https://www.td.com/ca/en/asset-management/resources/graphing-tool/
With each year that passes, the difference between the
strategies increases more and more in favor of the lump sum investing
style.
https://www.aaii.com/journal/article/13583-how-much-risk-can-you-handle-and-still-meet-your-goals
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.
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 a money market account paying .25% daily interest. This is the same rate as paid by a 1 year term GIC!
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.
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 money market account.
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.
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.
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.
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.
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.)
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.
