My Million Dollar Portfolio: 2022 Edition

A well known financial advisor group sent me a package boasting of their superior expertise at managing the savings of retirees. Give them a million dollars and, with a little luck, they might send you an annual cheque for $30,000 until you and your spouse die. This correspondence was back in the later part 2020.

Being in my 12th year of retirement, my personal experience told me the financial wizards were wrong. I decided to conduct an open, totally public, competition. My approach versus the expert approach. I created a million dollar self-directed demo portfolio from which I would remove 4% annually. Would I run out of money and if I did when?

Not only am I not running our of money, that demo portfolio is worth $1,318,266.72 today. For 2022, I have decided to remove $3480 each month, $41,760 annually, to cover living expenses which are increasing with growing inflation.

As the year unfolds, I will keep you posted. In the interest of full disclosure, I took a screen shot of the present portfolio. Cheers!

Saving for a future purchase is difficult today

I have a friend who saved some cash for the future. The problem is inflation. Hide $10,000 under your mattress and in five years it will have the buying power of $8,587.34 if inflation runs at as little as 3% annually.

Deposit the money in the bank and the interest paid helps to lessen the loss. But unless the interest paid is greater than the inflation rate, the buying power of the money still shrinks. It is tough protecting money from inflation. For many of us, it is impossible.

Which brings us to the stock market. Convert your savings into equities, stock, and, if you are lucky, when you cash out in five years you will have all your buying power intact plus a nice gain. If you are unlucky, and this may happen about a third of the time, you will will have vastly less money. It is not difficult to imagine a loss of 20% or more. A loss of 20% is so common that it even has a name: a bear market.

Clearly, the market often pays handsomely but it can also inflict great financial pain. The possibility of a handsome gain is the reward for taking on the risk. The aim of investing is to find ways to minimize risk while maximizing gain.

Does this mean one should stay clear of the stock market? For some folk, in a word, yes. If you cannot afford the loss, even temporarily, don't invest in the market. But if you are able to aim for a withdrawal window that spans a time frame up to three years, you simply do not sell your stock while the bear is roaming the market. You hold onto your stock, you enjoy the dividends if your stock pays dividends, and you wait until the bull market comes back. I like to plan for a three year recovery period.

Some important points to keep in mind when investing in the market:

• Buying stock is placing a bet on the health of our financial system.
• Investing in the market means you have converted your cash into stock. It is not money again till sold.
• The market is risky. Companies can and do go bankrupt. Losing all of one's investment is always a possibility. Think Northern Telecom or General Motors.

Remember the $10,000 placed under the mattress? It lost more than 14% of its buying power in five years. 

If that $10,000 had been converted to stock in the Bank of Nova Scotia five years ago, it might easily have gown to $11,362 today. Plus it paid a generous dividend greater than 4.5%. In total, one has more than $13,660 before factoring in inflation. 

If the market is down at the end of five years, one simply keeps the stock for up to three extra years and enjoys the extra dividends as the reward for patience.

It is worth noting that the top five Canadian banks have never cut their dividend. The Bank of Montreal is approaching 200 years without once missing its dividend payment. This is something to keep in mind when buying Canadian bank stock.

The rules guiding my investments

• I invest for income. Period. Except in those VERY rare cases when I don't. In the past, I insisted on at least a four percent dividend. Now, with the markets at all time highs, three percent is the new cutoff. When does the three percent rule not apply? A good example would be BAM.A. It does not pay a great dividend but it is such a great investment that I find it almost impossible not to include it in my portfolio. I'm adding it the first chance I get.
  

• I strive for diversity in my retirement portfolio. To this end, I have a spreadsheet that tracks my asset allocation. For instance, I try not to have more than 30% of my investments in the financial sector and no stock every commands more than 10% of my total portfolio. At the moment no one stock even breaks six percent.

• I believe there's safety in numbers but the number cannot be too great. I try to have at least two dozen different investments but never more than thirty investments total. This is a mix of mainly individual stocks with a small number of ETFs. My U.S. and international investments are always accomplished using ETFs. I like XUN or XUS for my U.S. exposure and VIU or VIDY for my international.

• I insist on having some exposure to REITs and utilities. I always have at least ten percent of my portfolio in REITs as a mix of two ETFs: RIT and ZRE. Because these two ETFs use different approaches to building the investment universe in which each one plays, owning the two gives a bit more diversity and RIT adds some exposure to the U.S. REIT market.  As for utilities, I own the standard players and ignore the utilities-based ETFs. I like Emera, Ontario Hydro, Fortis, Alta Gas (Yes, I consider this more utility than pipeline.) and Algonquin Power and Utilities. I like something in the order of 10% to 15% of my portfolio invested in the utility sector. (Note: I own AQN but it is not longer recommended.)
  

• I buy good quality companies with intentions of holding the investment for two years or more. In a perfect world, I'd hold each stock forever. Sadly, the world is not perfect. Still, it is not uncommon for me to have zero turnover in any given year. The top six Canadians banks or the major utility players or Bell or Telus in the telecom sector are all examples of stocks that pay a fine dividend and can be held indefinitely.
  

• I like to have one or more stocks under consideration. If these good bets fall onto hard times and lose 20% or more of their value, this is a buy signal with one warning: find out why the stock is out of favour. Recently Restaurant Brands was more than 20% off it high for the year. It was a buy. Algonquin Power was also off 20% but I worried that it will might lose more. Eventually I added AQN to my portfolio. I should have resisted buying AQN. AQN is having serious problems. As of today it is down more than 30%.  A 20% drop is entering bear market territory. A 10% drop, or a correction, is also a boundary that when breached should draw one's attention. Recently, TD was down about 8.5%. It wasn't correcting but it was on sale.

Today, after almost eleven full years of retirement and of withdrawals to live in retirement, my portfolio has more than doubled in value. As you can see, so far, my approach has been very successful in my retirement.

How I would invest $10,000

I have a friend with $10,000 to invest. This is money that they can afford to lock away for three or four years. There is no chance that even in an emergency they would require this money. This money is truly available for investing, no string attached.

I'd buy a stock selling at a discount to it's high for the past year and it must offer a decent dividend. I want a solid company as I like to sleep at night. I want a stock in a company I can trust, one in which I have faith. I don't want to have to be checking it's gains or losses too frequently. It should be a buy-it-and-forget-it stock. ENB (Enbridge), T (Telus) and TD all meet these criteria.

To decide how much of each stock I should own, I created a simple spreadsheet. See below. (It didn't copy and paste perfectly but you will get the idea.) I insist on a minimum yield of 4%. This mix yields 4.89% today.

					Invest	$10,000
Stock	Price Tdy	Dividend	Dividend	% to own	Quantity	Total Dividend	12-Month High	% Off Its High	Investment
TD	$82.20	$3.16	3.84%	33.00%	40	$126.40	$89.12	7.76%	$3,288.00
ENB	$50.42	$3.34	6.62%	34.00%	67	$223.78	$51.34	1.79%	$3,378.14
T	$28.72	$1.26	4.40%	33.00%	115	$145.45	$29.99	4.23%	$3,302.80
					Yearly	$495.63		Cash	$9,968.94
					Yield	4.96%		Balance	-$9,968.94

 

I opened a simulated portfolio using Portfolio Manager in TD WebBroker. This pseudo portfolio tracks the performance of the $10,000 portfolio suggested by the spreadsheet.

 Will my friend take my advice and go for the safety of diversity offered by investing in three areas of the market: financials, pipelines and telecoms? Will the attractive dividend income, almost 5%,  grab their attention and commitment? I'll have to call my friend tomorrow and discover what was decided.

   

• Sept. 22, 2021 -- $10,000 to invest
• Oct. 22, 2021 -- Value of Portfolio has climbed to $10,330  (Telus is the drag on the portfolio.)
  
• Sept. 24, 2021 -- $10,009.23 Portfolio balance at close.
• Nov. 5, 2021 -- $10,606.03