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My latest crack at a "Retirement Portfolio"

Friday, May 27, 2022

Turning a sow's ear into a silk purse


One often reads how awful it is to lose money in the market. Well, it's true; it is awful. But, and it is a big but, the passing of time eases the pain—and I mean completely eases the pain. I bought some Manulife stock a few months back. Since then it has fallen on hard times. The stock has diminished in value to the point that it is living in bear territory and promising to put down roots there.

So, am I going to sell, accept my loss and move on? No. Absolutely not. The price today is the price. Period. But, this new price comes with a few perks. A big perk is the yield: 5.88%. If I were to sell, where could I move my money and earn as much income?

Furthermore, at its new, and arguably improved price, Manulife has more room to grow in value. If it hits the target value envisioned by financial advisors, even taking as much as three years to get there, I will realize $3.96 in dividends for each share, plus I'll benefit from an increase of $4.78 in stock value. This is a total gain of $8.74 or 13% annually when calculated over three years.

If I insist on dwelling on the inflated price that I originally paid, then I clear $6010 over three years for an annual gain, dividends included, of 8%.

The trick to winning in the market is to buy decent firms paying good, solid dividends and then holding as planned. Play the long game. Do not fritter away your profits with too many trades. My Manulife is a sow's ear today but in three years I hope to see it replaced by a silk purse.


Friday, May 13, 2022

Wednesday, May 11, 2022

Dropping IGM and putting RIT in my sights

Recently, I was eager to increase my holdings of IGM and I did. I more than doubled my holdings. 

Then within just days I sold all my IGM, getting out with all my money but just barely. Why? One, IGM was dropping farther and faster than I ever imagined it would. And two, while it was wilting, another and more attractive investment was on the horizon: RIT.

RIT is an ETF which gives one a managed mix of mostly Canadian REITs with about ten percent exposure to the U.S. REIT market. It just seemed like a wiser place to park my money. One cannot get locked in too tightly to one's plans. Stay alert.

I bought RIT after its price had corrected. I kept some powder dry to buy more should it enter bear market territory. As it is, I have a dividend income of 4.5% on this buy. I'm happy no matter what happens to the price in the coming days.

IGM is still a favoured Morningstar investment for Canadians seeking income and it is still featured in the Morningstar Canadian Core Portfolio. For this reason, IGM is still on my radar but it will have to get deep into bear market territory before I bite. IGM is now down almost 30% from its high of the past year.

The financial markets are in quite the turmoil today. These types of markets usually are around for days and weeks, sometimes even months. In today's financial climate, IGM could fall a lot further.

Sunday, May 8, 2022

Link to Retirement Calulator

 Here is a link to a neat Retirement Calculator. I like that one can change the numbers in the yellow coloured fields. The result does not take inflation into consideration, at least not that I can tell, but it is a handy quick estimate of how long your savings will last.

Sunday, May 1, 2022

Risk free comes at a price

If you want a risk free investment, buy a GIC. You may only make 3.5% on a four year term but at maturity all your investment will be returned. Oh, it may have lost buying power if inflation runs at more than 3.5% but you will get all your money back. Guaranteed.

 

If 3.5% is not enough yield, why not take on a little risk and put 2% of your portfolio in IGM stock. IGM is off its recent high by 21.2%. It is selling for $40.71. A price that puts it in bear territory. Buying today, you will enjoy a dividend income of 5.53% for the next four years. That much is pretty much guaranteed. IGM is not overly generous with its dividend. Its payout ratio is quite reasonable. The dividend should be secure.

Morningstar lists IGM on both its Canada Core Pick List and its Canada Income Pick List. Only eight stocks receive this buy recommendation in the recent monthly report. At the moment, Morningstar gives IGM four stars. This means Morningstar believes IGM will most likely reward investors with capital gain.

During the March 2020 bear market, IGM dropped in price to about $21. Clearly, the IGM price can fall a lot more. A paper loss is possible. On the bright side, it climbed out of the depths of the 2020 bear market in little more than a year. If you can afford to hold, its price should recover. (IGM was selling for $43.20 at market close Mar. 7th, 2023.)

My take

I ended up buying some REITs wrapped up in the ETF RIT. I the units were $17.95 with a yield of 4.5%. These units partially replaced the units of XRE that I sold at the beginning of the recent correction. I sold the XRE high and I bought the RIT at a much lower entry price point.

One thing you never get with a GIC is a profit surprise and with a yield of only 3.5% you are hardly being paid to be patient or otherwise.

Make a note to yourself and revisit this advice in four years. See if I was right when I pronounced RIT or even IGM a better investment than a GIC. With a GIC you have almost locked in a guaranteed loss. With RIT or IGM, but especially RIT, I like to think I am risking making a tidy capital gain and banking a generous dividend. That is a risk with which I can live.

Saturday, April 30, 2022

Don't time the market

I subscribe to Insights, a blog by Goodreid Investment Counsel. The following is a window into the quality advice in that newsletter. If I were looking for an investment advisor, the team lead by Gordon Reid would be among my top contenders. At times, I have found the advice in the Goodreid letter to be what I would call "wise and financially astute."

Myth: Timing the Market Results in Higher Returns

It is true that if you could consistently time the market such that you bought securities at their trough and sold them at their peak you would earn higher returns, so why is this a myth? To answer this question, we can look at several variables. 

To start let’s examine the length of the business cycle. If we can predict the length of the business cycle or better yet the length of each phase in the business cycle, then we will know when we are at the peak (and therefore should sell) and when we are at the trough (and therefore should buy). 

In the U.S. we can observe that the average length of the typical business cycle is 4.7 years, but varies greatly from cycle to cycle, with the standard deviation of the average cycle length being 2.2 years. (Marmer, 2016)  With most cycle durations deviating up to 47% away from the mean, it becomes very difficult to predict each cycle length with any real accuracy. 

To compound this problem the average stock market cycle in the U.S. is 7 years long with a standard deviation of 3.1 years. (Marmer, 2016) With both the business cycle and stock market cycle having differing, and highly variable durations it becomes nearly impossible to consistently predict how long each phase will last in order to sync up your trades to maximize profits. 

We can also observe the difficulties of market timing on a more granular level. During 2019 the TSX had a price return of 19.1%, which is a figure you may have seen discussed in the media as we entered the new year. What you might not know is that of the 251 trading days on the TSX in 2019, the 19 best days account for just over 94% of the annual return. Obviously, it would be next to impossible to predict which of the 19 days of the year would yield these returns. 

Instead of timing the market it's better to develop a disciplined strategy to be in the market that considers both your willingness and ability to take risk. We know that markets go up over the long run so don’t let your portfolio suffer by potentially missing the relatively few days (in this case 19) of the year that can drive your overall return.