Moderate Growth for Retiree

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor.

Moderate Growth for Retiree

Postby Kody » 30 Oct 2008 23:54

A long time ago I made a post indicating that my mother was going to give me some money to invest for her, which would also act as an early inheritance. I didn't really know what to do with the money, and had trouble balancing all the different issues (income vs. growth, taxation problems, etc.). I could only think of something like a Vanguard Managed Payout fund, which some posters justly pointed out was rather awkward.

I sent my mother some books (Bogleheads Guide, etc.), and after looking them over, she now has the courage to invest the money herself. She has asked me to help her set up a discount brokerage account at TD Trust and would like my guidance in selecting a small group of funds. I have no qualms about playing with my own money, but with my mother's, I am very worried about making mistakes. She will look over any portfolio decisions with an accountant/adviser, but first I (we) would appreciate your collective wisdom.

Some notes:
a) I will only be able to put about 15% of her money in a registered account.
b) She will probably only want to draw down 3% a year, with NO inflation adjustment. The money is not necessary and is just for travel, luxuries, etc. Her pension and rental income provide her with enough to live on.
c) Although she doesn't need the money, she does not want to see the money ravaged too much by inflation in the decumulation stage (thus the desire for some growth). However, if I have to go in any direction, I believe she would do better in a low-growth, low-volatility portfolio. Even though she could theoretically just take dividends from an all-equity portfolio, I don't think the volatility would be pleasant for her.
d) I don't want to slice and dice too much. I think she would feel much more comfortable with a small group of funds.
e) I would like to keep MERs low, but to a certain extent am willing to trade cost for psychological well-being. That is, I don't mind putting some money in a relatively expensive Claymore monthly dividend fund if any knowledgable posters indicate they find the monthly payouts to be reassuring.

Considering the above, I am looking for a portfolio that would provide better than 6% nominal return with moderate volatility. Would the following seem reasonable?

Registered account:
15% Canadian Bond index (iShares - XBB)

Non-registered account:
10% Cash/Money market fund/GICs (suggestions welcome)
15% Canadian preferred shares fund (Claymore - CPD)
25% Canadian equity fund (iShares TSX 60 - XIU, or XIC, or dividend fund - XDV/CDZ)
15% U.S. equity fund (Vanguard Dividend fund - VYM or VIG - inefficient, I know, but she feels more comfortable with some dividends)
20% World equity fund (simple world fund like Vanguard - VT, or a dividend/value fund like iShares - IDV )

Any comments or criticism are welcome.
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Postby OptsyEagle » 31 Oct 2008 14:31

You might want to give that portfolio a review of how well it performed over the last couple of months, so that you and your mother have an idea of how much money can be lost and how quickly, before the investments are made.

If you are comfortable with the most recent past, I am sure the future will be fine.
Silver Ring
Silver Ring
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Joined: 25 Feb 2007 18:59

Portfolio allocation

Postby Kody » 01 Nov 2008 10:28

Thank you for your reply. If I tell you that my own portfolio has been buy-and-hold equities, I'm sure you'll understand that I'm aware of how much money can be lost in a short period of time. The silver lining of the last few months is that I've found out I can stomach much more pain than I would have expected.

As for my mother, she has so far been in a 70% fixed income portfolio with her bank. Even something that conservative lost over 10% this year, and it wasn't reassuring for her to hear from me that that was good.

Despite that, she believes she can stomach volatility so long as I structure a portfolio which will provide her with a steady stream of dividends. I thought of using preferred stocks (despite their volatility) in her non-registered account simply because I understand they will be taxed more favorably than bond interest. However, since my mother really doesn't need to reach for every penny, perhaps just adding bonds to her non-registered account would be better, even if it means losing money to taxes. If you or anyone else has a suggestion for how to add fixed income in a tax-efficient manner, I would be glad to hear it. I feel constrained by the lack of room in her registered account. And if I am being foolish by trying too hard to reach for tax efficiency, I would be happy to hear that also. I suspect that if a retiree doesn't need the money, then they will probably be less annoyed to have a tax-inefficient account than they would an account that hits rough patches like what we've experienced this year.
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Postby like_to_retire » 01 Nov 2008 11:01

she has so far been in a 70% fixed income portfolio with her bank. Even something that conservative lost over 10% this year

She must have some fairly poor fixed income, since the FPX Income 30/70 shows down about -5.5% so far this year.

Personally, I feel your portfolio is a bit equity heavy at 60%. You might consider at least backing that off to 50:50 or lower for someone who is retired.

I feel you have too much foreign/US content. It won't enjoy the dividend tax credit on any dividends.

Gold Ring
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Dividend taxes

Postby Kody » 01 Nov 2008 20:36

I appreciate your input.

a) I agree that she hasn't done well against the index you cite. A slightly different portfolio composition, but perhaps equally a question of hefty management fees. Once my mother understood the expected return of a 70% fixed income portfolio, and the indeterminate value added by a manager, she quickly did the math on what the bank fees could be costing her.

b) You may be correct about the dividend tax credit being more valuable than higher exposure to foreign equity/currency. I would be curious to know how much foreign equity other seniors or low tax-bracket investors have.

Thank you again.
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