Million Dollar Portfolio Yields $77,400 annually

What if I sold everything in my Million Dollar Portfolio Demo? Why would I do that? Two reasons: One, it now has more than a quarter of a million dollars in unrealized gains. And two, the dividend income is now below 3% when calculated on the most recent values. Fisher Investments Canada will be saying, "Told you so!"

This brings us to my latest brain wave: Sell everything in order to let it all ride on ZPAY. If this sounds risky, if this sounds more akin to gambling than investing, it may well be just that: risky and a bit of a gamble.

I created a new demo portfolio based on selling my Million Dollar Portfolio, paying all the associated costs and buying 40,314 units of the BMO ZPAY exchange traded fund. This action cost me hundreds of dollars in fees but I think it may be a wise if risky move. Why? My gut tells me that in a downturn, ZPAY will not lose more than a quarter of a million. If my gut is right, my original principal is safe.

ZPAY yields 6.31% annually or $1.92/unit annually or 16-cents/unit monthly. That gives an income of $77,402.88 annually. At the moment, I am removing $3330 every month to emulate the money that a retiree would expect to realize in order to help cover  his or her monthly expenses in retirement.

Here is how I see this gambit playing out at the moment. ZPAY yields $6450.24 monthly. $3330 is removed from this amount to pay bills in retirement. The remainder, $3120.24, is used to buy some good, dividend paying stock like BCE. After 12 months I have more than $37,400 in stock. (With such a large portfolio, it might be possible to work out a reduced trading fee. I'd certainly contact TD WebBroker and have a chat with a supervisor.)

Why would I even contemplate making such an extreme move? Equities reward an investor with more capital gains then ZPAY and spreading the risk is never a bad idea and owning a mess of stocks and ETFs certainly spreads out the risk. Yet, on the other side, ZPAY is not just one investment but a mix. This is par for the course when it comes to ETFs. ZPAY may not be quite as single-minded a play as it appears. And ZPAY will make the 4% withdrawal easy.

I will try to never remove less than $3330 per month and, if the portfolio increases in value, I will recalculate the withdrawal every January if necessary and increase the withdrawal rate back up to 4%.

• June 22, 2021 -- $1,227,172.71 after paying all the buy/sell associated fees (Almost immediately after I made my purchase, my ZPAY demo investment dropped several thousand dollars. Ouch!)
• June 26, 2021 -- $1,224,350.73. Despite making $1209.42 today I am still down thousands in just days.
• June 28, 2012 -- $1,227,575.95. This is after withdrawing the July $3,330 payment.
  

Oh, the original portfolio is still intact and functioning for comparison.

Investing not trading

At the end of May I designed a small portfolio of $340,000 to demonstrate my approach to investing. I did this for two close friends who are switching their retirement funds from a financial manager to a self-directed portfolio.

I created the portfolio, "May 29 2021 Portfolio", using Portfolio Manager found on the TD WebBroker site. It is June 22 and this little portfolio is up almost $6100. Yesterday, I created a report. Take a look.

It is a fairly conservative portfolio that is heavily weighted toward dividend paying investments. It is delivering almost 4% annually in dividend income.

Although it is top heavy when it comes to Canadian investments, it does contain a good amount of  U.S. exposure and a bit of international as well.

The only item of interest, as far as I am concerned, is the Bank of Montreal ETF ZPAY.

Instead of holding bonds, I opted to put my free cash in ZPAY. I have to admit that this is a questionable investment. That said, ZPAY in up more than $800. It is performing exactly as I hope it would -- maybe even a little better.

If there is a solid correction, more than 15%, I will consider selling some or all of the ZPAY, probably at a relatively small loss, and spreading that money among the equity holdings.

If there is no correction or bear market, ZPAY should hold its own while delivering 6% or more in cash dividend income paid monthly. Come back in a year and we'll have a better handle on how well my investment strategy, expressed this portfolio, performs in real life.

Does ZPAY act an an alternative investment?

For years I have thought I could run a portfolio better than many financial advisers. Last November I decided to put my idea out there for all to see and to judge whether or not I was successful. The first thing I did was post a Million Dollar Retirement Portfolio demo. It is posted here:

Million Dollar Retirement Portfolio demo

Since last November two things have happened: One, a reporter told me than one success is not enough. One is not proof that I am onto something. And Two, a friend started a self-directed retirement portfolio and asked my what to do with their $340,000 investment. The bank was no help. I designed a portfolio for them and I am now following this new portfolio as well:

May 29 2021Portfolio

Both portfolios are doing quite well. My million bucks has grown to @1,220,250 since November and the May 29th portfolio is now at $344,450.

My goal with both portfolios has been to realize a dividend income of 4%, at least at the beginning. Put your money in an annuity, it won't pay more with each passing year. Unless you pay a very large fee, annuities payments are etched in stone for the life of the annuity. If I put a million dollars aside with the intent of withdrawing $40,000 each year, I feel I am a success if I am able to just deliver the $40,000 annually. Of course, I hope to increase this payment but I readily admit to the difficulties in achieving this.

Which brings me to ZPAY. This Bank of Montreal ETF is paying a dividend of 6.32% today. That payment would go a long way to keeping my portfolios close to meeting the 4% payout goal. But, would investing in ZPAY be wise? Would I be better off leaving the money to gather dust in cash?

I really don't know. But, my gut tells me that ZPAY, if held for years, might very well be the hedge that I long for. Over time my gut says it will outperform cash thanks to the dividend and although it will lose value in a correction or bear market, it may not lose as much as my other equities.

My demo portfolios have ZPAY in the mix and ZPAY looks good in those portfolios. The day I invest some real money in ZPAY seems to be coming closer and closer.

Learning to welcome the bear

A couple of relatives whom I love very much have decided to open a self-directed investment account. Prior to this, their RRSP savings were kept in mutual funds. To them the mutual funds felt safe, even conservative, let us be clear -- that money was in the market. A self-directed portfolio is not as big a step as most folk believe.

I worry about them and this decision. Why? Because this decision will make them aware of the daily vagaries of the market. With mutual funds, one sticks the money in and walks away. With a self-directed portfolio one tends to keep an eye on what the market is doing and if one is not prepared for the all too common retreats from recent highs, panic can set in. I know a lot of people who have put money into the market, panicked when the market dropped and got out of the market with whatever funds remained. 

So, I believe anyone getting into the market should know what they are getting into. To that end I have some links I would like to share:

Historical stock market data (Canada): One important take away from this post is the fact that, generally speaking, markets spend more time making money than losing it.

• The Canadian market has been positive 73.7% of the time
• The Canadian market has been negative 26.3% of the time

Looking at this another way, investors who buy and hold have a probability of making money 73.7% of the time. Investors trying to time the market must be right more than 73.7% of the time to do better than the buy and hold strategy. That’s a high bar to clear.

When I retired in 2009 the financial wizards on the financial beat at the newspaper where I worked warned me not to put my buyout money into the market. I did. Where they saw disaster, I saw opportunity. I was right; they were wrong. Read what Jim Yih wrote on his blog:

Markets tend to rebound after bad years. The TSX has experienced back-to-back negative years only twice over the past 75 years.

• The TSX was negative in only 20 out of 79 calendar years.
• In 18 of those 20 years, the market bounced back with positive returns in the following calendar year.
• The average return in years following a negative year has been 14.6%.
• Internationally the data is very similar but there has been a little more volatility and also greater downside risk.

Now, let us turn to Investopedia, an excellent source for facts related to investing. Here is a link to the page I am referencing: 3 Reasons to Not Sell After a Market Downturn. 

The average duration of a bear market is 1.4 years, compared with 9.1 years for the average bull market. The average decline of a bear market is 41%, while the average gain of a bull market is 480%.

Folks often talk about the risk of losing money in the market. A much bigger risk is getting out of the market and missing the recovery, missing the next 480% gain in the market. The past is not a perfect predictor of the future but it does provide some assurances that what goes down tends to go up in the end. To be a success in the market, one needs to be positive. Instead of selling on the way down, try buying instead. That is what I do.

One is often warned that this advice does not apply to those close to retirement and who do not have the luxury of time to ride out periods of market volatility. These retirees and soon-to-be-retirees should have more conservative portfolios.

This is true for those who might be forced by circumstances to sell during a market downturn. But then no one should be in the market who does not have the ability to ride out a market retreat, correction or bear market.

I have invested mainly in dividend paying equities both before and during retirement. My dividend income is higher than absolutely necessary to live. In other words, I could suffer a decline in my dividend income and, with some jiggling of numbers, I could still balance my books. 

In a truly severe bear market, I expect I might suffer a decline in dividend income of up to as much as 15%. I can handle that. And during a truly severe bear market, I will pick up some very good stocks at bargain basement prices. Owning these stocks will boost my dividend income. In other words, done correctly, retirees can welcome the bear and benefit from the crashing market.