Posted by Tim Stobbs on December 19, 2007
I realized after reading the comments of yesterday’s post that I have yet to explain my investing goals so more often that not my investing behavior must be driving the average person crazy trying to figure out if there is a purpose to it all. For example, I like index funds, yet I also own individual stocks. So what am I? Value investor, index investor… will I just make up my mind already!
The main reason I’ve driven people up the wall is I’m doing what I call for lack of another term a double bridge investment plan. I’m actually constructing two portfolios at once. One which will be used to save for retirement and the other while actually in retirement. Hence the complete different styles of investment, since the goals are complete different with each one.
Bridge #1 – Saving for Retirement
This is the index investing portfolio. Here I’m aiming for long term growth so indexing makes sense. I also include my pension money in this pool of money, which because of my current company includes one individual stock (my new company is publicly traded, so when they offer free cash for their stock I’m taking it). The longer term plan is when I break $20,000 in this pool I’m switching out of index mutual funds and into ETF’s with a lower MER. In the longer term my wife will likely follow a similar path, so even if she keeps an actively managed mutual fund it will only be for perhaps five more years. Everyone did make some good points yesterday, so I will likely do some more research into this and discuss with my wife to see if we change the plan.
This bridge will likely stay in it’s current form for at least ten years. After that some adjustments will be made to likely shift down the equity exposure and build up some stabilization funds like bond or GIC ladder with several years of expenses build into it.
Bridge #2 – In Retirement
Due to the tax laws in Canada, dividend income is desirable in retirement because if you are in the lowest tax bracket you don’t pay tax on that income (if you hold it in a taxable account). So with this in mind I want some dividend based income in retirement. To achieve this I could cash out some of my RRSP money in retirement and buy some then or pick up some smaller positions now in a taxable account account and let some DRIP plans do the work for me. I’ve chosen to do the second option on a select basis. So when I see a great opportunity I tend to go shopping. So hence the few active stock picks.
The bit of exception to this plan is our holdings in EIT.UN. The income from this stock is distribution, so it is fully taxable. Yet where we have it held it doesn’t matter. My wife’s income is so low she doesn’t pay tax on the distributions anyway and my taxable account the tax is off set by the interest cost of an investment loan. So either case, the tax is either none existent or minimal which allows for the reinvestments of distributions for now.
All of these stocks will be held by us until we die or something dramatically changes in the underlining businesses. The idea is to start developing some of these streams of income now and let them grow for 15 years or so.
There is also one additional reason we have the taxable accounts. Flexibility in the future. I don’t know if I’m going to retire at 45 or not. I aware there is a lot of life to live from now until then. So with that in mind having access to some taxable account money I consider good idea in case something comes up in the future I need access to some cash. I most likely avoid using the taxable accounts this way, but if nothing else it is a backup plan.
So that is double bridge invest plan: one bridge to get you to retirement (growth based) and another for in retirement (income based). I know the entire thing looks a little messy, but it all makes complete sense to me. Yet despite all my work on this plan it’s still change a bit and it will still evolve a bit more going forward.
I’ll admit I’ve been focused more on bridge #2 in the last year, partly because the market down turns have provided some excellent buying opportunities in my mind. So during the next couple of years I’ll likely focus my attention back on dumping money into bridge #1.
I hope that addresses all the comments from yesterday, but if you have more questions please feel free to ask.