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Tuesday, April 21, 2015

Don’t Keep All Your Eggs in One Basket

Posted by Tim Stobbs on April 8, 2015

Well the other day I requested a post ideas and I was asked to provide some thoughts around my couch potato portfolio and specifically this article, which points out the good times for that portfolio won’t last forever.  So while I’ll do that,  I also thought I would expand the focus to discuss my overall portfolio approach.

You see I don’t ever believe in putting all your eggs in one basket (yes, it was Easter and eggs are stuck in my head).  Most people believe that statement applies to just one stock or perhaps one stock index.  I instead expand it to also include any given investment style.

That article I previously linked to pointed out rightfully that the couch potato portfolio is going to have some down years.  Now when you saving up for retirement, this isn’t a particularly big issue other than to slow down the rate of savings for a while.  Yet when you are living in retirement these down years can be outright critical.  After all if your portfolio takes a 20% decline one year and you take out another 4% on top of that you just increased the downside to 24%.  If that continued for a few years you would be in some serious trouble as you likely won’t have enough cash to allow you to recover in the long haul.

So what do you do?  Keep multiple streams of income so you can ease off pulling out money during these major dips in your portfolio.  There are multiple options out there for people to have other income streams including, but not limited to: part time work, workplace pensions, government pensions, investment portfolios, cash savings or rental income.  Another less obvious way to expand that list is to also splice your portfolio into different investment styles to balance their risks.  I’ve previously mentioned my plan include all of those above except rental income (I prefer to keep REITs instead of rentals).

In my case, our actually overall portfolio consists of three different subsets of investments: my workplace pension, my couch potato in our RRSPs and finally dividend investing in our TFSAs.  So while the couch potato has a weakness of pulling out money during a big drop, this doesn’t exist in the dividend investing portfolio since I plan to never touch the principle and only take out the dividend income.  Therefore you might be tempted to believe dividend investing is superior to the couch potato, which isn’t true.  The price you pay for that level of security is often lower returns so you often need a MUCH bigger portfolio value to retire if only used dividends.  For example, if your dividend portfolio only generated 3% instead of using 4% withdrawal rate for a couch potato your portfolio to generate $30K in income goes up from $750,000 to $1,000,000 for dividend only portfolio.  So security is offset with much bigger savings targets.

This is why I think you should actually consider a blend of investment portfolio styles to balance out the risks and positives of each.  So in our case, our target spending is around $30K a year.  We plan to generate that income from various streams.  In the beginning of our retirement, for example, my wife plans to continue working for a few years after I quit which should generate at least $6000/year.  Then I’m aiming to have the dividends in our TFSAs generate another $6000/year.  That leaves $18,000 to come out of our RRSPs.

Yet what happens if the stock market tanks just after I quit my job?  I could reduce our withdrawal from the RRSP up to zero by using other income streams instead.  Perhaps I pick up a part time job or contract work for a few months or we could just using our cash savings to fill the void for a given year. For a year, this isn’t a big deal…the issue becomes if all of your portfolio was just in couch potato you would be a much harder spot.  Since you need to take out the full $30K, it would have a bigger one time impact which depending on the size of the drop you may never recovery from.

The other complication for income streams is your access to given stream will vary through time.  So for example, I can’t collect Old Age Security until I’m 67 and my workplace pension is locked until I turn 50.  We could also downsize our house to bring in a one time shot of capital into the investment accounts.  But once some of those time locked steams kick in I need less of my other streams to cover the remaining.  So over time you can over draw from one stream, if you can make it up from another one later on.  So in theory I could take out too much from the RRSP, but I better be damn sure of my offsetting future income stream to cover the difference.

You are likely just realizing that mapping out all the options do get a bit mind numbing with the amount of possible combinations.  So rather than try to do that I would suggest you merely map out fully your default plan and then be prepared to make adjustments as you go.  Predicting the future isn’t a real option so plan for what you expect and be prepared to adjust as you go.

I should also point out while I’ve mainly have been discussing the negative side of your portfolio that upside is just as important.  So for example, this most recent wave of good returns for the couch potato portfolio (9% for the last six years) when you are retired would be a great time to withdrawal a little extra money to increase your cash savings or perhaps add to your dividend portfolio.  Don’t just blindly spend the extra returns as you are going to need those to cover your down years in the future.

So in summary, don’t put all your eggs in one basket.  Be prepared to have multiple income streams and be willing to balance them off each other in the good and bad times.  The details after that are up to you.  Just remember…there isn’t just one right answer, but rather thousands of ways to do it.  Find out what works for you and go with it.

How you balance your income streams?  Do you keep more than one investment style in your portfolio?

2015 TFSA Update

Posted by Tim Stobbs on March 12, 2015

As I previously noted in my last net worth update we already finished maxing out our TFSA accounts for the year.  So with that in mind my wife and I went shopping for some additional stocks.

Our strategy for our TFSA accounts is fairly straight forward.  We buy individual stocks that pay a dividend and mirror our existing bills.  So that means we tend to look at banks, power companies, telecommunications, real estate trusts….you get the idea.

We also have a few other ‘rules’ that we try to follow.  These include we also try to buy stocks with a fairly good yield, so while this doesn’t result in any firm minimum number or maximum we do try to aim for the accounts combined having about a 5% yield based on current value.  The other ‘rule’ we try to meet is to have about two companies per sector and try to not have too much dividend income from any one company.  We don’t keep a firm cap or anything, but we try not to have more than $500/year in dividends for a starting position in a given stock.  If the dividend growth of the stock pushing it higher than that I tend to ignore that.

Our current holdings are (by stock ticker symbol):

  • BMO
  • RY
  • EIT.UN
  • D.UN
  • REI.UN
  • NPI
  • AQN
  • BCE
  • RCI.B
  • CSW.B

We recently increased our shares in RY and started a position in RCI.B. That consumed the majority of our available cash so I doubt we will be buying much more for a while until our cash position builds up again.   We don’t bother with any DRIPs for these accounts.

Overall we are hitting the majority of our objectives with these accounts.  Our current combined yield is $4973/year on $100,270 in account value, which puts us just under our 5% target (yes I’m acutely aware our actual yield on contributions to these accounts is much higher).  The longer term plan is to get the yield up to $6000/year by the time I retire from my day job, which should be doable in three more years.  That way we can only draw out the dividends from these accounts and never touch the principle.

Well at least that is the plan…long term I suppose when we adjust positions over the years we might end with a small amount of principle getting paid out.  I intend to just take the cash out periodically rather than a complicated tracking spreadsheet. The other longer term adjustment would be in our retirement years strip out our RRSP and taxable accounts and move the money to the TFSA over the years to reduce our tax owing in the long run.

Of course these are only ideas for the long term.  I still need to sit down and plan out in more detail how I will switch from the contribution phase to the withdrawal phase.  After all getting the money invested is one thing, living off the investments gains is entirely another beast.

Any questions or ideas of companies for me to consider?

What’s It For?

Posted by Tim Stobbs on February 18, 2015

You have likely already been reminded you should be investing some money in your RRSP today.  How do I know that?  It’s the season for it so most people via the 1000s of ads out there are told they really should be investing their money.

Yet I’ll offer you a more basic question than: RRSP or TFSA, stock versus bond, or even index fund or actively managed…..the question is: why?

Pardon?!?

Why are you saving and investing the money at all? What is the purpose of the investment?

*silence*

Need a hand? Perhaps the answer is: to retire.  Which is a good idea, but what does that look like?

*longer silence with confused look*

Far too often we save blindly because we fail to really understand what sort of lifestyle you want in your retirement.  After all, depending on the lifestyle you want that will drastically change how much you should be saving and how early you can retire.

For example, let’s say you have a couple who is in their 50s and they have been really good savers and have $500,000 in investments and a paid off house.  Do they need to work any longer?  Perhaps it depends on the lifestyle they want.

If they choose a modest life of mostly hanging around the house, being involved in the local community helping out with a few organizations, reading a lot of books and playing with the grand kids, they don’t really shop a lot and when they do they tend to buy high quality items that last a long while…well depending on the exact numbers they could retire in a just a year or two.  Yep, if they don’t need much income, perhaps $24,000 a year, they could potentially retire shortly.

But if they want to travel the world for four months of the year, enjoy shopping a lot and are real foodies that enjoy all the finer things in life.  Again it depends on the exact number, but if they spend like $5000/month.  They may very well have to keep working until they turn 65 or later.

It all depends on the why.  Why are you saving?  What sort of life do you want to lead and what is stopping you from doing that at least in part right now before you even consider retiring?

The illusion is that someone one choice is better than the other, when it fact, what matters most is which one appeals most to you.  If you have never really spent on $5000/month when you were working, what on earth do you think you will be doing when you retire?

What do most retirees end up spending? It varies but on average they spend $30,000 to $40,000 a year.  That’s it.  No huge lifestyles of the rich and famous, but rather a modest but happy life having lots of time to do those things you enjoy.

You could do less than that if you want, especially if you consider your mortgage was paid off.  So if you aimed for $30,000/year target you could be retired rather easily on $750,000 in investments.  Yep, that’s it. Forget about the million dollar mark, you don’t need it.

So if someone tells you they need at least $2 million or more to retire…I would ask why?  It won’t change the answer in some people’s cases, but more often than not they don’t understand the why and end up with overly large targets.

Instead, take the quicker way out…think about what you really want from your retirement and then plan around that.  The more detail you can provide the better plan you can make.   It won’t also be easy to do, but in the end you at least know exactly why you are putting money into your RRSP or TFSA.

What are you saving for?