Many years ago we visited some Italian friends for dinner. That was the first time I realised that pasta wasn’t meant to have a couple of pounds of stew heaped on top of it. Pasta in our house was usually over-boiled spaghetti, buried under lots of meaty-tomatoey stuff. Sometimes, we tossed in a few tablespoons of curry powder. Or maybe some jalapeños. And left-over spuds were always a no-brainer addition. Look, I’m not saying I didn’t enjoy some of these concoctions. But I was totally taken aback by how much I truly enjoyed the far simpler pasta that we experienced at our friends’ house. Portfolios are a bit like pasta in that respect. Sometimes, we can get carried away by having too many ingredients to choose from. Simpler can be better.
BlackRock’s iShares XGRO (20% fixed income) & XBAL (40% fixed income) have been available as all-in-one portfolio solutions since 2007. The arrival of the all-equity ETFs boosted interest in these off-the-shelf portfolios. In 2019, Vanguard Canada launched VEQT, their all-equity ETF. In that same year, the iShares XEQT ETF & Horizons (now Global X Canada) HEQT were also launched. And in 2022 we got BMO’s ZEQT. These funds are globally diversified, with about 45% of the allocation going to the US, 30% to Canada, & the remainder going to International, which includes a small allocation to emerging markets. These ETFs hold 10,000, or more, different company stocks from around the globe. That is some kind of diversification! And according to Harry Markowitz, a Nobel Prize-winning economist, diversification is the only free lunch in investing. There are a bunch of academic papers that support this level of diversification. While there are minor squabbles about percentages, or how great the American market is, I think some of us could benefit from using the allocation model employed by these highly diversified ETFs. Of course, that won’t stop us trying to mess with a good recipe from time to time, eh?
My own portfolio has gone through changes over the years. I was a growth investor at one time. Later, a dividend growth investor. Over time, new ETFs made it easier to chase the next hot sector or geography, so I started adding some of those. It wasn’t long before my portfolio looked more like one of my mad Irish-Indian-Mexican, & only vaguely Italian, pasta dishes! I finally got around to doing pasta the Italian way. It took me a little longer to learn how to apply that same keep-it-simple philosophy to my portfolio. But both cooking & investing are a little easier now. I will, however, admit that I occasionally toss a little hot pepper, or a little hot stock, into the recipe too!
Regardless of your preferred investment philosophy, there’s probably an all-in-one solution out there for you now. Along with the 100% equity ETFs, if you want 20% bonds, there are the V/X/ZGRO ETFs. The V/X/ZBAL ETFs cover the 40% bond allocation model. And so on. If you want the fund managers to take care of selling shares for you for income, BMO now has the T Series ETFs, like ZGRO-T & ZBAL-T. These ETFs dispense monthly income at the rate of 6% annualised. Now this distribution is well supported by recent market performance, but you should consult a professional to see if that 6% spending rate is sustainable throughout a lengthy retirement. Global X launched some funds for the high income investor. In 2023, EQCL provided a covered call & leveraged ETF that pays out at about a 12% rate. This sounds like a dream ETF &, since it was launched, it has been. Along with the fantastically high distribution, the underlying share price has continued to grow. But a 12% withdrawal rate might not be a safe bet for anyone starting out with a long retirement horizon. To complement this, Global X also have a globally diversified ETF with only covered calls. And another with only some leverage. What’s your favourite flavour?
With any fund that deviates from just holding & compounding plain old company stocks, it’s worth comparing its total return performance against an equivalent regular version. Regardless of huge differences in yield, total return comparisons offer a very useful perspective on relative performance. This is important to review during different parts of the market cycle. Many of these new funds look good, but they’ve only been active during a period of generally great market growth. Or with some smaller shocks that recovered quickly. Comparisons of these newer funds over recent shorter timelines are not as useful. Be wary of overly optimistic expectations until there’s some history of performance during longer or more severe downturns. Maybe these funds will do well. But getting it wrong with overly optimistic expectations can wreak havoc with retirement planning.
So what’s the message here? Having a big, sloppy, messy set of investments can add work & stress to the job of managing a portfolio. It’s worth comparing such a portfolio to the far simpler portfolios like those asset allocation ETFs we talked about above. If you are confidently outperforming an equivalent all-in-one or asset allocation fund, & if you don’t mind the work, then carry on doing what you’re doing. But if the off-the-shelf ETF is beating your portfolio over the long haul, you might want to ask why. Could the simple recipe be worth considering?
Of course you absolutely should consult a professional before you start moving investments around. There are so many things that can go wrong. You don’t want to get hit with a big tax bill from selling off investments in a taxable account, for example. Nor from shifting things between tax sheltered or tax deferred accounts incorrectly. That’s a huge no-no. Professional assistance may be required to avoid these, & other, potential pitfalls. And finally, if a big, sloppy, messy portfolio is underperforming by a significant amount, it may even be worth paying a professional to manage things. DIY investing isn’t something we’ve sworn an oath of allegiance to! At the very least, it may be worth interviewing a few financial planners & advisors, to get a feel for what they might do differently for you. Even if you decide to continue with the DIY approach, these encounters can be very educational. They may even help you create a better plan. You’ve already got a financial plan though, right?
Okay enough with all that for now, can you guess what’s for dinner tonight! 😜
If you want to learn more about saving & investing, please check out Double Double Your Money, available at your local Amazon store.
Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.
A tidy portfolio can deliver growth or income with less work!
Managing a bag of stocks & ETFs is difficult. The fund companies have come up with products that have the potential to take away much of this pain. The all-equity ETFs & the all-in-one asset allocation ETFs offer a complete portfolio, wrapped in a single ticker symbol. Of course, no matter how good these products are, there might be some emotional investing needs too. Investing is both mathematical and psychological, eh? So maybe a little tweaking is okay!
Owning an ETF like BMO’s ZEQT (or iShares XEQT, VEQT from Vanguard Canada, etc.) is probably a good core choice for many investors. An ETF like this is already globally diversified. It’s geographically weighted according to market size & importance. It includes what many consider to be a reasonable home country bias. It holds large, mid, & small cap companies. It’s a really big haystack that I think Jack Bogle would approve of. According to Nobel Prize winning economist, Harry Markowitz, diversification is the only free lunch in investing. These funds meet that bar too. And finally, it’s a simple approach that is a lot less work for a DIY investor.
Do you spend your time figuring out if you should be dumping some of the tech ETF, so you can buy more of the gold one? Or trying to figure out when you should be selling the US market off, in order to buy Europe & Asia? Are you trying to work out what to do with this week’s hot & cold stocks? Worried about sector ETFs that might be going in, or out, of favour? Surging or failing markets? It’s all quite stressful & time consuming, eh? Life is too short. Especially as we get older! An ageing brain needs some challenge. But not torture. The globally diversified funds have everything in there. Some stuff will go up, some will go down. These funds are diversified & that’s how they work. And there’s one other important point to simplicity: if there’s a chance that the investing manager of a couple might depart first, a decluttered portfolio might be greatly appreciated by the surviving partner. The simpler the investing solution in place, the better it’s likely to be.
Want bonds? Choose one of the all-in-one ETFs (ZGRO, XBAL, VCNS, etc.) with a bond allocation that matches your needs. These are very simple solutions for highly diversified, asset-allocated portfolios, & they come with built-in rebalancing. Some investors might prefer an all-equity ETF that is complemented by separate bond & cash-like ETFs. There are some good arguments for breaking out the bond & cash allocations. It’s a little extra work, but it may make sense for some.
Now different investors have different approaches, so it’s not just about growth & accumulation. Fortunately, there is often a simple solution for many of the other investing styles too. For example, an income investor that favours high yield funds can choose something like the EQCL ETF, from Global X Canada, for the equity portion of their portfolio. It’s very similar in asset mix to the all-equity configuration of ZEQT. But instead of focusing on growth, this fund uses covered calls & leverage to drive a far higher distribution. People are different. Some are happy to go for maximum growth & sell off shares for income. Others prefer that the fund company delivers a bigger income stream for them. Rather than selling shares, these people are more comfortable figuring out how much of the big distribution they need to reinvest, in order to sustain & grow that income stream. Some investors like to mix & match such strategies. There are those who use different strategies in different accounts, so one style will be used in the TFSA & another in the RRSP. If you are new to these income funds, note that there are some total return & tax characteristics that are different to the regular type. Take the time to learn before diving in. Though that suggestion applies to everything. And it should have previously applied to the messy portfolios we sometimes find ourselves with! LOL
BMO offers yet another approach with their T6 Series ETFs. These funds dole out a targeted 6% distribution with funds like ZGRO.T & ZBAL.T. Here the fund manager is delivering the extra income, primarily via return of capital, but without the investor having to manage the sale of shares. This is cool for those who think that the 4% Rule isn’t allowing them to spend as much as they’d like. But it’s not as biased towards the far higher distributions that come from some of the high yield funds. This is more of a middle ground for income seekers. Don’t assume that this 6% distribution is a given for an inflation beating income stream for a full retirement lifecycle, by the way. Read this post on the Safe Withdrawal Rate in Retirement on why that might not work all the time. Nonetheless, the T6 funds will take care of automatically delivering a higher monthly yield, based on the value of the underlying fund at the end of the previous year. You still need to pay attention to the variability of the income stream over time. There may be a need to reinvest a little extra when income goes up after a great year, for example. That might safeguard against an income drop if the markets go down the following year. If the fund is subject to successive down years, the income stream will decline too. No solution is perfect when we try to predict the future, eh? But the bottom line is that simpler solutions exist for most investing styles & strategies. And for varying levels of distributions. Regardless of the investing strategy that is preferred, it shouldn’t stop an investor exploring ways to tidy up a messy & confusing portfolio. Especially if it reduces stress, while improving visibility & returns. Decluttering can be both refreshing & potentially rewarding.
If you can’t get your head around having so few holdings, how about putting the BMO one (ZEQT) in the RRSP, the iShares one (XEQT) in the TFSA, & Vanguard’s (VEQT) in the non-registered. Each one of these is globally diversified. They own a little piece of everything traded on the public markets. These are all essentially identical. But I get it. I totally feel the need to spread it around the different fund companies myself! There is also something to be said for making the single ticker solutions the core of a portfolio. While leaving a smaller allocation available for some gambling on the side. Sorry, I meant some intelligent macro investing on the side to boost alpha! If you know you can do it well, or if you can afford the greater uncertainty of return for a small part of the portfolio, then it might be fun, no it’s still crazy, okay! 😜
One other consideration. If the current messy portfolio performance is seriously lagging that of a single ticker solution, ask why. There may be good reasons why. And good reasons to justify staying the course with existing investments. But if we can’t come up with good answers (that aren’t guesswork or wishful thinking!), then consider this … if a portfolio is consistently underperforming the single ticker ETFs by an amount that is significantly more than 1%, it might be better off in the hands of an advisor who only charges 1% to manage the portfolio. Even if all the advisor does is invest it all into ZEQT or VBAL & manage the financial planning & cashflows for the investor thereafter!
There is also one big caution with all this. Decluttering a portfolio isn’t like spring cleaning at home. Do NOT rush into selling a bunch of stuff without getting some professional tax & investing advice. A long-term holding in a non-registered account, for example, may have significant capital gains tax liability if sold off. It might bump income up to a higher tax bracket. It might generate income that exceeds an OAS clawback limit, & so on. There are many potential issues, so seeking professional help is often the best course. There can be other challenges with balancing different fund types across the different account types. If you don’t know how to manage all this, get some help. Even if you’re just not sure if you know enough to manage all this, get some help first!
If you want to learn more about saving & investing, please check out Double Double Your Money, available at your local Amazon store.
Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.
Since Bill Bengen’s study on this approach back in the 90s, some variation of his 4% Rule is often used in Monte Carlo simulations to see if a retiree’s portfolio is capable of outliving the retiree. While some just look at the high market returns of recent years & suggest that we can withdraw at a far higher rate, there are others who suggest that even the 4% withdrawal rate might be too high to use going forward. Who is right?
As I get closer to retirement, I’d love to buy a basket of funds yielding 8 or 10% & live high on the hog with those juicy distributions all the way to the end. But I probably won’t do that. Here, I’m going to use 4 funds that have been around for more than 25 years to illustrate why it might be worth paying attention to the 4% Rule. I’m using a mix of American & Canadian funds. I’m ignoring the currency differences, the tax implications, & many other things but, despite that, I think this example will illustrate some interesting points. Many of the newer funds are too new to have much history to look at, but SPY (SPDR® S&P 500® ETF Trust), XIU (iShares® S&P/TSX 60® Index ETF), CLM (Cornerstone Strategic Value Fund, Inc.®), & FBNDX (Fidelity® Investment Grade Bond Fund) all have some history behind them. Indeed, the S&P 500® Index is often used as the benchmark that other funds are measured against. And very few can outperform this index, for total return, over the long haul.
For this example, we’ll look at four retirees with a million dollar investment in each of those funds. And we’ll start the exercise with some folk who retired at the beginning of 2020. That $1m is more than the average Canadian retirement savings, by the way, but it’s a nice round number for doing mental math. Each retiree withdraws 4% in the first year & increases that amount by the rate of inflation (US inflation numbers used for all) for each subsequent year. Why that approach? Because the portfolio income stream then compensates for inflation in a manner similar to OAS & CPP. Income will be able to keep pace with the increasing cost of groceries, gas, rent, etc. Going from 2020 up to the end of 2023, the income stream would grow from $40k to just under $48k for all four portfolios. All good, considering the higher inflation rates of recent years. After those withdrawals, the underlying portfolio values at the end of the period are SPY ($1.37m), XIU ($1.21m), CLM ($1.18m), & FBNDX ($830k). All four portfolios delivered exactly the same income stream, but the underlying value of all the equity funds went up. While the bond portfolio lost value. But don’t give up on bonds just yet, we’re not done!
As a side note, the idea that we can just live off the distributions feels great, but it doesn’t always work. CLM would have delivered huge distribution cashflows, almost $200k in the first year. But if we sucked everything out along the way the underlying fund value would have dropped to about $641k at the end of 2023. And the total distribution for 2023 would have dropped to $131k. Those are not desirable trends. On the other hand, all the other funds would have distributed too little income & selling some shares to boost income to the 4% level would have been required. I know retirees don’t like having to sell shares for income but, for the rest of this example, we’re going to stick with the approach of reinvesting all the dividends & distributions throughout the year. And then selling shares equivalent to the annual income requirement going into the next year.
Now let’s back it up to retirees starting this whole process in 2015. At the end of 2023, they have been retired for 9 years in this scenario. All portfolios delivered the 4% income stream, indexed to inflation, so that income went from $40k at the beginning, to $52.3k at the end. Ending portfolio values were SPY ($2.05m), XIU ($1.36m), CLM ($1.6m), & FBNDX ($760k). SPY put in a stellar performance over this time, the SPY retiree might be adding a luxury cruise or a boat to the retirement bucket list now, eh! CLM, the high yield fund, outperformed the Canadian index by a nice amount, while the poor bond fund took it in the teeth again.
Next, we’ll jump back another 5 years, to start the process in 2010. Once again, income increased for all portfolios, going from the starting $40k up to $56.8k in the final year. Portfolio values at the end were SPY ($4.00m), XIU ($1.62m), CLM ($1.09m), FBNDX ($799k). OMG (that’s not a ticker symbol!), I wish I could go back in time & stick everything into an S&P 500® Index fund! It looks so good, we should just go all in & look forward to retirement, eh? Not so fast!
For retirees starting in 2005, the income stream would grow from $40k at the beginning, to $64.5k at the end. The portfolio values at the end of this time period are SPY ($2.72m), XIU ($2.28m), CLM ($77k), FBNDX ($637k). That’s a bit of a shocker, CLM is almost wiped out this time. I should point out that American investors can reinvest the CLM distributions at the lower of Net Asset Value or market value. I’m not sure how much this would improve the results for a US investor. But this is focused on Canadians & we can’t do that. Instead, we would have suffered from the significant drawdowns in 2007 & 2008. Those impacted CLM’s value from that point forward. Over this time period, the Canadian fund didn’t look so bad against the American index. And the bond fund, though it lost value, is still hanging in there & delivering income 19 years later. It’s also notable that investing in SPY five years earlier resulted in a significantly lower end portfolio value today, than we had in the last pass. While XIU, under its market conditions, did comparatively better by starting earlier.
One last entry point, this time we’ll start in the year 2000. It’s the same story for starting out with a $40k income, gradually increasing in line with inflation. But the first-pass results only go up to 2014, not our 2023 end point. Because CLM went to $0 in 2014! The dot-com bubble bursting in 2000 hurt all the equity funds for a couple or three years after the bubble burst, but CLM took it hardest. When it got hit again in 2007 & 2008, there just wasn’t enough gas left in the tank to support the 4% withdrawal guideline & it went to zero. Here are the portfolio values at the end of 2014 … SPY ($464k), XIU ($1.19m), CLM ($0.00), FBNDX ($1.22m). That’s pretty interesting now. The American index is seriously suffering & it’s been well surpassed by the Canadian Index. And who knew bonds were so useful. Over this time period, when some pretty bad stuff was happening in the markets, FBNDX was the best performing fund of the bunch!
Let’s do one more run, but without CLM this time. All the remaining portfolios survived up to today & they delivered an income stream that grew from $40k back in 2000, up to $72.9k in 2023. Job done on the income front. Portfolio values at the end of 2023 were SPY ($327k), XIU ($1.50m), FBNDX ($850k). Over this 24 year period, given the withdrawal schedule, the Canadian index fund was a clear winner for end value. And while the bond fund also did well, the American index underperformed. This might be unimaginable for an investor who’s been getting rich on the S&P 500® Index over the past decade & a half. Interestingly, if no withdrawals were being made (an accumulator’s portfolio, rather than a retiree’s portfolio), SPY would have a value of $5.0m at the end of 2023, compared to XIU at $4.7m, & FBNDX at $2.64m. The timing of withdrawals over different timelines & under different market conditions can seriously impact end values. That’s the sequence of returns risk that retirees worry about.
Just for fun, let’s look at a couple of time periods where we start with a 10% withdrawal rate. That means that the million dollar portfolio starts out with a $100,000.00 income stream, increasing by the rate of inflation thereafter. If we begin in 2000, CLM went to zero in 2006. SPY went to zero in 2007. XIU went to zero in 2010. FBNDX went to zero in 2012. None of these portfolios survived more than 13 years. Let’s be real here, the period from 2000 to 2010 was a bad one. But nobody knows when the next bad decade will arrive. If we leapfrog that terrible decade & start in 2010, CLM delivers that $100k+ income stream up to 2019. FBNDX expires in 2021. XIU dies in 2023. Only SPY survives ’til the end of 2023 & the portfolio is still worth $1.68m at that withdrawal rate. Makes for great retirement guesswork, sorry planning, when we do this for ourselves, eh!
On every funds’ website & literature, you’ll find a line about past performance not being of any use in predicting future performance. While that is 100% true, that does not mean that we can’t learn something from historical performance. And this little exercise highlights a few things that should make us pause & think.
One of the most important insights for retirees is that a high withdrawal rate, or living off a high yield, is a bet on good returns over the course of that retiree’s retirement timeline. And it is a bet that the retiree won’t be hit by sequence of returns risk, where an early big hit hurts the durability of the portfolio for the rest of the retiree’s, or the portfolio’s, lifespan. It’s also a bet that high inflation won’t destroy portfolio value in the early years. Look, retirement is a bit of a gamble anyway. Most of us have no idea how long we’ll survive. But we would like our portfolios to survive as least as long as we do. It’s all about striking a balance between living the good life in the go-go years. And, should it be necessary, having enough money for a long term care home at the back end. Everyone’s situation is different too. Some retirees will have a bigger & more secure income from OAS, CPP & company pensions than others. Leaving something for the kids will be important to some, but not for all. There are many factors that can influence withdrawal rates. But all retirees will want their portfolio to survive to the end. Now these sample “portfolios” won’t represent the typical well-balanced or well-diversified portfolio of the average Canadian retiree. However, that wasn’t the point of the exercise. It’s more about thinking cautiously. And using the lessons of history to guide an appropriate level of caution when it comes to withdrawal rates.
Despite Warren Buffet’s advice to just buy an American index fund (& there may be nothing wrong with just owning an S&P 500®Index fund for a 100 year investing horizon!), it might not be an appropriate sole holding based on the real retirement timeline for many retirees. While we would all love to have a high yielding portfolio that delivers steady income, going all in on high income funds may not be the solution for everyone either. It’s worth comparing the total return of any such funds against a selection of domestic & international equity & bond index funds. It’s hard to beat index funds for total return. And if the index funds can’t always guarantee the 4% income stream over a long retirement, then living off the proceeds of a fund that yields 10% might not be viable over the long haul either. Compare the total return performance over a long enough timeline to see if the fund is outperforming the market index funds by enough to justify the higher withdrawal rate. Through good times & bad. If it’s not, then caution is warranted. That doesn’t mean that such funds have no place in a portfolio. There may well be a justification for adding a little income boost in the go-go years, for example. But it does require some careful assessment. After all, it’s never a bad thing to cover your donkey (😜)! In case the markets deliver some negative surprises at the wrong time. Or if retirement goes on for longer than your portfolio expects!
At the end of this exercise, all we can really take away is that the 4% Rule might serve as a good baseline to assess the durability of our retirement income stream. Retire at the right time & we might get away with a far larger withdrawal rate. Retire at the wrong time & even a 4% withdrawal rate might be challenged. Unfortunately, none of us knows what happens next.
Newer investors should also be cautious about recency bias. The outstanding performance of the S&P 500® over the past decade & a half might, or might not, continue. The performance of bonds in 2022 was so bad that some newer investors are avoiding bonds altogether. Note that the original study that created the 4% Rule was based on a 50:50 portfolio of US stocks & bonds. However, there are times when international markets outperform the US. The Canadian market outperformed the US market from 2000 to 2010. Many new high yield funds are considered safe because the underlying holdings are blue chip companies. Just remember that a bad baker can start out with great ingredients & still bake a lousy pie! Only time will tell which of these fund managers will be able to deliver a good total return from these newer income funds. And even for those with a market-matching, or even with a market-beating, performance, taking all the distributions for living income may not allow the portfolio to survive over the course of a long retirement. And finally, all our circumstances are different. A retiree with a lower expected number of years in retirement might withdraw more aggressively. One with a greater life expectancy, & with a goal of leaving lots to the kids, might play a far more conservative game.
Since my crystal ball is broken, I think I’ll be sticking closer to a 4% withdrawal rate when my retirement day rolls around. If you know how to do better, please let me know.
For some, all this may be too challenging to manage. Despite the fees involved, there is nothing wrong with paying a professional to manage your portfolio for you. And to manage the retirement income stream throughout retirement. For some, that will be a good choice. Though figuring out how to choose a good financial advisor has its challenges too.
If you want to learn more about all this from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.
Important – this is not investing, tax or legal advice, it is for entertainment & thought-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at each fund’s website. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.
There are some strong opinions out there on which investing strategy is best. Over time, & from a pure numbers perspective, the only thing that really matters is total return. It doesn’t matter whether you get that return from capital gains, dividends, some other kind of distribution, or any combination of those. I suggest to my kids that they invest in low-cost, market index ETFs. They’ve got the time to make that work. No guarantees, of course. Going forward, maybe the American & Canadian markets will do what the Japanese market has been doing since 1989. That might not be a great outcome for them come retirement day.
The closer I get to retirement, the more I worry about running out of money during retirement. Any simulation I run with the 4% withdrawal “rule” always has a few chart lines that wipe out early. And I’m not even planning for an extravagant retirement lifestyle. Not only do I not want to run out of money during retirement, I’d like to think there would be enough left over for my kids to take my ashes back to Ireland when my time is done!
I started out with mutual funds way back. When I realised how much I was paying for underperformance, I got out of those. Then I tried picking growth stocks. I wasn’t very good at that & I lost some money. On the bright side, I didn’t have much money to begin with, so there wasn’t much to lose! Professional money managers were up next. Since I didn’t know what I was doing, I figured they would. Turns out they weren’t keeping pace with the market either & I was paying extra for that underperformance. Though I don’t blame the pros, they were creating portfolios based on my risk aversion. And I was pretty risk averse after getting burned by my own poor stock selections. With the benefit of hindsight, had I gone into index funds from the get-go, I would have fared far better. Despite the risks, that’s why I recommend index-tracking ETFs for my kids.
Now that I’m much closer to retirement, I have a different outlook. While I’m a hybrid investor now, investing in both stocks & ETFs, I have a leaning towards dividend-growth investing. It started with those 4% withdrawal simulations. If 4% was enough to live on, why not just have a portfolio that generates distributions of 4% annually? Rather than have to sell shares for income, couldn’t I just live on the dividends & distributions? Of course, you need a portfolio big enough to make that work. But that’s a whole other story! After years of messing around with the dividend-growth strategy, I finally got around to moving towards that approach a few years back. Now, instead of retiring at 83, I might be able to get out at 79! I’m kidding.
I hope! 😜
The anti-dividend lobby tell me it’s the wrong approach. But if I were already retired, selling shares of those beaten down index funds this year would give me some serious grief. While my dividend-focused portfolio is down year to date, it’s ahead of the market by more than 13%. And that comes with my bond allocation having the worst year in the history of the bond market too. That’s not too shabby. Moreover, those dividends are on synthetic DRIP (dividends are automatically reinvested in more shares of the same equity) so that my share count is increasing at an even faster rate, as the share prices get beaten down.
While the year-to-date market-beating performance is meaningless over such a short spell, I’m more focused on the dividends than the share price. A stock down 50% is buying twice the number of shares than before the downturn. So long as the dividends aren’t cut, I’m happy picking up more shares when things are on sale. While the dividend-growth stocks may not match the long term total return of an index fund, the real power of the dividend-growth strategy is psychological!
I’m off to Ireland for a long-overdue vacation today. I have no idea what I’m hoping the market will do while I’m away. But I’m praying I’ll get there, & back, safely. And that my portfolio keeps on chugging out those dividends while I’m gone. 🇮🇪☘️🍻
Important – this is not investing advice, it is for entertainment & educational purposes only. Do your own due diligence & seek professional advice before investing your money.
I’m trying to encourage my kids to save & invest while they are young. As usual, Dad’s advice turns to muck pretty much right off the bat. The markets tanked. I tell them, with great confidence & authority, that it’s just noise. To keep on saving & investing. That they’re just buying the good stuff on sale now. Listen to Dad.
There are lots of experts out there with advice on how to handle market losses. I must admit, I’m not one of them. I failed my biggest test back during the dot-com crash. I sold off all but one of my holdings then. The only one I held onto went to zero. All the stocks I sold would have made me money. Had I held onto them! What do you think I learned from that experience?
Stay out of the market, it’s just a lottery? Yeah, I did that for a while. Too long a while. But no, that’s not it … the lesson I seem to have learned is to be afraid of selling anything!
Nowadays, rather than chase what’s hot, I buy what’s not. Most of my investments are in bigger, bluer, dividend-growth companies. Or in ETFs that hold companies like that. But that doesn’t make a downward spiral any more enjoyable. Turns out big blue-chips can go down too. I have the same dilemma today: I don’t know if I should sell, hold, or buy more. Not knowing, I do what I do best … nothing! My stocks just sit there, showing red, & I do nothing. The automatic DRIP adds new shares on dividend pay days. I don’t need to do anything with that either.
I have neither the quant skills nor the psychic ability to figure out what happens next in the market. Instead, I’m trying to get more comfortable just doing nothing. It reminds me of the few times in my career where the future of my employment was at risk. When I lost my jobs back then, I had no other sources of income. But I survived. Between the individual stocks & ETFs I own today, I own little pieces of hundreds of companies. What are the chances they’ll all fire me at the same time & kill the dividends? Pretty slim, I think. What are the chances that they’ll all go to zero? While there are no guarantees, that’s pretty unlikely too.
For a lazy & conflicted investor like me, it was almost a relief when I came round to thinking that doing nothing might be best. I still worry every time I see the market drop further. I wish I could just stop looking. I can’t. But, so far, I’m sticking with the do nothing strategy.
Only time will tell if if I can keep on doing that. And if that was the right thing to do. Especially for the sake of my kids! 😜
The Wry Eye 