Don't panic. Learn.

As you may know, I'm a senior and I'm retired. My pension 1s very poor. It wouldn't pay the annual rent on a one bedroom apartment in the city where I live.

I took an early retirement and had to accept a 25 per cent cut in both my pension and CPP payments. Why the cut? Without an income, I had to start drawing on these five years earlier than planned. Sadly this was still not enough to balance our books and my, who is younger than I am, was also forced to draw on her CPP early and she took an even bigger hit. And these hits are permanent.

We turned to the stock market for income and began buying stocks and ETFs. Thanks to the bull market which just stumbled, we have balanced our bills with ease for the past 11 years. When I retired we had a portfolio worth x-amount. We have drawn annually on our savings for the past 11 year, and yet, before the bear market began clawing back our gains, we had a portfolio more than 60 per cent larger than when we retired.

My wife and I are managing our own investment portfolio. We have self-directed TD WebBroker accounts. We do not have a financial advisor. Why? I gave almost $4,196.71 to a London Life financial advisor back in 2000. When I retired, it took some effort but I got 75% of my original investment back or about $3147.53.

The source of that investment was money that I had accumulated in a London Life annuity policy. They came knocking and promising and I fell for the spiel. If the money had been left untouched, it would have been so much better for me, but not for them. They received an annual management fee for this costly, to me, fiasco.

I've made some other bonehead financial moves, more than I can address in this short essay. But, I must say that I have always landed on my financial feet. I've learned paper losses can be managed if you keep alert and have a modicum of luck. Note the mention of luck. Never discount luck. Always position yourself to be in place financially where a lucky outcome is expected.

What has amazed me over the years is the consistent flow of poor quality of investment information filling the financial pages of our newspapers. For instance, never sell but weather a bear market. Simply hold on, ride it out, and it will recover. I call this advice incomplete.

Check the chart on the right. The purple line with heavy dots is my portfolio. The two other lines are Canadian and American markets. While all the usual market trackers were diving, I held a straight course. Why? I had sold my equities and gone to cash.

Clearly, this was a winning move in the short term but staying out of the market indefinitely is fraught with danger. A big danger is, as the usual advice warns, one risks being caught offside when the bull returns.

And so I put half my funds back into the market when my investments had entered true correction territory. I immediately lost thousands. Sounds bad and in one sense it was; I lost thousands. But, as a percentage loss my loss slashed by half by the fact that half my porfolio was still in cash.

Think about it. If you have a hundred thousand dollar retirement account and you enter the market when it has already corrected, your losses are zero and the market losses are10 per cent or more. If you only invested half your cash and it dived toward bear territory in tandem with market, you would lose $5000 immediately. The market would be down a full 20 per cent or more but you would be down only five per cent.

I have never seen this pointed out in any newspaper account detailing what happens during a market collapse.

With the market in full bear market mode, I invested the vast majority of the second half of my cash holding. Like the first money, this second round of investments dived as well. I lost thousands more. A reporter who doesn't understand the market might very well be reporting that I was now caught in the middle of financial blood bath. Oh pooh! This isn't all that bad at all. Do the math.

You are down by five per cent and double your holdings. You now have $95,000 invested in equities. You lose a further five per cent or $4750. You have lost a total of $9750 from a $100 thousand portfolio. You are down 9.75 per cent. But the market is down 25 per cent.

Your investments have not even entered correction territory. And, as is par for this course, the next day the markets take a bounce. This is a screen grab of the gain my portfolio made immediately after the bear market buy.

The info on the left only applies to one of my portfolios. The other portfolios all  performed well. One was actually up 13.7 per cent while another was only enjoyed an increase of 3.68 per cent. For this reason we will only claim only an overall recouping of six per cent. But again, do the math. You are now down only about 3.75 per cent while the media is reporting that retired seniors are facing financial disaster.

Facing a disaster? Maybe. Maybe not. You have almost all your money back but, let's be honest, it is all in paper gains. In the coming months of potential financial turmoil you may well lose at least ten percent of it. Maybe more. But, and it is a big but, your dividend has taken a big jump in real, hard cash. Your portfolio now contains far more stock. Each additional share, and you have hundreds of additional shares, each one pays a nice dividend.

My dividends, for example are up in the five digits. I fully expect to see dividends cut. I can afford it. I have built a cushion into my portfolio.

It is not unreasonable to believe you may realize a dividend yield of about five per cent, or better, calculated using the projected income and your total investment. If, like me, you can squeak by with a dividend income as low as 3.5 per cent for a year or two, you can weather a cut in your dividend income of about 30 per cent.

If you have kept a little money on the side to supplement your dividend income for a couple of years, you are in good shape. Headlines like the one on the Financial Post will not make you lose sleep. And remember, bear markets do not last. Some are as short as three months. Others may last as long as three years. In the end, all are followed by roaring bull market that climbs halfway or more to its former highs.

Why are newspapers such questionable sources of financial advice?

I worked for decades in the news businesses. I worked at two newspapers and one television station. During that time I learned that newspaper folk, if they are reporters they like to be called journalists, often get caught up in the stories of the day. For that reason, I like the term reporter rather than journalist.

There are two big stories in the news today: corona virus or COVID-19 and the ongoing oil pricing and pumping war between Saudi Arabia and Russia. The financial crisis story is a result of the first two stories.

Reporters deliver quickly gathered stories surrounding the events of the day; ideally, journalists keep us informed with factual, in-depth stories set in the proper context. And still we readers often come away with the wrong immediate impression of a story? Why? Answer: headlines. Headline writers strive for punch and brevity. I've often heard reporters complain about the headline used to draw attention to their stories. Unfortunately, headlines set the tone for the story and do it before we've read even one word. That can be a problem.

For instance, today I read an article by Post Media's Financial Post that carried the headline 'Disasterous': Seniors face double threat from pandemic as retirement portfolios walloped by markets in turmoil. The dek, the summary appearing below the headline, went on to claim negative returns at a time of withdrawals mean retirees risk running out of money. Petty frightening stuff.

To illustrate the problem the article told the story of a 75-year-old (couple) with a $500,000 portfolio. They planned to  live on this money for ten years at a withdrawal rate of $50,000 per year. A 20 per cent drop in capital would reduce their annual income by $10,000 to only $40,000.

If you think about this story, it doesn't add up. Not a all. This is a financially astute couple. They have managed to accumulate $500,000 outside a RRIF. This means they can make withdrawals free of withholding tax. And they do not have to deal with withdrawal limits as they would if the funds were in an RLIF.

How do we know our fictional couple does not have a RIF. Simple. The story goes on to say that there are also implications for those with RRIFs.

So, let me flesh out the story of our fictional couple. They must have been invested in equities or they would not have lost 20 per cent of their money. More than likely, they were aware of the promise and the threat inherent in investing in stocks.

As investors, and clearly successful ones, they understood how money grows when invested. A mixed ultimate-growth portfolio of pure equities and no bonds, 70% Canadian and 30% U.S. stocks, a common mix, grew at an average rate of about 9% over the past ten years. They might have hoped to see that growth continue. If this was their thinking, their dream may have been optimistic but it was not unreasonable.

Link to calculator.

See the graph on the left. It is amazing. It shows the results of making an annual withdrawal of $50,000 from a $500,000 portfolio which is growing at an average rate of nine per cent. It takes 26 years to be bled dry.

Our couple had their $500,000 portfolio pared down to $400,000 by the bear market and then they removed $50,000 to live. They were left with only $350,000.

It is amazing but with only $350,000, our couple could still withdraw $50,000 annually and have it last 14 years. All that's necessary is that the growth rate remain at nine per cent.

A bear market loss of 20 per cent removes an investor's rose-coloured glasses. Our fictional couple would be concerned. They might even panic and look for a solid investment with a dividend yield not threatened by a dividend cut. One investment that answers our couple's needs is CIBC. Its yield recently hit just more than 8.3% when the stock fell to a low of almost $70, down from a high of nearly $116 in the last year.

Canadian banks are known for not cutting their dividends, even in tough times. The dividends won't be increased, possibly for a number of years, but they also be cut. Buying CIBC would not be unreasonable. A $350,000 portfolio of CIBC stock with a dividend yield of eight per cent might very well last 10 years. They could have bought 4997 shares of CIBC paying  an annual dividend of $5.84 for a total annual dividend income in the first year of $29,182.48. They will have to deplete their equity holdings by only $20,817.52 in the spring of 2021.

Of course, our couple would be keeping their fingers crossed that they managed to buy in at the ultimate low. Only time will tell if they did. But the CIBC stock has already climbed back to $84.46. And their portfolio of $350,000 is now valued at more than $420,000. Remember, their annual dividend income is now in the neighbourhood of $29,180 annually. They only need to redeem $20,820 in equities in the coming year. With a dividend of 8.34% calculated on the cost of their shares when purchased, I believe their portfolio will last the full ten years. (I confess, I'm surprised.)

Somethings to keep in mind: the average Canadian bear market lasts only 10 months, and that is using the Royal Banks figures based on a bear market kicking in when a 15% decrease in value from the market high occurs. The longest bear market lasted 23 months according to the RBC and the shortest only three months. The bank also says that historically after a bear market, a significant bull bear market follows.

It appears our couple is safe and may well realize a better outcome than most would imagine possible while we are still in the depths of a serious market correction.

I'm retired and I'm in the market. I have to be. I could not live on the interest being paid outside the market.

I could see the virus storm on the horizon. Everyone knew Saudi Arabia and Russia were about to get into a financial fracas. I got out of the market and went to cash.

I put half my portfolio back in the market when a full correction based on my holdings had occurred. I put the second half of my portfolio back in the market when it had fallen deeply into bear market territory. Now, I am sitting back to weather the storm. My income from my investments has actually increased by about 65 per cent. I'm ready to batten down the hatches and weather any dividend cuts that come my way. You see, I live on my dividends. I do not part with equity easily.

And how has my approach worked out for me? Well, check the chart of my one portfolio. I have to have a number of portfolios. One cannot mix RIFs, LIFs, TFSAs and non-registered accounts. My portfolio is the purple line with dots and the nice up-tick at its end.

And did I mention that I bought some CIBC when the price crashed?

How to invest in the market

A friend has asked me about investing in the market. A damn fine idea, I thought. The money I've earned in the market over the years has kept more than one wolf away from my financial door.

The friend also asked me if I had a stock broker. The answer: no. I  have a TD WebBroker self-directed investing account. Many Canadian banks have a self-directed investment arm. For instance:

• The Bank the Nova Scotia has Scotia i-Trade.
• The Royal Bank has RBC Direct Investing.
• The Bank of Montreal has BMO InvestorLine.
• and of course there's TD WebBroker
• and there are more. Google it.

The cost to open and operate a self-directed investment account varies from bank to bank. Many, possibly most, charge about $10 per trade, either to buy or to sell. There is no charge for holding stock, ETFs, mutual funds and such inside your account as long as you maintain a certain dollar amount in your account. This amount varies from bank to bank. For instance, at the TD, if all the accounts in one household have a cumulative value of $15,000 or more, the $25 per quarter maintenance fee is waived. There are other ways to avoid the maintenance charges as well. Here is link to the TD Direct Investing Disclosure of Rates and Fees. Again, before signing on the dotted line, google the other banks. Do some shopping.

Once you have set up a self-directed account, immediately deposit some money, hopefully enough to avoid the quarterly maintenance fees. If you have no stocks on your radar, an investment savings account may be the place to stick the money. The TDB8150 investment savings account calculates interest of 1.6% daily and pays monthly right now.

• TD Investment Savings Account (TDB8150)
• Minimum opening balance: $1000
• Current rate of interest: 1.6%
• Minimum subsequent deposits: $100

At this time, the subsequent deposit rule applies even if you have allowed the balance in your TDB8150 account to drop below $1000. And there is no charge for making a deposit or a withdrawal. Plus, there is no minimum term during which a deposit must remain in the account.

If you cannot wait to put some money in the market but you are not sure what stocks you want, you could buy an entire portfolio in an etf. Called asset allocation ETFs, the three product lines that I am most familiar  with are from Vanguard, iShares and the Bank of Montreal.

• Asset Allocation ETFs
• Vanguard
• iShares (XBAL and XGRO)
• Bank of Montreal

Once you have a self-directed account, a world of investment suggestions will open up. Be careful. As the old saying goes, if the folks giving you the advice were so smart they probably wouldn't be pounding out investment suggestions to the uninitiated.

As a TD WebBroker client, I can avail myself of a number of different investment advice streams. Here is but a smattering of what is offered.

• TDSI Action List - Our Best Ideas (This comes out around the first of each month.)
• TDSI Morning Action Notes (This comes out every morning the market is open and is updated over the course of the day.)
• Morningstar Canadian Core Pick List (This comes out around the first of each month.)
• Morningstar Canadian Income Pick List (This also comes out around the first of each month.)

There are more lists and suggestions but you get the idea. I treat these tips like seed crystals. I like to see the tip grow, get added to, confirmed, polished and then I may buy.  To do this the first step is to look at the info posted by, in this case, WebBroker.

This is the Peyto Exploration & Development Corporation page. I own some PEY. When I bought PEY it was a four star stock according to the Morningstar Quant Report. Four stars means it is selling for less than its fair market value. Five stars are the maximum.

Below the stars are a line of icons showing various reports from different companies with each report discussing PEY. I take most of these with a grain of salt, as they say.

Do you see the line that starts Overview, Charts, News, Fundamentals and Earnings? I find the info under Fundaments very informative. For instance, PEY is yielding 6.86% but it has a Payout Ratio of only 39.18%. This means PEY is not straining to round up the money to pay its dividend.

Although PEY is not earning as much as the industry average, it is profitable. Its Return on Assets (ROA) is 4.22%. This is better than the industry average of 3.04%. Its Return on Equity (ROE) is 8.99%. This is also better than the industry average: 5.71%. From the Fundamentals page I learn, "PEY has one of the highest ROEs of all companies in the Oil & Gas - Integrated industry."

So, why is PEY losing value if it is so damn good? A click on the next tab, Earning, will give us the answer. Total revenue has been dropping since 2014. Unfortunately, the operating expenses are holding steady as revenue falls. The result? The net income is falling. It is gradual but it is on a downward slide.

There is one more place to check. Click on Analysts. Look for the yellow "New" tag.

After seeing all this, I have kept my PEY. I have about one half of one percent of my total portfolio invested in PEY. If it heads south, I'm not going to lose sleep. But if it continues to pay even half its present dividend without losing too much value, I'm happy. Right now, with it yielding 6.86%, I'm ecstatic.

Now, for my biggest and most important investment tip. Be prepared to lose money. Markets have names for money losing situations: corrections are losses from 10% to 20% and bear markets are losses greater than 20%. The average bear market is said by some to lose about 30% and last for just more than a year. Remember that's the average. It can drop more, lots more, and a bear market can last longer, a lot longer.

The trick is to buy when the price is right, to buy when almost everyone else is selling. I got some of my bank stocks, now selling for around a hundred dollars a share, for less than half the present price. I got both my Fortis and my Emera for about 30% less than what is presently being asked. I've sold some of my Emera so if it drops, and it will eventually, I will have locked in some of the profits.

Lastly, if you know other folk who are interested in investing, form an investment group. Get together and share information. Share book recommendations along with stock tips. If different members use different investment firms, the club will have a very rich source of investment reports. There will be some overlap but there will be gems to share.

I started this by saying I had a friend looking for some info. This was written for them. I hope it will be of value. Cheers!

I vote for stocks in retirement today and not for bonds: comments?

I've been asked why I am posting so few updates and new articles. The reason is simple: I'm a retired senior who started this to encourage discussion and it hasn't happened. I'm not a financial expert but only a senior trying to make ends meet at a time when interest rates are at historic lows.

With interest rates so low, it is possible to earn less on one's retirement savings than one loses to inflation. I see this as negative income. (An oxymoron.)

Before retiring, I worked as a journalist at a newspaper. I was mainly a photographer but I also wrote a couple of columns and took third place in a journalism competition one year. I thought some of the journalists with whom I worked would jump at the chance to discuss some of the stories that run in the newspaper. But there was no interest.

Take the story that ran last weekend in my local Post Media paper. The story was right: the problem of where to put one's retirement savings is complicated. That said, the article failed to deal with the complications by failing to take a firm, positive stand on the historically good reasons to hold stocks rather than bonds.

I hold no bonds directly. Why not? I cannot afford to. It is that simple. I aim for an income of at least 4% on my retirement funds. That yield is not possible with bonds unless one starts depleting principal.

I'm waiting for the next big correction, more than 15%, or the next bear market, a drop of more than 20%. My present strategy, and it may change a little, is to build the following portfolio:

2%       Canadian Imperial Bank of Commerce (CM)
2%       Enbridge (ENB)
1%       H&R Real Estate Investment Trust (HR.UN)
2%       Inter Pipeline (IPL)
2%       Peyto Exploration & Development Corp (PEY)

The above stocks are all highly respected and deliver a fine dividend with a promise of an increase in share value over time. These stocks give my portfolio yield a nice hit of dividend income.

18%     iShares Canadian Select Dividend Index ETF (XDV)

 The above gives me more exposure to a wide range of Canadian dividend paying stocks. Diversity is good.

 37.5% iShares U.S. High Dividend Equity Index ETF (Cad-Hedged) (XHD)
17.5%  Vanguard FTSE Developed ex North America High Dividend Yield Index (VIDY)

The above ETFs give me exposure to markets outside of Canada, and even the States, while continuing to deliver good yield.

15%     2-year maturity GIC paying 2.44%
3%       Cash held in and paying 1.6% in TDB8150

I went with a GIC rather than a bond fund or bond ETF as the GIC has a definite value. Most bond ETFs never mature, they are sold a year before maturing and are replaced with more bonds. The value of the fund will go up and down. One can lose money and this is defeats the goal of owning teh bond fund or ETF.

Add up all the percentages shown above and you should get 100%. Oh, I do hope so. For stories like this an editor is not a luxury but a necessity.

I'm hoping to realize about 4.25% yield and thus be able to keep the wolf away from my door for another year in retirement. So far I have gone for ten years and removed about 3.5% annually to live while seeing my overall portfolio grow some 60%.

As the Post Media article correctly points out: This strategy only works if you stick to the strategy when markets are down. But the flip side, the owning bond side, simply doesn't work in today's climate. If I had gone into bonds, say 40% or 50% bonds as often advised for retirees, my principle would most likely be diminished today. I'd be depleting my principal rather than growing it.

I look forward to any comments but I'm not holding my breath.

Thoughts on RIFs and TFSAs

First, an overview. I have a RIF. Each January I move the mandatory withdrawal as an in-kind transfer from my RIF to my TFSA and, if I run out of contribution room in my TFSA, I move any remaining funds to a non-registered self-directed account.

The contribution room in a TFSA is the sum of the annual contribution room plus the total amount of withdrawals made in previous years and that have not been replaced.

My TFSA is filled with good, solid, dividend-paying stocks. I withdraw the dividends to live in retirement and I replace that withdrawn dividend cash the following year with dividend paying stock of equal value.

The contribution room in my TFSA is not large enough to hold the entire in-kind RIF mandatory withdrawal. I transfer the remainder to my unregistered self directed account. I also remove the dividend cash from this account to live in retirement. As this is dividend income from Canadian companies, the tax is paid at the reduced dividend tax rate.

Some of the stocks in these accounts are paying a very handsome dividend. For instance, my HR.UN REIT pays 6.31% today. Click the link to discover what it is paying today. Another, EMA, is paying 5.15%. Each year, the amount of stock grows and the dividend income increases.

Stuff to watch:

• Annual minimum withdrawal amount from your RIF. Make sure you withdraw enough.
• If it's a LIF, you must know both the minimum withdrawal demanded and the maximum withdrawal ceiling. Do not withdraw more than allowed.
• Keep your own TFSA records. I find my records are more up-to-date that the government ones, at least early in the year. Check the TFSA contribution room very carefully. Do not over-contribute to your TFSA.

Overall view of RIFs
Receiving income from RIFs
Making or replacing withdrawals from a TFSA

Something to note: there is no withholding tax on minimum withdrawals from RIFS but, and it is a big but, you must pay tax in the following year. For this reason, when I remove the dividend cash to live, I tell the bank to withhold 30% for income tax. This amount is large enough, at the moment, to cover both the tax bill on the in-kind withdrawal and the tax on the cash withdrawal.

My hope is that I can shrink my RIF fast enough to prevent the increasing withdrawal percentage from forcing me to part with some of my stock.

One last caveat: take care not to have too much income and trigger the old age security clawback. For info on this see: Old Age Security pension recovery tax.

If you are familiar with how a spreadsheet works, I have found setting up a spreadsheet makes tackling all of this quite easy. My TFSA contribution room numbers are always up-to-date and trustworthy. I've found the government TFSA contribution room estimates are about a year behind in January. If I went blindly by the number issued early in the year by the government, I'd be in big trouble. When you understand how the number was calculated by the government, the reason for the problems will be clear.

Comparing investment approaches or apples to oranges?

If you've read my post before this one, you will know that I am running a test of highly respected and frequently recommended investment approaches. I like to describe what I am doing as comparing approaches. My hope is that this description will sidestep the "comparing apples to oranges" criticism. And it's a very valid criticism, I might add.

A portfolio that is one hundred percent equities is clearly going to be more volatile than one that contains a good percentage of bonds. A volatile portfolio has wider swings in value. In good times the one hundred percent equity portfolio will soar higher and during corrections or bear markets it will settle deeper into the financial hole. Bonds in a portfolio smooth out the ride somewhat. The more bonds the smoother the ride.

The market, so far this year, has been performing very well. Therefore, it is no surprise that the Morningstar Canadian Income Portfolio is leading the pack. It is a one hundred percent equity based portfolio.

Likewise, it is no surprise that my own personal portfolio is doing well. You see, I have jettisoned almost all bonds from my holdings. There are a few hiding in a couple of mutual funds. (Yes, mutual funds. I hold my head down in embarrassment. Why do I hold these two monthly income funds? The two funds are my weak attempt to soften the great volatility my portfolio endures.)

I need the dividend income to live in retirement and have made a conscious decision to suffer through market pullbacks in return for increased dividend income. I must confess, it is a tough ride. I only succeed because my wife has nerves of steel.

My test, so far, is revealing what we could have surmised from the various portfolio compositions. More bonds, less benefit from a rising market. Portfolios with a high equity content are outperforming in this market.

So, why do a test like this at all? Well, for one thing, it appears the Couch Potato Assertive Portfolio  based on ETFs is, for me, a better bet than the Couch Potato Portfolio that uses the e-Series funds from the TD. I have pitted these two approaches against each other in the  past and each time the e-Series portfolio tends to trail the ETF one. Note the word tends. In the past, the e-Series portfolio has outperformed the similar ETF based portfolio now and then.

And there has been one big surprise: XGRO, an entire portfolio in one ETF, is doing mighty well. It is holding down second place this morning. And it contains a few bonds. Nice. I may give XGRO a look for my granddaughters' RESPs.

Comparing suggested investment approaches

I used equal amounts of money to create each of the following investment portfolios. One portfolio is labeled Our Portfolio Almost; the important word is almost. The investments reflect my own approach to investing but the amount of money used is but a wonderful dream. Forgive me, but one has to dream, don't they?

The year is only seven days old. The competition is too young to draw any firm conclusions. That said, I  find it interesting to note the Morningstar Canadian Income Portfolio is away ahead of the pack with a current value of $777,515.47. That's thousands of dollars ahead of the second place portfolio.
 

I am actually tracking more than the five portfolio approaches shown but I feel these five are the most interesting. If the ones not shown should have more success in the future, I will display those results as well.

The present line-up first to last is:

1. Morningstar Cdn Income: $777,515
2. Our Portfolio Almost: $773,170
3. XGRO ETF: $772,653
4. Couch Potato E-series Assertive: $770,219
5. Couch Potato ETFs Assertive: $769,931

The XGRO ETF is a complete growth-oriented portfolio in one iShares ETF. Very interesting, eh? This ETF offers one stop shopping for the newbie investor.

Don't count the Couch Potato Assertive portfolio out. I've run competitions like this before and the Couch Potato Portfolios were often in first place or near the top.

At the end of the year, I will look for two things: overall value of the portfolios and the dividend income delivered. Being retired, I  put a lot of weight on dividend income. I can live with paper losses but I need those real dividend dollars to live.

I should note that in years past, the great strength of my own investing philosophy has been the generous dividend income. This time I am not so cocky. The Morningstar Portfolio promises to deliver a third more in dividends than my approach.