Investing

Would you bet against the S&P 500?

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  • Dec 7th, 2017 3:45 pm
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Also strong economic growth in certain emerging nations, particularly in Asia (China, Singapore et. al.) resulted in high demand for commodities like oil, coal, gold, silver, copper used to enable that growth. For example gold shot up from $300 USD/oz to over $1000. That high demand drove up markets that supply those products, especially Canada and emerging markets. This also resulted in an increase in the value of the currencies of those countries, and a corresponding relative drop in the US$, further increasing the high returns of Canada and emerging markets relative to the US market. The C$ went from .62 US$ in 2002 to above par in the late 2000s.

Since then we have seen a drop in many commodities, particularly oil, and the C$ has also dropped significantly.

Take a look at this table and you will see the strong performance of Canada and Emerging Markets and low performance of the S&P500 during that time. All you need to get rich is be able to predict how each region and asset class will perform in the future. :)
http://www.stingyinvestor.com/cgi-bin/P ... pYear=2010

Do a web search for "commodity super cycle".
Invest your time actively and your money passively.
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Deepwater wrote:
Dec 3rd, 2017 9:12 am
All you need to get rich is be able to predict how each region and asset class will perform in the future. :)
I know I alluded to this in another post but let's take your assumption above and say that I can't predict how each region and asset class will perform, which I can't.

So based upon this advise, I take the Couch Potato Portfolio and I opt for a balanced portfolio which has a 10 year return of 5.38% ( http://canadiancouchpotato.com/wp-conte ... s-2016.pdf )

If I withdraw 4% for myself each year, that means that there is 1.38% for growth. This barely keeps up with inflation. While this might be better than the S&P 500 during the 0% growth time period you mentioned above, is a 1.38% growth really enough to provide for a comfortable retirement?

6% just seems to be the magic number for a a portfolio return, 4% withdrawal and 2% to keep up with inflation?
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timc00k wrote:
Dec 3rd, 2017 3:33 pm
I know I alluded to this in another post but let's take your assumption above and say that I can't predict how each region and asset class will perform, which I can't.

So based upon this advise, I take the Couch Potato Portfolio and I opt for a balanced portfolio which has a 10 year return of 5.38% ( http://canadiancouchpotato.com/wp-conte ... s-2016.pdf )

If I withdraw 4% for myself each year, that means that there is 1.38% for growth. This barely keeps up with inflation. While this might be better than the S&P 500 during the 0% growth time period you mentioned above, is a 1.38% growth really enough to provide for a comfortable retirement?

6% just seems to be the magic number for a a portfolio return, 4% withdrawal and 2% to keep up with inflation?
Why not withdraw less? Clearly, that means you have to save more in the first place or lower your expectations, but, if you only need 3%, then you'll comfortably beat the BoC's inflation targets. Ideally, I would hope to get by with just my dividends, and maybe even have some left over to reinvest (I have family who did that, and have never sold a stock since the 1960s).
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Wavelet wrote:
Dec 3rd, 2017 4:50 pm
Why not withdraw less? Clearly, that means you have to save more in the first place or lower your expectations, but, if you only need 3%, then you'll comfortably beat the BoC's inflation targets. Ideally, I would hope to get by with just my dividends, and maybe even have some left over to reinvest (I have family who did that, and have never sold a stock since the 1960s).
My wife and I have done our best to pay off our home and we are trying to now pay of my kid's out of province university education which is making a real dent in our savings. I know the easy answer is to not pay for it, but it is something that we value and would like to do for them.

With that in mind, I do want my wife to also have some of the luxuries in retirement that we gave up on during our career and for these reasons, a 4% withdrawal was what I was looking at.

I could drop this to 2.5% but you are right, there is more savings that would need to be done.
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timc00k wrote:
Dec 4th, 2017 2:13 pm
My wife and I have done our best to pay off our home and we are trying to now pay of my kid's out of province university education which is making a real dent in our savings. I know the easy answer is to not pay for it, but it is something that we value and would like to do for them.

With that in mind, I do want my wife to also have some of the luxuries in retirement that we gave up on during our career and for these reasons, a 4% withdrawal was what I was looking at.

I could drop this to 2.5% but you are right, there is more savings that would need to be done.
Oh, I'd never suggest not supporting your kids. I just suspect that like most people (including me) we may have to work longer to have a secure retirement of the quality we desire. I know that for me, if I can't live off my dividends, I won't be retiring, although some would certainly call that too risk-averse. I'd rather be safe than sorry.
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Do you plan on spending your investment capital during retirement or just living off the dividends? Nothing wrong with wanting to not spend capital and hand it down to the kids, but it takes a large amount of savings that only a fortunate few will achieve.

At a 4% withdrawal rate a portfolio will last 25 years with no inflation, even with zero growth. Even with 2% inflation a 4% withdrawal rate adjusted for inflation each year will last 20 year. 2.5% withdrawal rate will last 40 years without inflation. With 2% inflation it will still last 30 years, even with zero growth.

When you hear the 4% rule, or people living off 4% of their portfolio, that includes inflation, and anticipates spending capital. It is based on withdrawing 4% of your portfolio in the first year of retirement, then adjusting that by inflation each subsequent year. The value of the portfolio is ignored after the first year. For example with a $1M portfolio and 2% inflation withdraw $40,000 in year 1, $40,800 in year 2, $41,616 in year 3 etc. it is based on studies of what withdrawal rate had a low probability of exhausting a portfolio over a 30 year retirement. It's important to note that the analysis was based on a low-cost balanced portfolio with between 50% and 75% stocks. As long as future economic and market performance is no worse than the past since about the mid 1920s, the portfolio will have a low chance running out of money. Even through the Great Depression and the Stagflationary 1970s a 4% withdrawal had a low failure rate.

Here are some links that explain it in more detail:
Determining Withdrawal Rates Using Historical Data
Safe withdrawal rates
Trinity study

4% SWR is a very mechanical static method for determining sustainable retirement withdrawals. Since it was designed to withstand the worst of economic conditions, retirees with more typical returns will likely end their retirement with much more money than they started with. Variable withdrawal rates are more flexible. See this link:
Withdrawal methods
Invest your time actively and your money passively.
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Deepwater wrote:
Dec 4th, 2017 8:42 pm
Do you plan on spending your investment capital during retirement or just living off the dividends? Nothing wrong with wanting to not spend capital and hand it down to the kids, but it takes a large amount of savings that only a fortunate few will achieve.

At a 4% withdrawal rate a portfolio will last 25 years with no inflation, even with zero growth. Even with 2% inflation a 4% withdrawal rate adjusted for inflation each year will last 20 year. 2.5% withdrawal rate will last 40 years without inflation. With 2% inflation it will still last 30 years, even with zero growth.

When you hear the 4% rule, or people living off 4% of their portfolio, that includes inflation, and anticipates spending capital. It is based on withdrawing 4% of your portfolio in the first year of retirement, then adjusting that by inflation each subsequent year. The value of the portfolio is ignored after the first year. For example with a $1M portfolio and 2% inflation withdraw $40,000 in year 1, $40,800 in year 2, $41,616 in year 3 etc. it is based on studies of what withdrawal rate had a low probability of exhausting a portfolio over a 30 year retirement. It's important to note that the analysis was based on a low-cost balanced portfolio with between 50% and 75% stocks. As long as future economic and market performance is no worse than the past since about the mid 1920s, the portfolio will have a low chance running out of money. Even through the Great Depression and the Stagflationary 1970s a 4% withdrawal had a low failure rate.

Here are some links that explain it in more detail:
Determining Withdrawal Rates Using Historical Data
Safe withdrawal rates
Trinity study

4% SWR is a very mechanical static method for determining sustainable retirement withdrawals. Since it was designed to withstand the worst of economic conditions, retirees with more typical returns will likely end their retirement with much more money than they started with. Variable withdrawal rates are more flexible. See this link:
Withdrawal methods
Let me ask you this. What would you feel would be a reasonable withdrawal rate for my wife and I?

1. House is paid off and we want to remain in it.
2. We have 0 debt
3. My pension at 55 will be $11,000 as of this writing. It will go up if I retire with the company but the way the job market is, who knows.
4. My wife's pension is $21,500 at 55.
5. We have $700,000 saved in cash and hope to have $900,000 by age 55.

All in all, we have roughly $32,500 in pension money guaranteed each year and we will add to this with savings. It would be wonderful to live just off dividends, but I didn't think that would be possible and was thus looking at a 4% withdrawal rate.

Your thoughts?
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timc00k wrote:
Dec 5th, 2017 5:31 pm
Let me ask you this. What would you feel would be a reasonable withdrawal rate for my wife and I?

1. House is paid off and we want to remain in it.
2. We have 0 debt
3. My pension at 55 will be $11,000 as of this writing. It will go up if I retire with the company but the way the job market is, who knows.
4. My wife's pension is $21,500 at 55.
5. We have $700,000 saved in cash and hope to have $900,000 by age 55.

All in all, we have roughly $32,500 in pension money guaranteed each year and we will add to this with savings. It would be wonderful to live just off dividends, but I didn't think that would be possible and was thus looking at a 4% withdrawal rate.

Your thoughts?
I hope you mean invested and not actual cash.

You can take cpp early at 60 with a penalty and is oas at 65 which should be factored in. You can look up an estimate on the Service Canada website for cpp.

The bigger question is what do you currently spend a year?
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timc00k wrote:
Dec 5th, 2017 5:31 pm
Let me ask you this. What would you feel would be a reasonable withdrawal rate for my wife and I?

1. House is paid off and we want to remain in it.
2. We have 0 debt
3. My pension at 55 will be $11,000 as of this writing. It will go up if I retire with the company but the way the job market is, who knows.
4. My wife's pension is $21,500 at 55.
5. We have $700,000 saved in cash and hope to have $900,000 by age 55.

All in all, we have roughly $32,500 in pension money guaranteed each year and we will add to this with savings. It would be wonderful to live just off dividends, but I didn't think that would be possible and was thus looking at a 4% withdrawal rate.

Your thoughts?
I need to preface this by by saying I am not an accountant or financial advisor, anything I say shall not be construed as advice, and is provided for entertainment purposes only. :)

On top of the 4% or whatever you withdraw, you also can add pensions, CPP & OAS and subtract taxes to determine your spending. With $900k you could withdraw $36,000 at a 4% withdrawal rate. Add $32k in pensions, $12k in OAS and 16k in CPP (just a guess, assuming taking it early and not getting the full amount), that would give over $90k in income. Not bad!

4% always seems like a good base withdrawal rate for planning purposes because it has been safe through the worst economic times in the past century. Roughly 4% is what I use, but it will be a bit higher at first and a bit lower after my CPP and OAS start.

One good book you could read is The Real Retirement: Why You Could Be Better Off Than You Think, and How to Make That Happen by Fred Vettese and Bill Morneau (yeah, that guy). It discusses how much you will need in retirement based on various family and lifestyle situations.
https://www.amazon.ca/Real-Retirement-C ... 11849864X/
Invest your time actively and your money passively.
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Deepwater wrote:
Dec 5th, 2017 9:36 pm
I need to preface this by by saying I am not an accountant or financial advisor, anything I say shall not be construed as advice, and is provided for entertainment purposes only. :)

On top of the 4% or whatever you withdraw, you also can add pensions, CPP & OAS and subtract taxes to determine your spending. With $900k you could withdraw $36,000 at a 4% withdrawal rate. Add $32k in pensions, $12k in OAS and 16k in CPP (just a guess, assuming taking it early and not getting the full amount), that would give over $90k in income. Not bad!

4% always seems like a good base withdrawal rate for planning purposes because it has been safe through the worst economic times in the past century. Roughly 4% is what I use, but it will be a bit higher at first and a bit lower after my CPP and OAS start.

One good book you could read is The Real Retirement: Why You Could Be Better Off Than You Think, and How to Make That Happen by Fred Vettese and Bill Morneau (yeah, that guy). It discusses how much you will need in retirement based on various family and lifestyle situations.
https://www.amazon.ca/Real-Retirement-C ... 11849864X/
Thank you for your assessment.

I'm not so worried about the income at 65 but rather, it is the income between 55 and 65 that is my concern.

For Chance7652, yes the money is not cash, it is invested in stocks. Right now, my portfolio earns roughly 10%/year give or take but as DeepWater and a few others know from some of my other posts, I am looking to diversify away from stocks and towards ETFs, but it's hard to go from a blue chip 10%/year return to a roughly 5%/year balanced ETF portfolio, but as I get closer to an age 55 retirement, it is necessary to make some changes to my portfolio.
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timc00k wrote:
Dec 6th, 2017 11:21 am
For Chance7652, yes the money is not cash, it is invested in stocks. Right now, my portfolio earns roughly 10%/year give or take
So does our mostly passive portfolio with low FI component:

Trailing investor return (money-weighted return, internal rate of return)
Investor return as of 30/11/2017
Since* 31/05/2014 11.0%
* Annual compound return


Trailing portfolio return (time-weighted return, comparable return)
Portfolio return as of 30/11/2017
1 month 1.2%
3 months 7.5%
6 months 4.6%
YTD 13.4%
1 year 15.7%
3 years* 10.0%

Btw, you don't have to go with a bonds ETF for an FI portion of your portfolio (that most likely will drag the performance down). Check out total returns in my husband's TFSA - both strip bonds are beating XEF and one beats ZCN. Yes, of course, it's short term - and %return fluctuates, but they're all pretty close...

VFV (S&P500) is a clear winner though, so no, wouldn't bet against it - at least not just yet.. :)
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freilona wrote:
Dec 6th, 2017 1:49 pm
So does our mostly passive portfolio with low FI component:

Trailing investor return (money-weighted return, internal rate of return)
Investor return as of 30/11/2017
Since* 31/05/2014 11.0%
* Annual compound return


Trailing portfolio return (time-weighted return, comparable return)
Portfolio return as of 30/11/2017
1 month 1.2%
3 months 7.5%
6 months 4.6%
YTD 13.4%
1 year 15.7%
3 years* 10.0%

Btw, you don't have to go with a bonds ETF for an FI portion of your portfolio (that most likely will drag the performance down). Check out total returns in my husband's TFSA - both strip bonds are beating XEF and one beats ZCN. Yes, of course, it's short term - and %return fluctuates, but they're all pretty close...

VFV (S&P500) is a clear winner though, so no, wouldn't bet against it - at least not just yet.. :)
Thank you for sharing some insight into your own portfolio, that was nice.

I need some help with the acronyms in your post:

FI portion
RES BRASCAN - From screenshot
RES FAIRFAX - From screenshot
DI - From screenshot
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FI portion - Fixed Income portion
timc00k wrote:
Dec 6th, 2017 4:07 pm
RES BRASCAN - From screenshot
RES FAIRFAX - From screenshot
DI - From screenshot
If you're not familiar with bonds, they seem confusing at first, but try looking at CORPORATE STRIPS section in the bulletin: https://www.questrade.com/docs/librarie ... s_list.pdf .

RES BRASCAN - Brookfield Asset Management Strip, maturing in 2035 (CUSIP 10549ZBV0 in the bulletin)
RES FAIRFAX - Fairfax Strip, maturing in 2021 (CUSIP 30390ZCK1 in the bulletin)
DI - Debt instruments (Questrade's Asset Type for individual bonds and GICs)

The beauty of strip bonds, you buy them at discount - and collect the full price at maturity. No interest payments until then, hence "stripped" :)
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timc00k wrote:
Dec 6th, 2017 11:21 am
I'm not so worried about the income at 65 but rather, it is the income between 55 and 65 that is my concern.
Yes that's a challenge I deal with too. One way to handle is a spreadsheet with annual estimates for assets, income and expenses, including taxes. Another way is to set aside a portion of your assets in a GIC ladder to ensure you have enough guaranteed funds to fill in the gap between retirement and government pensions.
For Chance7652, yes the money is not cash, it is invested in stocks. Right now, my portfolio earns roughly 10%/year give or take but as DeepWater and a few others know from some of my other posts, I am looking to diversify away from stocks and towards ETFs, but it's hard to go from a blue chip 10%/year return to a roughly 5%/year balanced ETF portfolio, but as I get closer to an age 55 retirement, it is necessary to make some changes to my portfolio.
In previous posts I understood you were looking at investing in a small number of stocks selected primarily based on high recent returns, hence the recommendation that you diversify more. Did I misinterpret your situation? Nothing wrong with holding a diversified portfolio of stocks with good fundamentals, or a hybrid portfolio of ETFs and stocks.
Invest your time actively and your money passively.

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