After the fall (and partial recovery): Portfolio evolution

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

Postby Bylo Selhi » 11 May 2009 09:04

Norbert Schlenker wrote:
like_to_retire wrote:I had pegged preferreds as fixed income, and there's nothing wrong with that because that's what they are, but while their payout is fixed, their share price can be very equity-like. Anyone with preferreds learned that through the fall of last year.
[nods sheepishly]
scomac wrote:Like most of you, I road the roller coaster down and then back up again... I too turned to preferred shares as a tax efficient substitute for a portion of our fixed income

While the price fluctuation was gut-wrenching, I'm not sure why that should matter for people who use preferreds for income generation -- provided, of course, that the dividend is secure. Contrast with GICs, where 100% of your principal is guaranteed, but at maturity your income may be cut in half (or worse) when you reinvest at market rates.
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Postby scomac » 11 May 2009 09:09

Bylo Selhi wrote:
Norbert Schlenker wrote:
like_to_retire wrote:I had pegged preferreds as fixed income, and there's nothing wrong with that because that's what they are, but while their payout is fixed, their share price can be very equity-like. Anyone with preferreds learned that through the fall of last year.
[nods sheepishly]
scomac wrote:Like most of you, I road the roller coaster down and then back up again... I too turned to preferred shares as a tax efficient substitute for a portion of our fixed income

While the price fluctuation was gut-wrenching, I'm not sure why that should matter for people who use preferreds for income generation -- provided, of course, that the dividend is secure. Contrast with GICs, where 100% of your principal is guaranteed, but at maturity your income may be cut in half (or worse) when you reinvest at market rates.


That's a fair comment, but I don't think that either of us is going to quit owning preferreds just because of price volatility. In my own case, the desire to have a smoother ride is forcing me to reclassify these securities and adjust exposure to risky assets accordingly to account for the increased potential for volatility of the preferreds.
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Postby Taggart » 11 May 2009 09:22

Bylo Selhi wrote:Contrast with GICs, where 100% of your principal is guaranteed, but at maturity your income may be cut in half (or worse) when you reinvest at market rates.


That's exactly what Paul & Vicky Terhorst had planned to do when they retired from their jobs in the U.S. almost 25 years ago, at the age of 35. In their case of course they were going to roll over CD's. In his book, they had planned to do it for a lifetime, and use no other form of investing, but within a few years, interest rates declined so low, that the strategy backfired, and they had to look at other arenas to put their savings.
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Postby George$ » 11 May 2009 09:38

ghariton wrote:...
Place in bonds enough money to cover your basic living expenses. Place the rest, which is intended to cover the "nice-to-have", into equities. And I don't care about the numerical ratio that results.

The experience of the last year has not changed this approach at all. I am very comfortable with it.

George


I think my 'plan' (if it can be called such) is the same as George's above -

(i) Have enough $ in cash + RRBs + Short term Bonds + expected DB pension income to take care of basics until the lights go out for me and my spouse

(ii) the rest is in the market and this includes some cash that thinks it should take advantage of the equity drop. I loose no sleep if the market drops another 50%.

Overall I have not changed anything much in the last five years.

But then again I'm both fortunate and have always lived frugally and so have a substantial 'margin of safety' at this point in my life ( I'm 68 ).

George
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Postby hboy43 » 11 May 2009 09:44

Hi:

My belief is that just about any strategy is OK as long as you stick with it. Otherwise, you tend to harvest the bad times of multiple strategies as you flit about instead of just one if you had just stuck with it.

So I rode 100% equites/leverage all the way down, and in the last 3 months a good way back up. In hondas, about 25 down, 17 or so back up.

My investing philosophy is predicated on some pretty hard nosed obervations/assumptions:

I strive to either be wealthy or to be poor. I live poor either way. I don't spend much or want much. I don't expect this to change, it is in my nature. If wealthy, I get to have the odd extravagance if I come up with anything interesting. I get to donate useful sums to interesting people and projects. If poor, the house is paid for, the heating fuel is free for the gathering, and the garden plot improves every year bit by bit. The government will backstop me anyhow. I don't agree with the welfare state and I vote against it at every opportunity, but that is the reality of Canada. I have paid my dues to the Nanny state, and will use the Nanny if it comes to it. To be middle of the road leaves me with neither the advantages of wealth, nor those of poverty, so I don't aim my finances to try to hit middle.

If I am not mobile, I don't want/need to be alive. The above puts an upper limit on useful life (as I define it) of about 70. So I only have 23 years to go.

With low returns, high taxation, and inflatiion, fixed income is by definition a losing asset class in the long term best case. 100% equities may also be a losing asset class in the long term, but history suggests that there are reasonable chances for it not to be.

My wife has a well paying job and our monthly surplus is usually > $3000. If all my equity and leverage blew up, we would still have her teachers pension coming in 15 years or so.

My diversification away from equities is not FI as is usually the case for most but rather the homestead and self reliance. With fuel inputs for gas and diesel of about $40, and the odd chainsaw part, I am self sufficient in heating and cooking fuelwood. With some effort and organization, I could sell at retail in perpetuity fuelwood for another 3 households worth about $4000 annually. The orchard is an ongoing project as is the garden and the fields. Not much returns yet, but some areas are starting to show improvement. With the purchase of a tractor last year, I have a prime mover for serious grunt work, if not yet the impliments and knowledge to use it effectively yet. With some engineering design and about $5000 to $10,000 investment, I could have the infrastructure to cover the baseline electricity load of about 3kWh/day to run 2 freezers, one fridge, a water pump, and the odd light.

So with my admittedly odd life philosophy, I am not changing much. I have vowed to put more into the homestead projects over time. My version of rebalancing across asset classes. I'd really like to get the fencing done so that my 3 acres of field could keep pigs in and deer out. I'd like to start on my baseline electricity infrastructure. Oh, it would be nice to get the shop finished, and we have plans to add insulation to the ceiling of the house.

I have not bought any equities in about 2 months. I bought all the way down and was lucky enough to by some beat up companies near the lows. I have been enjoying having a positive margin again. For now, investment income goes to paying down debt, and surplus from my wife's job and the rental property goes to homestead infrastructure.

That's the plan.

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Postby Jaunty » 11 May 2009 10:10

Bylo said:
while the price fluctuation was gut-wrenching...

I guess that is the thing - it hits the emotions. It was also hard for me to watch my net worth shrink - including an asset group I considered relatively docile (if that the correct antonym of volatile, for stocks). All that aside, I expect to continue with Prefs as before for the tax advantaged income.
I still have to figure out how many Civics I was down and am now back up!
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Postby like_to_retire » 11 May 2009 11:54

At this point, I am inclined to classify preferreds as more of a hybrid income security that warrants a distinctly separate allocation from equity or income.

Finally, someone that agrees with me. :roll:

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Postby Shakespeare » 11 May 2009 11:59

If you use a binary "high risk/low risk" breakdown, preferreds, junk bonds, and trusts/REITs would all be on the "high risk" side.
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Postby scomac » 11 May 2009 12:16

Shakespeare wrote:If you use a binary "high risk/low risk" breakdown, preferreds, junk bonds, and trusts/REITs would all be on the "high risk" side.


I'm fine with that and that is essentially what I have done; moved prefs from the fixed side of the ledger to the equity side. To compensate for this the additional fixed income should be in the form of RRBs so as to maintain a reasonable balance of interest sensitive assets to inflation sensitive assets.
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Postby couponstrip » 11 May 2009 12:51

ghariton wrote:I've never believed in market allocation according to target ratios of equity, bonds, etc. I've got an amount of bonds that will let me live modestly but reasonably comfortably to age 90, and I maintain that amount. (That's close to Shakespeare's ironn rule.) (After 90, it will be CPP and OAS, and my house equity will help pay for the nursing home.)

The rest of my money is in equities, mostly US ETFs, but some Canadian ETFs as well, plus very small amounts in three individual energy producers (my play mone). As the market fluctuates, so does the proportion of equities in my portfolio. They currently amount to about a third. While that ratio must have bounced around a lot lately, it is not something I track.


I am of the same mind for our family. After coming a long ways from naive simple questions on this forum over 2 years ago, I have learned, mostly from this forum (possibly directly from ghariton if you have posted this before) that this approach is what will determine our financial independence and potential retirement, if we choose.

However, I think it is important to indicate that while this approach allows for immense financial peace of mind, it is a luxury that, perhaps, many on this forum can afford, but I would argue the majority of people in the world could not/can not. It may be due to insufficient earnings/savings, or it may be due to a desired retirement lifestyle greater than what the accumulated capital will allow. Either way, most will require the equity premium and will need to weather the related volatility.

I have run countless simulations using past data, and I find the uncertainty of declaring an asset allocation and withdrawing a fixed percentage in retirement unacceptable. One run will show an 8 figure surplus at death at age 90 (many decades from now...not 2009 dollars), the next run shows destitution at age 76. I can't live with that uncertainty, especially once we have given up our jobs, possibly earlier than we needed to thinking that we would be ok. So my financial ambition is as George has outlined above, and we hope to achieve it with enough capital and a modest lifestyle. Failing enough capital, it will need to be a simple lifestyle.

Fixed income for needs and as much wants as we can afford. Equities for the rest, and to provide for luxury if the markets allow.

The most valuable investment we currently make is to continue the simple life we have always enjoyed throughout our 15 years of university. If we become accustomed to something extravagant, it would be alot harder to scale back later. This is the greatest risk that I see: A change in lifestyle expectations somewhere along our journey which may not be fundable with fixed income in retirement.
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Postby 2 yen » 11 May 2009 17:55

Springbok, thanks. I'm feeling lazy today, how does AOG.UN, for example, look after conversion? Isn't it a trust itself? Thanks for responding if you have time.

Scomac, not to oversimplify your analysis, but I've found a simple Excel pie graph of asset and sector allocation reveals a lot, especially for my pea brain. It's hard to watch one of those pieces of pie get too large. I also did the same thing for dividend income and that was truly revealing in that real estate, which is 15% of sector allocation, is 25% of dividends.
Yikes! Shakespeare calmed me down a bit when I first realized it, but I won't be adding more real estate any time soon.
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Postby newguy » 12 May 2009 08:00

While I find other members personal financial details interesting I still feel weird typing about myself, maybe that's why people lurk.

Anyway here it is, my portfolio evolution with xirr from start date and comments

Sep-05 sld house
Dec-05 na started learning DIY
Mar-06 na
Jun-06 na
Sep-06 8.92% learned xirr
Dec-06 15.12%
Mar-07 13.54%
Jun-07 10.03% quit job 2nd time
Sep-07 8.39%
Dec-07 6.77% wdraw lots cash
Mar-08 4.61% couple flip flops
Jun-08 4.15%
Sep-08 -2.64% started unindexing
Dec-08 -9.71% 100%+ long oil co's, new job
Mar-09 -2.57%
Jun-09 3.66% ?? quit job reindex

Those flip flops were when the tsx was near it's high, I thought I should have more fixed income. When it made a new high I changed my mind and went more equity, remember China was gonna buy everything. During the crash it was very exciting and right or wrong I saw crazy buying oppurtunities. Anyway it's worked out well so far I'm back to even and the txs has 5000 pts to go.
Thanx FWF!

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Postby Springbok » 12 May 2009 08:41

2 yen wrote:Springbok, thanks. I'm feeling lazy today, how does AOG.UN, for example, look after conversion? Isn't it a trust itself? Thanks for responding if you have time.

Scomac, not to oversimplify your analysis, but I've found a simple Excel pie graph of asset and sector allocation reveals a lot, especially for my pea brain. It's hard to watch one of those pieces of pie get too large. I also did the same thing for dividend income and that was truly revealing in that real estate, which is 15% of sector allocation, is 25% of dividends.
Yikes! Shakespeare calmed me down a bit when I first realized it, but I won't be adding more real estate any time soon.


2yen,

AOG is really an investment fund that invested mainly in income trusts. However, this has changed. There is more info on their site ,but this sums it up:

It is also being proposed that the investment universe of both Brompton Equal Weight Oil & Gas Income Fund ("OGF") and Brompton Advantaged Equal Weight Oil & Gas Income Fund ("AOG") be expanded beyond income trusts to include other income producing oil and gas securities, such as dividend paying common equities and convertible debt, to offset the decreasing quantity of oil and gas trusts. The portfolios will be broadened beyond oil and gas producers to also include service companies, pipelines and mid-stream operators. The funds will adopt an active investment management strategy, with MFC Global and Alan Wicks' team specifically, being appointed as the portfolio manager. OGF and AOG are expected to have very similar portfolios and investment strategies, but AOG will retain its tax advantaged structure.


BTW, I also use Excel pie charts - One for allocation and one showing source of income. They do give a nice quick snapshot of where you are. If I had more energy, I would do them by account or at least registered vs unregistered but the numbers are summarized in the spreadsheet anyway so no real need.
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Postby CROCKD » 12 May 2009 13:57

hboy43 wrote:If I am not mobile, I don't want/need to be alive. The above puts an upper limit on useful life (as I define it) of about 70. So I only have 23 years to go.


As I am about to turn 70 this month, I guess I better get ready for a life of immobility.

Funny that never occurred to me when I was skiing a double Black Diamond run at Mt. Tremblant a couple of months ago!!
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Postby Springbok » 12 May 2009 16:05

CROCKD wrote:
hboy43 wrote:If I am not mobile, I don't want/need to be alive. The above puts an upper limit on useful life (as I define it) of about 70. So I only have 23 years to go.


As I am about to turn 70 this month, I guess I better get ready for a life of immobility.

Funny that never occurred to me when I was skiing a double Black Diamond run at Mt. Tremblant a couple of months ago!!


Hey Crock - Good post!

I am also a crock, but not yet quite 70 (7 months to go!).

Played golf today - partner was a 76 year old and he was outdriving me by 20 yds! And I was outdriving the 50 somethings by about same margin!

Don't think I am ready to call it quits quite yet!

PS: Haven't been to Tremblant for years - We used to ski it a lot in the old days before the new development took place. My wife and I split up there. But it was just for a day :) She took final run to South side and I took final run to North side (where we had left car!) No cell phones in those days so I drove around (quite a hike then) to find her sitting waiting for me!
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Postby 2 yen » 12 May 2009 17:38

Springbok.....thanks!
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Postby kcowan » 19 May 2009 08:22

Image

It seems to be the poorer picks that are fueling the dead cat bounce....
The Garbage Rally
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Postby cash » 19 May 2009 23:41

kcowan wrote:
It seems to be the poorer picks that are fueling the dead cat bounce....
The Garbage Rally



I think it is premature to call this a dead cat bounce. There are a number of factors which will determine whether the current market rally is sustainable, however, I think it is fair to say that the worst case scenario now appears to be averted. A complete collapse of the Financial system now appears highly unlikely and financial market function has improved from November.

That said, I think there will be a correction from this point, and I'm hoping for more attractive entry points for some of my favorite picks.
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Postby DanielCarrera » 20 May 2009 05:43

ghariton wrote:I've never believed in market allocation according to target ratios of equity, bonds, etc. I've got an amount of bonds that will let me live modestly but reasonably comfortably to age 90, and I maintain that amount...

The rest of my money is in equities,..

So, without planning it, I guess I do run an asset allocation scheme after all. Place in bonds enough money to cover your basic living expenses. Place the rest, which is intended to cover the "nice-to-have", into equities. And I don't care about the numerical ratio that results.


That was an interesting post. In my case, I am young, in the accumulation phase of my life. I rely on my job to cover my daily needs. I keep an emergency fund plus enough cash to cover near term needs (e.g. saving for a new car) and everything else goes into equities (index funds).
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Postby DanielCarrera » 20 May 2009 06:48

hboy43 wrote:I don't agree with the welfare state and I vote against it at every opportunity, but that is the reality of Canada. I have paid my dues to the Nanny state, and will use the Nanny if it comes to it.


The "nanny" state does have some valuable advantages. I believe strongly in equal opportunity. In a country like the US, poor people have drastically less opportunity to succeed (e.g. education) than rich people. In Canada, the "opportunity gap" is much narrower.

It is difficult to find a balance between not being a nanny state and giving poor people equal opportunity. At a minimum, I approve of free health care and free education up to high school and subsidized (but not free) university education.

If I am not mobile, I don't want/need to be alive. The above puts an upper limit on useful life (as I define it) of about 70. So I only have 23 years to go.


People can be mobile and active after 70. If mobility is important to you, you could invest in a gym membership. Squats are an excellent exercise to ensure long-term mobility. Not only do they give you stronger legs, but they strengthen bones too, they give you better balance (which helps prevent a fall that would take away your mobility) and the larger muscles cushion your bones so that if you do fall, the bones are less likely to break.


With low returns, high taxation, and inflatiion, fixed income is by definition a losing asset class in the long term best case. 100% equities may also be a losing asset class in the long term, but history suggests that there are reasonable chances for it not to be.


I have similar feelings about FI vs equities. Btw, there are alternatives to FI. For example, buying solar panels to put on your roof would decrease your utility bill. This is equivalent to a bond investment, except that it is not taxed, and is automatically indexed to inflation. Anything that you buy that saves you money (e.g. buying a house instead of renting) is equivalent to a tax-free FI investment.
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Postby Jo Anne » 20 May 2009 08:31

DanielCarrera wrote:
hboy43 wrote:If I am not mobile, I don't want/need to be alive. The above puts an upper limit on useful life (as I define it) of about 70. So I only have 23 years to go.


People can be mobile and active after 70. If mobility is important to you, you could invest in a gym membership. Squats are an excellent exercise to ensure long-term mobility. Not only do they give you stronger legs, but they strengthen bones too, they give you better balance (which helps prevent a fall that would take away your mobility) and the larger muscles cushion your bones so that if you do fall, the bones are less likely to break.


If you have bad knees, don't do squats. Squats are absolute hell on your knees.
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Postby DanielCarrera » 20 May 2009 08:42

Jo Anne wrote:If you have bad knees, don't do squats. Squats are absolute hell on your knees.


If you have bad knees you should consult a doctor. Depending on what's wrong, squats might actually help. I have a friend who has bad knees, and when she started doing squats it hurt some at first, but her knees actually got better. Her doctor was very pleased. But I can imagine that for other people squats would make it worse. So if you have bad knees you definitely want to consult a physician to find out which group you are in.
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Postby Springbok » 20 May 2009 14:43

Jo Anne wrote:
If you have bad knees, don't do squats. Squats are absolute hell on your knees.


If you don't do squat, more than your knees will be bad. Don't ask me how I know.
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Postby AltaRed » 20 May 2009 23:03

I stayed the course during the fall primarily because I had/have 5 years (or more) worth of living expenses sitting in cash to tide me over until equities hopefully recover and prosper. I bought some VTI and VGK somewhere near the bottom with USD cash and a $5k GIC for my TFSA. Overall, I am significantly higher in US and European allocations than most people and will likely remain that way for the next several years.

Beyond that, I have done nothing to my portfolio and have been deer-in-the-headlights on deploying more USD cash into VTI and VGK and CAD into select Canadian dividend payers until I see if there will be another severe market correction. Somehow this recovery seems too surreal to last notwithstanding there are trillions of cash sitting on the sidelines. Somehow I think this could be a W shaped recession.
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Postby j831robert » 21 May 2009 19:46

Sorry, but I'm just trying to beat Shakespeare and Jo-Anne to 'diddely squats, (as in 'don't know ...... ......). :lol:
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