Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

How the Asset Allocation in your ETF can help drive Returns

Posted By Financial Independence Hub | September 7, 2021

By Kevin Prins, BMO ETFs

(Sponsor Content)

“Diversification” is a word that gets thrown around a lot these days: and for good reason. A diverse and balanced portfolio can help provide more consistent returns versus individual securities. The asset allocation of your exchange traded funds (ETFs) is of paramount importance to help provide more consistent returns and targeting an appropriate portfolio risk level.

The good news is that ETF providers have provided choice in a range of all-in-one portfolios that are delivered as an ETF on the exchange. Now you can choose from a diverse mix of both domestic and foreign equities and fixed income.

Coupled with your specific investment goals and tolerance for risk, you can rather easily determine which ETF is a good fit for you by considering its strategic asset allocation relative to your needs.

Strategic Asset Allocation vs. Chasing the Asset Class with the highest return

Predicting the top performing asset class year to year is extremely difficult and, when poorly executed, can lead to disappointing results for your portfolio.

But with a diversified Asset Allocation ETF, you can take all the guesswork out of investing.

In other words, your portfolio’s fortunes aren’t tied to a single asset class, making it far more resilient, while simultaneously increasing your chance of having exposure to markets when they have bull runs.

Many investors who try to do it themselves will rely on friends, market research, or maybe even an investment blog to help them pick the securities that will comprise their portfolio.

But this can be time-consuming and risky. Not to mention that these portfolios tend to be under diversified.

You’ll gain exposure to both fixed income and equities with a balanced asset allocation ETF. What’s more, you can avoid one of the common pratfalls of overweighing your portfolio with Canadian securities and instead take a global approach, again helping improve your portfolio’s balance.¹

You’ll also be exposed to both cyclical and defensive sectors, ensuring that your portfolio is designed to perform well in a variety of economic conditions.

The fixed income/equity balance is of importance, as this has the potential to bolster your portfolio with both security and reliable income, while also adding growth potential and inflation protection.

It’s worth stating that a portfolio’s strategic asset allocation will more than likely have a higher impact on its performance than even the individual stock selection, as the graphic above indicates. ²

That’s because opting for a conservative, balanced, and or growth portfolio and investing in asset classes based on your preferences will play the determining role in how to allocate your investment.

Whatever your investment goals, an approach predicated on strategic asset allocation can help you reach them.

8 Reasons to look at Asset Allocation ETFs

Simplified Investing: An all-in-one investment solution that provides instant market exposure
Broad Diversification: Holds a basket of ETFs that in themselves hold many securities
Professionally Constructed: Leverage the asset allocation experience of industry professionals
Automatic Rebalancing: This keeps one’s investment portfolio on track to risk and return objectives Continue Reading…

New Decumulation option on the horizon in Canada

Posted By Financial Independence Hub | August 23, 2021

By Andrew Gillies

Special to the Financial Independence Hub

Employees with a workplace pension plan are part of a lucky minority. In the Canadian private sector, less than 25% of workers currently have an employer pension plan. Most often, the plan offered is a Defined Contribution (DC) arrangement.

DC plans are appealing to employers because they pose few legal or financial risks. Within a typical DC scenario, both the employee and employer contribute money into the employee’s individual account. Come retirement, the onus is on the employee to figure out how to convert these pension savings into steady income.

Decumulation game not easy to win

The name of this game is “Decumulation.” It’s not an easy game to win. Retirees of DC plans are at risk of burning through their savings too quickly, leaving them without sufficient income in their later years. Conversely, financially conservative retirees may spend too little of their pension savings at the expense of a comfortable retirement.

One foolproof decumulation option DC retirees have is to buy an annuity from an insurance company. An insured annuity is a financial product that retirees can transfer some or all of their pension savings to in order to receive regular, guaranteed payments until death. The downside? This guarantee doesn’t come cheap. The average retiree who purchases an insured annuity can expect to forfeit as much as 20-30% of their pension savings to pay for the promise of predictable lifetime income with no future upside.

More affordable lifetime annuities

Fortunately, a new more affordable type of lifetime annuity will soon be offered through registered DC plans in Canada, and it’s a game changer. The Variable Payment Life Annuity (VPLA) was recently proclaimed into law and is poised to provide an excellent decumulation option for members of registered DC pension plans.

Within a VPLA framework, investment and mortality risks are pooled amongst many retirees, rather than insured at the individual level. This cooperative approach makes the VPLA significantly less expensive, while still delivering reasonably predictable lifetime retirement income.

The trade off, of course, is the “variable” element of the VPLA as payments may fluctuate due to market volatility or mortality experience within the pool. Still, without an insurance company taking large profits, a VPLA will generally pay out a monthly pension substantially greater (20-30% greater) than a traditional insured annuity while retaining future upside potential. Continue Reading…

Retired Money: Is “Core & Explore” too dangerous for retirees and near-retirees?

Posted By Jonathan Chevreau | August 19, 2021

My latest MoneySense Retired Money column revisits the topic of Core & Explore. You can find the whole column by clicking on the highlighted headline here: Rethinking Core & Explore.

If the image on the left looks familiar, it’s because we used it last week to illustrate a republished blog on Explore by Michael J. Wiener, the blogger behind the popular Michael James on Money blog.

Go back to a couple of my Retired Money columns the last year and you’ll see I touch on the topic of speculation for retirees more than once, usually couched in the context of Core & Explore.

See for instance these pieces: Should Retirees Speculate? and How to Master Core & Explore.

“Core” is the prudent long-term strategy inherent in the MoneySense ETF All-Stars: low cost, diversified across geographies and asset class. Fully takes advantage of the “only free lunch:” that of broad diversification.

“Explore” on the other hand, is the polar opposite. The theory is that if you’ve taken care of 80 or 90% of your “Core” or Serious Money, you can go crazy with the other 10 or 20%, by “scratching the itch” of taking flyers on all those crazy things we’ve seen lately, like SPACs, cryptocurrencies etc., nicely surveyed by CFA Steve Lowrie in this recent blog: SPACS, NFTs and another Tech-inspired Silly Season.

Of course, as long as markets keep soaring, it’s hard not to love assets like Bitcoin or Ethereum, which may have tripled or quadrupled in a matter of months. Anyone who bought Tesla a year or two ago, or the ARK ETFs that were roughly 10% in Tesla and many comparable high flyers, was looking like an investing savant by the end of 2020, including Yours Truly. Continue Reading…

What the Olympics can tell us about managing Retirement portfolios

Posted By Adrian Mastracci | August 17, 2021

Adrian Mastracci, “fiduciary” portfolio manager at Lycos Asset Management touches on applying Olympian wisdom to your retirement portfolio.

Let’s reflect on the Olympians who recently competed at Tokyo. They deserve praise for braving years of preparation, training, commitments and pandemics.

Striving and competing to be best in their chosen pursuits. Regardless of outcomes.

I especially appreciate long distance events like cycling, running, swimming and rowing. They demand a wealth of endurance and perseverance, much like retirement portfolios.

Athletes often have to reach down deeper to muster more bursts of adrenalin. Just when it seems there is little, if anything, left in the tanks.

My top takeaways

Investors can draw some parallels from hard working Olympians. Wisdom from the Olympiad is relevant and applicable, particularly to long-term investing.

I summarize my top takeaways. Successful athletes require:

• Much dreaming and sketching out of personal goals.

• Setting specific, well thought out strategies.

• Disciplined game plans that realize on their dreams.

• Patience for the roller coaster of setbacks and achievements. Periodic tweaking of their action plans.

• Time horizons to learn and master their quests.

Olympians make wonderful ambassadors for the investing profession. I encourage investors to take a few moments and apply Olympian wisdom to the precious nest egg.

Athletes make choices and sacrifices along the way in their quest for Olympic goals. Investors balance choices between spending for the moment and saving for the long haul.

Risk is an inevitable part of the Olympics, as it is in long term investing. Athletes try different training plans, much like investors try a variety of strategies.

Investors can improve their long term portfolios with these four pearls of wisdom:

Pay attention to issues that you can control: risks, diversification, asset mix and investment quality.
Ensure that no investment can cause serious portfolio damage: losses are typically your biggest destroyers of wealth.

Buy and sell methodically over time – timing the markets is a low percentage strategy.

Always expect the unexpected – a positive mindset is best for making portfolio decisions. Stick to simpler game plans. Skip the fancy moves.

All the very best to the athletes. May they treasure the accomplishments and cherish the memories.

Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA started in the advisory profession in 1972. He is portfolio manager with Vancouver-based Lycos Asset Management Inc.

Information provided is intended for educational purposes only. Copyright ©2021, Adrian Mastracci. All rights reserved.

Getting your Fixed Income Fix with BMO ETFs

Posted By Robb Engen | August 11, 2021

This article has been sponsored by BMO Canada. All opinions are my own.

Fixed income doesn’t get enough attention on this blog, mostly because I’m still in my accumulation years and invest in 100% equities across all my accounts. But most investors should hold bonds in their portfolio to reduce volatility and so they can rebalance (selling bonds to buy more stocks) whenever stocks fall.

In this post we’re going to take a deep dive into BMO’s line-up of fixed income ETFs. We’ll see that there isn’t a one-size-fits-all approach to investing in fixed income, and that investors can capture yield using a wide array of products and strategies.

DIY investors should be familiar with BMO’s suite of fixed income ETFs. It’s the largest in Canada with more than $23 billion in assets. At the top of the list is BMO’s Aggregate Bond Index ETF (ZAG) with total assets of $5.86 billion.

Robo-advised clients also have BMO fixed income ETFs in their model portfolios:

Nest Wealth clients hold BMO Aggregate Bond Index ETF – (ZAG)
Wealthsimple clients hold BMO Long Federal Bond Index ETF – (ZFL)
Questwealth clients hold BMO High Yield US Corp Bond Hedged to CAD Index ETF – (ZHY)
ModernAdvisor clients hold BMO Emerging Markets Bond Hedged to CAD Index ETF – (ZEF)

BMO Fixed Income ETFs

Investors are nervous about holding bonds today. Interest rates are at historic lows, and when rates eventually rise, we’ll see bond prices fall – especially longer duration bonds. We’re also seeing higher inflation, which causes interest rates to go up (and bond values to go down).

I reached out to Erika Toth, Director at BMO ETFs to talk about fixed income ETFs and how investors should think about bonds and fixed income today and into the future.

Q: Erika, investors are concerned about low bond returns, particularly from long-term government bonds. How should they think about the fixed income side of their portfolio?

A: Investors should think of fixed income as a ballast in their portfolio. It helps reduce overall volatility (chart below). Correlations between US Treasuries and stocks (represented by the MSCI USA index) have been negative over the last two decades. All that to say, when stocks fall, bonds tend to do well.

From an investor perspective, there are two things at play – FOMO, and fear of volatility. Fixed income still has its traditional value in a portfolio; to offset equity risk.

What we are seeing from some clients is the willingness to take on more equity risk – shifting from a 60/40 balanced portfolio to 70/30 portfolio, as an example.

But you can see the payoff from fixed income using a simple example of Canadian equities (represented by ZCN) and ZAG. Volatility drops materially without costing investors too much return.

ETF	10-year annualized return	Standard deviation
ZCN	6.21%	11.8%
ZAG	3.69%	4.0%
60/40 (ZCN/ZAG)	5.38%	7.4%
70/30 (ZCN/ZAG)	5.61%	8.5%

The bottom line: Fixed income keeps investors in the markets during times of distress.

Q: What about a retired investor who typically holds a 60/40 or 50/50 portfolio but is concerned about generating income in a low-yield environment?

A: Such an investor may wish to include ETFs that harness option-writing strategies such as covered call writing, put writing, or a combination of the two, to generate a high level of tax efficient monthly cash flow (option premiums are taxed as capital gains and/or return of capital).

With fixed income generating lower yield today, the equity portion of a portfolio needs to make up for the yield shortfall. Covered call strategies are an efficient way to do so and ETFs are a convenient way that allow investors to attain access.

Here are a few examples of these types of strategies. I would include these on the equity side of the portfolio to increase overall level of yield:

ZWC BMO Canadian High Dividend Covered Call ETF, yields 7.3%
ZWB BMO Covered Call Canadian Banks ETF, yields 5.84%
ZWS BMO US High Dividend Covered Call Hedged to CAD ETF, yields 5.94%

Q: I’m a big fan of asset allocation ETFs to make DIY investing as simple as possible. But is it wise to unbundle ZGRO or ZBAL and hold multiple ETFs with the intention of avoiding long-term bonds in favour of shorter duration government bonds or corporate bonds?

A: Part of the appeal of the all-in-one asset allocation ETFs is their simplicity; and they tend to appeal to investors who do not want to get granular in their investment process. The other benefit of a one-line holding is that you are less likely to overthink the underlying components and make reactive decisions when you see something go into the red.

The 0.18 % management fee (0.20% MER) for ZGRO and ZBAL are all-in, there’s no double-dipping on fees. That is basically the cost of underlying ETFs with almost nothing more for the rebalancing. Keep in mind that there is often a trading cost for rebalancing multiple ETFs on your own. For investors with small portfolios, the cost of selling and buying stocks and bonds every year can become proportionally expensive.

Portfolio rebalancing is the maintenance involved in sticking with your asset allocation plan. Your asset allocation plan is what is going to help you meet your goals. One of the biggest pros to portfolio rebalancing is that it keeps risk under control, and sometimes just maintaining a level of risk takes some action.

There is tremendous value to having the rebalancing done systematically. Conservatively, experts say it can add between 0.30% to 0.40% annually over the long term.

For an investor who does not mind doing a handful of trades and rebalancing once or twice a year, the “unbundling” strategy could work. However, if the concern is rising rates, corporate bonds would tend to do better than government bonds. Continue Reading…

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BMO Fixed Income ETFs

Q: Erika, investors are concerned about low bond returns, particularly from long-term government bonds. How should they think about the fixed income side of their portfolio?

Q: What about a retired investor who typically holds a 60/40 or 50/50 portfolio but is concerned about generating income in a low-yield environment?

Q: I’m a big fan of asset allocation ETFs to make DIY investing as simple as possible. But is it wise to unbundle ZGRO or ZBAL and hold multiple ETFs with the intention of avoiding long-term bonds in favour of shorter duration government bonds or corporate bonds?

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