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.

What the Olympics can tell us about managing Retirement portfolios

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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

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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).

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.

BMO figure 1

RBC finds young Canadians flocking to online DIY investing since pandemic

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By Lori Darlington, President & CEO, RBC Direct Investing 

(Sponsor Content)

I was asked a question recently that made me look at what we’ve been experiencing during the pandemic in a new way.

A colleague asked if we would look back someday and see this as a time when people took more direct control of their finances – driven in part by so much else that feels outside of our control.  Considering the surge in Canadians becoming self-directed investors over the past 18 months, there may be some truth there, but I think there’s more to it than that.

We’re seeing a new age group emerging within this wave of new online investors: increasing numbers of younger Canadians are becoming DIY investors. More than half of the new clients who’ve joined us at RBC Direct Investing over the past 12 months are under the age of 35.

I don’t think this is simply a pandemic spike. I believe this is a generational shift. These younger investors are comfortable with digital platforms and they enjoy doing their own research – two key aspects of being a successful self-directed investor.

What this means for us is that we need to ensure we’re providing comprehensive support for these younger DIY investors, to help them make informed online investing decisions.

Years ago, we realized we needed to connect with younger Canadians who might be interested in investing. We created our own editorial team to produce a digital magazine, Inspired Investor, which features quick reads that show how our everyday lives intersect with investing and to offer ideas and tips for both newer and more experienced investors. We also have a Getting Started Guide and how-to videos in our Investing Academy.

And you don’t need to be a Direct Investing client to access our Inspired Investor or Investing Academy resources. We want to help investors across Canada build their knowledge and ensure that they are making decisions that match their own risk appetite, so they can trade with confidence.

No-risk Practice Accounts

We also understand that each person has a different comfort level with trading online, so we provide a ‘no risk’ Practice Account. Just as it sounds, this account doesn’t use real money; we provide $100,000 in ‘pretend money’ so investors can test out making trades. You don’t need to be an RBC Direct Investing client to do this, but you do need to have an RBC Online Banking account. Continue Reading…

Why the 4% Rule doesn’t work for FIRE/Early Retirement

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By Mark and Joe

Special to the Financial Independence Hub

The 4% rule is a common rule of thumb in many retirement planning circles, including the Financial Independence, Retire Early (FIRE) community in particular.

What does the 4% rule actually mean?

Should the 4% rule be used for any FIRE-seeker?

Does the 4% rule really matter to retirement planning at all?

Read on to find out our take, including what rules of thumb (if any) we’re using at Cashflows & Portfolios for our early retirement dreams.

The 4% rule is really a starting point for a safe withdrawal rate

Unlike 2 + 2 = 4, the 4% rule is not really a universal truth for any retirement plan at all.

It is, however, in our opinion, a great starting point to understand the impacts of asset decumulation, related to inflation, over time.

As you’ll read more about in the sections below, the 4% rule is fraught with many problems. None more so than for an early retiree or FIRE-seeker. In some cases, for the FIRE community, we believe the 4% rule should no longer be used at all.

Are any financial rules really rules?

Backing up, here is the source for the 4% rule.

The article from 1994!

4% rule

Despite the geeky photo, by all accounts, Bill Bengen was one heckuva guy and a smart guy as well!

Potentially no other retirement planning rule of thumb has received more attention over the last 25-30 years than Bengen’s publication about the 4% rule. This publication in 1994 has triggered a new generation of devotees and arm-chair financial planners that are using this quick-math as a way to cement some retirement dreams. We believe that is a mistake for a few reasons.

First, let’s unpack what the 4% rule really means.

What does the 4% rule actually mean?

From the study:

“In Figures 1 (a)-l(d), a series of graphs illustrates the historical performance of portfolios consisting of 50-percent intermediate-term Treasury notes and 50-percent common stocks (an arbitrary asset allocation chosen for purposes of illustration). I have quantified portfolio performance in terms of “portfolio longevity”: how long the portfolio will last before all its investments have been exhausted by
withdrawals. This is an intuitive approach that is easy to explain to my clients, whose primary goal is making it through retirement without exhausting their funds, and whose secondary goal is accumulating wealth for their heirs.”

Unpacking this further, for those that do not want to read the entire study, here is something more succinct from Bengen:

Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.

 

“Should be safe”.

Again, the theory is one thing. Reality is something different and the financial future is always subject to change. Furthermore, if you’re blindly following this formula without considering whether it’s right for your situation, let alone putting in some guardrail approach to monitor your portfolio value at various checkpoints, you could end up either running out of money prematurely or being left with a huge financial surplus that you could have spent during your retirement. We’ll prove that point in a bit from another leading author.

Should the 4% rule be used for any FIRE-seeker?

Probably not. For many reasons.

Recently, Vanguard published an outstanding article about the need to revise any thinking about the 4% rule for the FIRE movement – a driver for this post.

Although the 4% rule remains a decent rule of thumb we believe most FIRE-seekers should heed the cautions in the Vanguard post. Here are some of our thoughts based on the article’s contents.

  • Caution #1 – FIRE-seekers should not rely on past performance for future returns

We agree. In looking at this Vanguard set of assumptions below, and based on our own personal investing experiences, we believe historical returns should not be used to guarantee any future results.

 

Source: Vanguard article – Fueling the FIRE movement

While the FP Canada Standards Council doesn’t have a multi-year (10-year) return model in mind, they did highlight in their latest projection assumption guidelines that going forward, investor returns may not be as juicy as in years past.

 

Source: FP Canada Standards Council.

This means for any historical studies, while interesting, may not be a great predictor of any future outcomes.

  • Caution #2 – The FIRE-seeking time horizon is longer

Bengen noted in his 1994 study:

“Therefore, I counsel my clients to withdraw at no more than a four-percent rate during the early years of retirement, especially if they retire early (age 60 or younger). Assuming they have normal life expectancies, they should live at least 25-30 years. If they wish to leave some wealth to their heirs, their expected “portfolio lives” should be some longer than that. “

Bengen goes on to say:

“If the client expects to live another 30 years, I point out that the chart shows 31 scenario years when he would outlive his assets, and only 20 which would have been adequate for his purposes (as we shall see later, a different asset allocation would improve this, but it would still be uncomfortable, in my opinion).
This means he has less than a 40-percent chance to successfully negotiate retirement–not very good odds.”

To paraphrase, Bengen’s study was relevant to 30 years in retirement. Not 35 years. Not 40 years and certainly not 50 years like some FIRE-seekers may need if they plan to retire at age 40 and live to age 90 (or beyond).

This is simply a huge reminder that your time horizon is a critical factor when it comes to retirement planning.

  • Caution #3 – FIRE-seekers may need to live with more stocks

Bengen’s 1994 study was based on the following:

“Note that my conclusions above were based on the assumption that the client continually rebalanced a portfolio of 50-percent common stocks and 50-percent intermediate-term Treasuries.” Continue Reading…

Retired Money: how to prepare for “Transitory for Longer’ inflation

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As oxymorons go, you have to love the phrase “Transitory for Longer,” which comes up in my latest MoneySense Retired Money column. It looks at inflation, which of course is in the news virtually every day this summer, and one reason why stock markets are starting to weaken again (along with renewed Covid fears). You can find the full MoneySense column by clicking on the following headline: How might Inflation impact your Retirement plans?

As with trying to divine short-term moves in stocks or interest rates, I view predicting inflation — whether near-term, medium-term or longer-term — as somewhat futile. So the column preaches much the same as it would about positioning portfolios for stock declines or rises in interest rates: broad diversification of asset classes.

Asset Allocation for all Seasons

The ever useful four asset classes of Harry Browne’s Permanent Portfolio I find may be a good initial mix of assets to prepare for all possibilities: stocks for prosperity, bonds for deflation, cash for depression/recession and gold for inflation. Browne, who died in 2006,  famously allocated 25% to each.

That’s a good place to start, although as I point out in the column, many might add Real Estate/REITs and make it a five-way split each of 20%. Some suggest 10% in gold (both bullion ETFs and gold mining stock ETFs), which might be expanded to include other precious metals like silver, platinum and palladium. Some might add to this a 5% position in cryptocurrencies like Bitcoin and Ethereum, which some view as “digital gold.”

To the extent stock markets and interest rates will forever fluctuate over the course of a retirement, such a diversified approach could help you sleep at night, as some asset classes zig as others zag. Seldom will all these assets soar at once, but hopefully it will be just as rare for all to plunge at once.

Annuities and new “Tontine” approaches

Another approach to this problem is not so much Asset Allocation but what finance professor Moshe Milevsky has dubbed “Product Allocation.” Continue Reading…