Financial Planning, Retirement Issues

Tolerating investment risk in retirement!

February 28th, 2015 ernie Posted in Investing No Comments »

Tolerating investment risk in retirement!Can you tolerate investment swings in your retirement? Do you stay awake at night worrying about your investment nest egg? Do you check the stocks every day to assess the value, the direction and the changes that are occurring on the market? If you do, you may not be good at tolerating investment risk in retirement very well. The chart on the left illustrates the relationship between risk, return and the type of investment that can be in someone’s investment portfolio. Of course for many people they want the high return. But they may not be able to tolerate the high risk associated with high returns.

Tolerating investment risk in retirement!

What is the impact of swings in the market to your retirement? If the market drops by 10% does your portfolio change by the same amount? Are you invested proportionately too high in one area which if it nose dives will decimate your portfolio? Diversity is a key ingredient in retirement investments, really in any investment package. Regardless of how you invest, never put all of your eggs in one basket.

How can you manage and deal with those investments swings? One of the big tests came in 2008 when the markets dropped by more than 50% and portfolios did the same. Many people sold on the way down and never bought back in because they were too scared. They lost big time because the market has rebounded far beyond where it was pre 2008.

If you really want low risk and do not want to worry about your investments, money markets, GIC’s and cash is the investment to choose. Low income will also be the order of the day. At the other end, speculative stocks can deliver high return, but also come with high risk. Can you afford to lose it all?

Most investment advisers recommend a balance approach of high quality dividend paying stocks, mutual funds and bonds, GIC’s and Money Market. There will still be some swings, but not to the same extent that the stock market swings. In addition you will still obtain income from the dividend and interest that you collect from the stocks and bonds, GIC’s etc.

The best approach is to complete a risk assessment, work with your adviser, and take an active role in matching your investments and your retirement expenses to your risk tolerance level.

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Mutual funds are Expensive

November 21st, 2014 ernie Posted in Investing No Comments »

Mutual funds are ExpensiveThe chart on the left illustrate just how expensive mutual funds can be particularly when you look at them over a 40 year period in your retirement plan. In this example mutual funds are expensive to the tune of $159,000 over this period. Why are they so expensive? The answer is pretty simple once you begin to look at some of the details. The MER or expenses charged by the mutual fund company are really what is costing consumers all of this money. These charges are billed to the mutual fund to cover management fees as well as trading fees. They vary a great deal depending on the country you are in and of course the mutual fund. In Canada for example the fees can approach 2% in many cases while in the US they are smaller, closer to 1%.

This is always in addition to any fees that you might be paying your financial adviser to manage your overall account. These fees are charged to the mutual fund whether the manager has a good year or not. We have seen situations where the mutual fund has declined year over year and they still get paid their 2%. Almost like adding insult to injury in a situation like this.

Mutual funds are Expensive Compared to What

Consider that you will always be charged the expense fee regardless of how well your mutual fund actually does in any given year. Let’s assume that the investments your mutual fund is invested in provides a return of 5%, which is an aggressive return in today’s markets. We will leave that issue for another post. If your mutual fund and your investment adviser charge a combine 2% management fee, then your return on your mutual fund investment into your account will only be 3%.

Next consider, what happens in a down year. Lets say that investments do not do well and even though the investments in the mutual fund generate 5% income, the value of the stock portfolio declines and brings the net return into the negative territory. The MER is charged even though your fund loses money which adds to the overall loss.!

Mutual Fund Fees

It is these fees that contribute to the $159,000 loss in the graph above. If you manage your own portfolio you can eliminate the management fees. You will still have some fees for trading but hopefully these will be kept to a minimum. Since you have chosen blue chip stocks with a history of paying dividends each and every year. Since you have high quality stocks there is also no need to rebalance. Or do a lot of trading each year which further decreases you overall fees. Your fees can be significantly reduced leaving money in your account for your retirement. Something to think about!

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Stock Market Volatility and Retirement

September 30th, 2014 ernie Posted in Investing No Comments »

Stock Market Volatility and RetirementWe decided to select our first topic, Stock Market Volatility and Retirement, based on what is going on this week in the world’s stock markets because the volatility affects so many people. We are not stock market experts, just a writer that is informed and giving our own opinion.

The market has seen some pretty wide swings both positive and negative in the world’s stock markets. In fact the markets have been declining for the past few weeks, and now they are on the upswing as we reach the end of the year. Some groups blame it on the downgrade of the US Governments ability to pay their debt, while others blame it more on European Union difficulties, particularly with Greece, Italy, Spain and Ireland.

In our opinion it is really none of these. It is a combination of speculation and fear, along with an ongoing proven inability of our worlds politicians to manage their budgets and perform in a reasonable business like manner. Was that a mouthful or what. Lets look at each issue in some more detail. If you disagree that is fine. We would love to hear your opinion as well.

Stock Market Volatility and Retirement – Speculation

Read the rest of this entry »

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Investors Relying Heavily on Domestic Markets to Fund Retirement

July 7th, 2014 ernie Posted in Investing No Comments »

Domestic Markets Recent reports suggest that investors relying heavily on domestic markets to fund retirement are not following the guidance of investment advisers. The traditional doctrine of investing is to follow a diverse investment strategy which includes investing across industry’s, markets and countries. While many will spread their money over various industry groups to help them weather various financial storms, they do not seem to be investing in emerging markets nearly as much. We wondered why consumers would follow this domestic investment strategy and came up with several reasons, that by coincidence the writer also agrees with and follows.

Domestic Markets to Fund Retirement

Most people rely on local news about local companies in our country or continent. This news is far more readily available and as a consequence we know much more about our own economies than we do about other emerging market economies.  Emerging market economies are also much higher risk since they have a great deal to learn, companies come and go and they are very dependent on cheap labor as well. For our money and conservative approach, we would rather invest in companies that are based in our own country and let the experts in that company decide if they want to pursue opportunities in other countries. This brings us to the next major point.

Country Diversity Through Domestic Markets to Fund Retirement

Most large companies that pay dividends and are based in the US or Canada have a strategy to grow their revenues by investing in markets that are potential growth opportunities for them. They may be establishing sales opportunities or manufacturing opportunities or even both scenario’s. As a result by buying common shares of a domestic company that pays reasonable dividends you can obtain emerging market diversity while at the same time obtaining dividend income on a stock that has the potential for growth as well.

Some might consider this a conservative investment style, however for this writer it seems to be working well with dividend income, growth in the value of the stock and not needing to follow what is going on in another country were there is little news to follow. This allows this investor to sleep at night without needing to be spending a lot of time reading about something going on in another country in another culture for which we have little understanding or even none.

Emerging markets also have a habit of being very volatile. Is this something that you would like to risk your retirement savings on? If you do allow us to at least suggest diversity should be considered. Do not place all of your savings in one investment or even in one market. Spread it around after doing the appropriate research to ensure that your money is well invested and has a better than average chance of earning you a decent return.

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Young Investors are Hoarding cash

June 21st, 2014 ernie Posted in Investing No Comments »

Hoarding cashIt seems that young investors are Hoarding cash at alarming rates and leaving their savings to sit on the sidelines not earning any kind of income. Interest rates on cash investments are at all time lows while the stock market is booming and reaching record highs. So why are these young investors hoarding cash at increasing amounts and missing out on the stock market gains that have taken place over the last six years since 2008. The markets have almost doubled since 2008 and your investments should have done the same. Sure there has been lots of ups and downs, but the overall trend is aggressively up!

Hoarding Cash – 2008!

The answer is the stock market crash in 2008 and the corresponding housing crisis that started that year and continued for several years after that. Consumers who owned homes that were heavily mortgage lost those homes because the value of the homes went down so much, well below the value of the mortgage. The stock market crashed and anyone who sold their stocks because they thought they were going lower locked in those losses and never got back in the market. They lost big time. As we update this post there is another correction taking place in the fall of 2014. It may be time to take advantage of this correction and get back in the market. Invest in dividend paying stocks that have a long history of paying dividends. At least this way you will also derive some income from your investments.

The Answer for Many is Hoarding Cash

Many people are now hoarding cash figuring that if it is not invested in anything risky they cannot lose it. They also cannot take advantage of the increases in the stock market and housing either. The stock market as more than doubled since 2008 and homes are now well on the way to rebounding back to what they were pre 2008. Meanwhile those people sitting on cash are not only missing these gains, they are also losing in another way as well.

Inflation continues unabated at around 2% which means that the $100 in cash you had sitting in the bank last year will only purchase $98 worth of goods today. next year it will only purchase $96 and so on.  Inflation is silent and sneaks up on all of us and if you are sitting on cash you are actually losing money every year. If you have to pay any tax on the small income you do get on your cash, it only gets worse in terms of the money you have to spend on everyday living expenses.

The young investors have missed the boat in terms of the stock market gains, however they can still purchase dividend paying stocks from companies that pay well, have a record of paying every year and have a record of increasing their dividend each year as well.


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How is your portfolio doing

January 14th, 2014 ernie Posted in Investing No Comments »

How is your portfolio doingYou have spent years saving for retirement and now you have a nice little nest egg set aside to augment your Company pension and your government pensions. How is your portfolio doing overall and do you have enough saved for retirement?

You still wonder whether you will have enough saved to last through your lifetime in retirement. You also wonder how you’re doing relative to meeting that objective. There are several ways to compare your progress in your portfolio. We will review three of those methods in this post.

How is your portfolio doing

Capital preservation

Some people will have an objective of living only on the interest income and dividend income that the portfolio generates and not touch the principal. Many advisers support this approach. One must be careful and not chasing high-risk investments to generate income whether it is interest or dividends.

The odds are high that you will also have to dip into your principal at some point during your life. However this is a simple approach to assessing your portfolio health and if you can live on interest and dividend income alone along with your pensions you’re well on the way to living comfortably in your retirement.

Meeting a projected rate of return

In this approach you set a rate of return objective and assess whether you’re able to meet or exceed this objective at the end of each year. Some people will consider the plan a failure if you fall short of that goal.

Again this is a simplistic approach and some people may chase higher rate bonds and dividends in order to meet their objective which incurs more risk.

The balance sheet

Another approach and more complicated is to assess your balance sheet at the end of each year. This requires that you take the present value of all of your pension income, dividends and bond interest income and calculate a number. You do the same thing with your liabilities and compare your assets to your liabilities.

As long as your assets minus liabilities are the same each year or increasing you’re doing well. You must also include a factor for inflation to calculate your expenses in today’s dollars and you must figure out just how long you expect to live.

Inflation factor can be 2.5% to 3% based on the past 20 years or so of inflation. Figuring out how long you’re going to live is a bit more complicated and probably the best way is to look at your immediate family, mother, father, uncles etc. and pick an average based on how long they have lived.

We believe that you should use a combination of all three of these methods and reassess your situation anytime there is a major change in your financial, health, or personal situation to access if you’re still on target. At the minimum reassess how your portfolio is doing once a year and make any adjustments that you feel would be appropriate to ensure that you have the income that you will need in your retirement.


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Retirement Investing Myths

December 7th, 2013 ernie Posted in Investing No Comments »

Retirement Investing MythsThere are studies and reports that the average person begins saving for retirement at the age of 32! In addition over 25% of consumers have not started saving for retirement at all which is a huge concern to them and to people who provide social services and to governments who are interested in their citizens enjoying their retirement years. If you think the government will look after you, think again, it is unlikely that there will be sufficient income for you to maintain the quality of life that you desire.

There are lots of misconceptions and myths about retirement and saving for retirement. However more and more people seem to be getting the message that they need to begin saving for their retirement and follow a regular savings program to ensure that they have the quality of life they are looking for when they retire.

Retirement Investing Myths and Reality

Market volatility will keep a lot of people on the sidelines. They want to by low but are afraid that the instant they get in the market it is going to drop. This does happen from time to time, however if savers adopt a long term strategy, and use dollar cost averaging, their investments will grow over time and provide them with the money they will need in retirement.

Some people feel they need a large amount to invest for retirement and specifically for mutual funds and stocks. The reality is that with a regular savings plan, your money slowly builds and compounds over time. Many investors are pleasantly surprised at how much their investments have grown over time with a regular savings plan.

I can catch up on my savings when I am older. This myth is followed by many people. The reality is that they have missed out on all of these years of compounding interest and income which by the time you retire is providing more funds than what you can save. Start early prior to age 25 and watch your money grow.

Investing is complicated. Stick with straight forward savings plans and use a financial adviser to guide you through a balanced well managed savings plan. Maintain a balanced portfolio that is diversified to protect your investments over the long term.

Rich people are the only ones that benefit from tax deferred accounts. Rich or middle class or below middle class, everyone receives a tax refund when they invest in a registered retirement fund. They also benefit from the tax protection from all income within the savings plan when it is a registered retirement plan. Regular savings and compounding can build a really nice retirement plan, especially if you begin early.

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Compound it – Why It Does Not Pay to Wait

February 21st, 2013 ernie Posted in Investing 1 Comment »

compound itThis graph emphasizes why compounding interest works and why it does not pay to wait to begin saving. A person who begins saving at age 21 and saves a total of $24,000 by age 41 and assuming an 8% return on the investment which is reinvested will yield a total savings of $471, 358 by the age of 67. That is a lot of money and only based on a savings of $24,000 by age 41. In reality, this person will probably continue saving all his or her life and accumulate much more than this already large amount.  However the point of this post is really about what someone who begins later in life and how much money they will actually have at age 67.

The graph above assumes some one begins saving much later in life at age 47, which unfortunately is when many people begin saving. This is the time when they suddenly realize that retirement is not far away and they do not have enough money saved for retirement. If this person began saving at age 47 and saves the same $24,000 by age 67. Including the average 8% annual return, this person will only have %59, 295 saved. Not very much for retirement and they are already 67. They are looking at many more years of working unless they have a pension to make up the income they need.

Starting to Save for Retirement Late is Scary – Compound It

For those of you who are reading this post and fit into the latter category, it will be a scary thought to wonder how you are going to survive on so little savings. It is going to be tough unless you can continue to work for many more years. Let’s face it, most of us do not want to work that long, unless we really love our jobs.

In both cases both parties saved $24,000 over a period of 20 years. However the younger person began saving much earlier and so compounding continued for many more years and  creating much more wealth!

This is the main reason why we are so strong on suggesting that people begin early to save. There will be many market fluctuations along the way and some investments might not do so well, however when you combine the growth of value for your investments combined with the income they generate, you will be much further ahead and closer to your retirement goals. The income should always be reinvested to earn additional income.

How difficult is it to Save $24,000 over Twenty Years?

Just doing the simple math i.e. dividing $24,000 by 20 to get the amount you need to save per year and then dividing by 52 to obtain the amount you need to save each week brings us to the huge sum of $23 a week. This is not a huge amount. Most people will spend much more than this amount on whatever vice they have.  Whether it is cigarettes, fancy coffees, drinks at the local bar or whatever happens to be your particular interest, you can easily set aside $23 a week to save this kind of money by the time you are 67.

Imagine< $451 thousand by the time your are 67 and all you had to do was save $23 a week for twenty years beginning at age 21. chances are you will be able to save much more than that by saving a great deal more as your jobs pay more and your income grows. If you save 10% a year, or 10% a paycheck you will quickly be able to achieve these large numbers and be able to retire much younger than perhaps you have planned.

But I am too Young to even Think About Saving for Retirement!

This is what most people say. They have too many other bills to pay. They are having too much fun and they can worry about retirement later if they make it that far. Many people do make it that far and they also find that they have to work much longer than they planned just to live.

It is so simple. Just start saving now. Figure  how much you  need or want, how many years you have left before you want to retire and use a number like 8% return on average to calculate how much money you need to save for retirement each week. If you do not know how to make this sort of calculation, sit down with a financial adviser and ask him or her to do the calculation  for you. You might be surprised how little you need to get started and save every week.

Once you start, it will quickly become a habit. You will not even miss the money and your future will be assured! And compounding interest will help you achieve your goals! Just compound it!

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Should I buy Stocks or Mutual Funds

July 7th, 2012 ernie Posted in Investing 1 Comment »

Stocks or Mutual FundsThis is a really important Question, Should I buy stocks or mutual funds. I met with my adviser the other day and decided to take the view that stocks are a better choice than mutual funds and wanted to know what his opinion was. You see I was testing him since I know that he makes a lot more money from mutual funds than he does when I purchase a stock, even with the commission on the trade that he receives.

  • My rational for purchasing stocks and not mutual funds was as follows:
  • Mutual funds have not performed well in the past 3 years
  • Mutual fund managers continue to collect MER’s (fee’s) even for poor performance
  • You lose around 2% of the income a fund receives to fee’s
  • Funds stopped making dividend payments to unit owners and still paid themselves the MER Fee’s

and he really could not argue with me on almost all of these points. I even told my investment adviser that if I have this wrong or do not understand something, please tell me where I am not understanding things properly. There was no answer really to my statements. In fact, what he did say surprised me.

Stocks or Mutual Funds – My Adviser’s Reaction

Mutual funds are for people who do not have time to manage their own investments and want diversity as well as professional management. Also mutual funds often invest in many of the same companies unless you really go far a field. For example a balanced fund would have many of the same stocks that dividend fund would have! Were is the diversity?

I have reached the conclusion that I really do not have that great of an investment adviser despite all of the conversations I have had with him over the years. Still my portfolio has grown and it is intact. I have recovered from all of the downturns and grown well beyond the original values. I did not lose half or more of my portfolio’s value during 2008’s market dive, so on those fronts I have recovered nicely.

What Have I learned from this Conversation?

I guess I have learned several things from this current episode or discussion with my adviser which can probably be applied to many advisers we might work with:

  • He is just a guy like me, maybe a bit more informed
  • He has no magic crystal ball
  • He is managing the averages and avoiding significant risk areas
  • His guidance overall has meant that I have done well with my portfolio
  • Am I satisfied with the services he provides in general, yes
  • Could I have done better, absolutely
  • Should I change to another adviser – no, sometimes it is better to have an honest conservative adviser that you know.

The bottom line is that I will stay with my current adviser , however I will be challenging him a lot more and pushing him to justify his recommendations. As always all decisions about investments will continue to be mine, but I will be doing a lot more of my own research than I did before. My basic strategy is to invest in blue chip companies with a history of high quality bonds, regular dividend payments and a history of increasing their dividends!

General Trends and Guidance

Here is some more to think about regarding investing , regardless of whether you choose mutual funds or stocks:

  • Stock prices are cheap compared to earnings.
  • Earnings are growing at a healthy pace.
  • Economic growth is likely to continue.
  • The TSX and S&P 500 dividend yields are higher
  • Stocks have underperformed bonds.
  • Consumers lack confidence.
  • Volatility is high.
  • Companies have cash, and they’re not afraid to use it.
  • North American companies are global companies.
  • Inflation is powerful.

Comments are welcome, and we will include your link if the comment is constructive and interesting for our readers.


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Biggest Money Mistakes

October 7th, 2011 ernie Posted in Investing 1 Comment »

Biggest Money MistakesWe recently read an article online that discussed the standard money mistakes that the average consumer makes over their life time. Although this was a great article, we decided to write our own biggest money mistakes with some of our own real life situations that we have encountered. Here are our list of biggest money mistakes.

Biggest Money Mistakes

Selling an Investment Property too Soon:

Buying an investment property is probably the second biggest money decision most people make next to the decision to buy their own home. We purchased an investment property back in the 80’s with the idea of renting it out and watching the investment grow. Well after about 6 years and no appreciation we decided to sell. Had we waited another 5 years we would have tripled our original investment. Real estate is a long term investment!

Paying for Something Before it was Delivered:

We all have done this. We have paid for something that will be delivered in a few days or weeks in good faith. More and more often now, goods are not coming though on delivery due to delays are at worst companies going bankrupt. Now I always go for the 10% down and the rest on delivery. At least this way I only lose 10% if something happens.

Not Selling High: Classic greed is all this is:

Holding a stock that has gain like crazy, expecting it to go higher and then it cracks and nosedive. Nortel is the classic case in recent memory. Sell at least half of your stock so that you capture some of the profits and lock them in. Sell them all when you have made a decent amount of money. Avoid being greedy!

Buying a Vacation Home as an Investment:

Some vacation homes will be a good investment, however it is the old issue of supply and demand. Vacation homes can fall into over supply and or low demand depending on the economy. If you can buy a place such as a cottage were no additional building is allowed, then you may be ok. Buying a vacation home in Las Vegas is the other extreme and really follows the over supply and low demand phenomenon at the present time.

Keeping too Much Money in Employers Stock:

We have all heard the horror stories were someones total savings are locked up in company stock which is losing ground.  Never do this. Diversify your savings or retirement portfolio to protect yourself from the troubles a single company may have.

Too Risk Adverse for My Age:

Common theory these days is to move from high risk investments to safer investments that are income driven as we get older. If you have a company pension then you can afford to take more risk, while people who depend on their savings for income should move to lower risk investments as they get older.

Trusted an Advisers Guidance, and Ignored Fee’s: 

Following an advisers guidance to invest in a high load mutual fund is probably the worst you can do. There are high fees that the mutual funds pay to the advisers. Also trading stocks often is another way the advisers make their money. Always look at the investment and don’t blindly follow the investment advice.

Chased Hot Stocks:

Sometimes you win, but most times you lose. Most of us are to far removed from the investment to be able to react quickly enough to a hot stock that has suddenly gone cold. Unless you can follow a stock almost 24 hours a day, stick with blue chip stocks that pay a good return.

Short Term Money into Hot Stocks:

Money that you can only invest for a short term should be put in something that is guaranteed to return your original investment. Never go with short term hot stocks for money that you will need soon. It may not be there when you need it.

Failed to Re-balance:

Re-balancing stocks and funds in your savings plans on a regular basis makes sure that you continue to follow a diversified portfolio investment plan. This approach lowers your risk and ensures that you are not overexposed in one sector.

Panic When the Market Dropped:

I just spoke with an adviser who is a friend of ours and he mentioned that out of 400 clients, 2 sold and got out of the market when it crashed in 2008. The rest stayed pat and recovered all of their investments and then some. Once you get out of the market at a low point, that money that you lost is gone and can never be gained back.

Good luck with your investments and hopefully these ideas and money mistakes can be avoided in your future. Comments welcome.

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