Investing

One Fund Solution for Retirement

  • Last Updated:
  • Nov 8th, 2019 12:32 am
[OP]
Newbie
Jun 3, 2017
11 posts
3 upvotes

One Fund Solution for Retirement

What do you all think of VCNS or VCIP for retirement? This is for my parents in their 60s, trying to get them away from high MER mutual funds or complex strategies that require "management".

It's probably not the most tax efficient, but simplicity has value. VCNS for the next 10 years or so, then switch over to VCIP when they are in their 70s. Then simply draw from it what they need each month.

Thoughts?
9 replies
Deal Guru
Jan 27, 2006
14197 posts
7191 upvotes
Vancouver, BC
Any fixed income product (or one that contains fixed income) will have lower returns in the next few years due to the low rates as well as capital depreciation as rates rise which is extremely possible once all of the trade concerns are put to bed.

I would have a tendency to recommend a more of a two/three-fund approach rather than an all in one fund - ie an equity fund (take your pick on what is right but maybe a low volatility or a dividend growth fund due to the shorter timelines) and a fixed income. And every year, they move a portion of their equity side of things into the fixed income so they ladder in some of the interest changes.
Sr. Member
Dec 25, 2015
530 posts
325 upvotes
Canada
I’m curious to hear what others to say but I’d err on the side of keeping things simple. I think your on the right path with your approach. Low fees and simple. Curious to hear what others have to say

In response to craftsman the point of having bonds is to protect you if markets fall.

If rates do rise then either one of two things will happen, growth will accelerate leading to higher equity prices or a recession will come leading to lower rates and bonds going up.
Deal Guru
Jan 27, 2006
14197 posts
7191 upvotes
Vancouver, BC
wolfs004 wrote: I’m curious to hear what others to say but I’d err on the side of keeping things simple. I think your on the right path with your approach. Low fees and simple. Curious to hear what others have to say

In response to craftsman the point of having bonds is to protect you if markets fall.

Bonds are not the firewall of stability that people/advisors put them out to be... While the income from bonds will be steady, the actual price of the bond will change depending on what the rate of the bond is and the current rate predictions are - ie a $10,000 low interest rate 10 year bond paying 1.5% will still pay 1.5% per year for those 10 years BUT if you wanted to sell that bond when rates are going up, you won't get $10,000 for it... you'll get substantially less.

Have a look at the following graph of the SP500 vs a long term bond fund -

Image

Have a look at the red line which represents that bond fund and you'll notice that it's volatile and with major dips in the SP500, the bonds also drop. What the graph doesn't show is how interest rates affect bond prices... that's shown in the following -

Image

So, if rates do rise (and chances are they will at this point as rates are low), the price of your bond portfolio will drop.
wolfs004 wrote: If rates do rise then either one of two things will happen, growth will accelerate leading to higher equity prices or a recession will come leading to lower rates and bonds going up.
The problem is that unless you ladder into your bond portfolio (ie buying bonds as rates go up), changes are with any 'conversion' from current investment scheme to new scheme, the bonds would be purchased all at the same time which would be around NOW when rates are low and will probably climb resulting in lower prices for the bonds they own.

If you want stability at this stage of the market using fixed income, a better idea would be to ditch the bonds (which are really only yielding 1.5% for a 10 year) and leave the money in a HISA or short term GIC/term deposits as the rate of return would be the same OR better with zero chance of a loss of capital at this point.
Sr. Member
Dec 25, 2015
530 posts
325 upvotes
Canada
Your graph shows that from 2000-2002 bonds went up and from 2007-2009 bonds dropped 10-20% (eyeing it).

Rates aren’t going up. Which central bank has guided for higher rates that you speak of? Answer none.

Your probably better off having some bonds so they go up when rates keep dropping lower.

Additionally in 2000 and 2007 bonds did fine versus equities and provided the needed capital preservation.
Deal Fanatic
Jul 1, 2007
8404 posts
1432 upvotes
The conservative (30% stocks) and income (20%) are both WAY too conservative and way to overweight the most historically overvalued asset class on the planet, bonds. Even at 70, being 30% stocks to 70% bonds is way too conservative, unless we were in an environment like the 80s and 90s when you could rely on a reasonable return from bonds.

A balanced portfolio might be more appropriate. Maybe setting some cash aside in savings and GICs to cover X years of income needs in retirement and investing the remainder of the portfolio in a all equity funds.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Sr. Member
Dec 25, 2015
530 posts
325 upvotes
Canada
How are bonds overvalued. How did you determine this ? Maybe they were undervalued before and now fairly valued?
Deal Addict
User avatar
Feb 1, 2012
1323 posts
1718 upvotes
Thunder Bay, ON
Both are simple broadly diversified low-cost funds that would deliver the returns of their benchmarks less the MER and a small amount for trading costs and cash drag, with a very high level of certainty. They could do a lot worse.

Would the distributions from VCNS or VCIP cover their spending needs, or would they need to sell units to cover additional spending. VCNS has a trailing Yield of 2.26%. VCIP is so new that Vanguard does not publish its yield.

If the distributions are insufficient and they need to sell units they will be vulnerable to sequence of return risk since selling units would mean selling equities at bear market prices. A better solution for someone in portfolio drawdown mode may be to hold VEQT with a short-term bond fund like VSB in a 60:40 ratio. That way if there was a bear market, the short-term bond fund would provide a stable base from which to withdraw until equities recovered. Or hold the fixed income portion in a GIC ladder. But that would require holding multiple funds or GICs, and need an understanding of rebalancing.

If their retirement needs are well provided for including pensions, CPP and OAS, with little need to draw down capital, then a single asset allocation fund is a good solution. A less securely funded retirement could benefit from a slightly more complex two-fund or one-fund + GIC ladder portfolio.
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
Deal Guru
Jan 27, 2006
14197 posts
7191 upvotes
Vancouver, BC
wolfs004 wrote: Your graph shows that from 2000-2002 bonds went up and from 2007-2009 bonds dropped 10-20% (eyeing it).
That's because 2000 to 2002 wasn't a real deep recession but a dot.com boom/bust which since the SP500 is market-weighted, the average took a major hit but employment figures while down, didn't fall like it did in 2007-2009. This next graph shows what I mean -

Image

Notice the unemployment rate during the 2000-2002 'recession' was small (unemployment went from 4% to just under 6%) while the Great Recession was much larger (4.5% to 10%).
wolfs004 wrote: Rates aren’t going up. Which central bank has guided for higher rates that you speak of? Answer none.
You're right that no central bank is guiding upwards right now. But note that I never said that any central bank is currently guiding up either. I said that 'if rates rise' and since we are near historical lows with an ecomony that is running fairly smoothly (both in Canada and the US), it is unlikely that any more economic stimulus will be needed, especially if the US/China trade dispute is settled soon, so the prospects of lower rates is low unless the trade talks completely fall apart which seems unlikely at this point.

Both the BOC and the US Fed have stated that the current low rates are needed due to trade uncertainties and really nothing else so if those uncertainties are made certain, the current low rates won't be needed. Remember that prior to these trade uncertainties, both the BOC and the US Fed stated that they were hawkish in their outlooks for interest rates and the US 10 year bond yield was pushing 3.5% vs the 1.8% we are seeing today. It's not a far stretch to say that rates will rise shortly after the trade deal is done.
wolfs004 wrote: Your probably better off having some bonds so they go up when rates keep dropping lower.

Additionally in 2000 and 2007 bonds did fine versus equities and provided the needed capital preservation.
Unless you are wishing for a recession or stagnation (like what we see in Europe or Japan), rates won't be going much lower than where we are now.

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