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.