What we did for Bob – part II
In part I we recall that Bob and his wife, Jennifer have recently retired. They are both the same age - 62 and were surprised to learn that one of them could likely live to the age of 92. They would now have to plan for a 30 year retirement.
We illustrated the difference between fixed income investments like bonds and dividend paying stocks showing that bonds represent fixed income and dividend paying stocks represent rising income:
Rising income: real good
Fixed income: not so good
Why would one be better than the other? The answer is: “loss of purchasing power.”
And how do we counteract the loss of purchasing power? Many dividend paying stocks have a history of increasing their dividends but bonds pay a fixed unchanging income. Slowly but surely, inflation will exact a toll. Barely noticeable at first, Bob’s and Jennifer’s income could be cut by more than half1
The general idea is that rising income will compensate for the ravages of inflation and the loss of purchasing power.
In reviewing the formal process of doing a financial snapshot along with income and expense projections throughout retirement, it turned out that for Bob and Jennifer, a mix of guaranteed GIC investments along with dividend producing investments was the most appropriate recommendation for their situation.
Survey says
No comment required (see survey results below) but I was surprised at the numbers. I do not agree that the media had intensive coverage of the turnaround. My view was that the media covered the decline intensively but somehow the recovery did not garner the same headlines.
A majority of the over 1,000 adult Canadians who participated in the Angus Reid survey2 commissioned by Franklin Templeton early this year indicated they were unaware of the recent rally in the markets.
While the Canadian equity market posted a return of over 30% in 2009, 86% of Canadians had no idea the turnaround had taken place. In fact, despite intensive media coverage of the market turnaround, 74% thought the S&P/TSX Composite Index was flat, down or didn’t know. Only 14% knew the Index had posted a return greater than 20%.
One year after - analysis of the financial crisis of 2008/2009
When many investors rushed to one side of the boat to exit stocks in late 2008 threatening to swamp all, these same investors soon ran to the other side of the boat seeking the perceived safety of the bond market.
A word of caution here. Bonds – specifically bond prices, do not like increases (especially large increases) in interest rates. In other words, bond prices and investments that invest in bonds could go down in value. Be very wary of bonds in a rapidly rising interest rate environment.
By late 2009, many investors had realized they may have made a mistake by exiting the stock market earlier in the year. The best strategy during last year’s financial crisis was to do precisely nothing as the stock markets made a wonderful recovery all on their own.
Doing nothing by staying invested was the hardest thing to do at the time, but it was the right thing to do.
I am hopeful that other advisers at competing firms gave the same advice - as difficult as it was at the time. Switching investments or making radical adjustments to investment portfolios at market bottoms in the midst of a panic rarely enhances returns. As a matter of fact it quite likely hurt client returns dramatically.
The worst of the crisis was actually quite short-lived - starting around mid-September 2008 and ending March 9, 2009. Scarcely six months.
Incidentally, the one or two experts who correctly predicted the U.S financial collapse in the fall of 2008, failed to predict the huge recovery rally that started on March 9, 2009.
[Editor’s note: I have included a link here to see what the markets have actually done over the last year or so. It is a U.S. stock market index (The Americans have got us beat for market data). It is a very nicely drawn chart and is updated daily. Note that this U.S broad market index was up over 70% by mid-March of this year.]
New web site
Coming soon – www.belmontvillagefinancial.com
Unlike most other Financial Advisers, I also have a dual role as a GIC Deposit Broker.
As a deposit broker, I scour some 40 different banks, trust companies and credit unions looking for the best interest rates that are available on any given day. It is truly amazing to see the difference in interest rates between the many banks and trust companies. For instance, for a short term GIC of one year, the difference is almost 4 times more interest!
When www.belmontvillagefinancial.com goes live, you will be able to access our top GIC rates that we offer. Please call me for a quote if you have an investment maturing soon at your bank or credit union.
The search for yield
If the average investor is still reluctant to dip a toe back into the stock market, what other investments are there to look at?
GICs are safe and secure but your bank is likely paying only about 0.4% for a one year locked-in term to just over 2% for a five year term. Not much growth or income there.
I get asked the following question often: “Is there anything else that can potentially pay a bit more income to me without incurring a huge amount of risk?”
Yes there is and I have come up with a few recommendations.
Daily interest accounts and money market funds pay very little interest – rates are approaching zero in some cases. The bank is taking in money in the form of savings and chequing accounts and lending it to someone else in the form of a mortgage. The banks profit by doing this – we don’t.
We can turn the tables around a bit by investing in these same bank mortgages. These pools of mortgages pay higher interest rates. These investments aren’t terribly exciting (we like unexciting) and most have some sort of government backing if they are Canadian residential mortgages. They are suitable for risk adverse investors. These types of investments will pay quite a bit more than the best daily interest accounts. The investments are liquid and can be withdrawn at any time.
I like the TD Mortgage fund and the National Bank Mortgage fund.
To earn a bit more interest than investing in mortgages, we will have to go to the bond market. My cautions on the bond market refer to long term bonds – especially longer term government bonds. There is however, investments that specialize in short term corporate bonds specifically high quality corporate bonds – no junk bonds here.
The one I like in this asset class would be the Powershares 1-5 Laddered Corporate Bond Index Fund which could be used as an alternative to GICs. An appropriate target for this fund is to outperform a 5 year term deposit.
To get potentially an even higher yield we do have to go to the stock market to get enhanced returns. Not just any old stock market investment though – we want dividend income investments.
An example of an investment that could be suitable for the aforementioned Bob and Jennifer is the Stone & Co. Dividend Growth Class Fund which contains dividend paying stocks and unlike the mortgage and bond funds mentioned previously, you do have to accept the normal 20% - 30% price fluctuations or more for this type of investment. In return, the fund has the potential to generate a stream of rising dividend income that Bob and Jennifer require over the years.
The fund, which is run by Martin Anstee, was recently profiled in a March 6th article in the Globe and Mail; "We choose stocks that not only pay dividends, but increase dividends over time," said the manager at Stone Asset Management Ltd.
If you have an interest in dividend producing investments, please give me a call.
1 inflation of 3% i.e. in 30 years, $2.42 is equivalent to $1.00 today.
2 January 4 and 5, 2010, Angus Reid Public Opinion survey of 1,019 adult Canadians.
