so good, but a month is hardly enough time to make a firm judgment.

Let me list my recent posts:

• How much one can safely withdraw from an RRIF: Fisher Investments Canada 15- Minute Retirement Plan
• Before you can withdraw, you must have a retirement account loaded with money. Starting early really is the key here. Read the following four entries.

1. Step one when considering investing: Get a handle on your finances
2. Step two is to consider a self-directed plan
3. Step three looks at how to quickly and easily create that first portfolio
4. And after you've done all the above, you are not done. Now, you must learn how to hold and let time do its magic. This is a lot tougher than it sounds and because of this there are two posts: Sticking to the plan and How to get through a bear market.

Cheers!

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

·

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.

_____________________________________________________________________________

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.