Couch potato strategy with DB pension.

4859 Views 14 Replies 4 Participants Last post by bean438, Oct 15, 2009

bean438

Discussion Starter · Oct 14, 2009

Assuming a DB pension of 60% of your best 5, indexed to inflation (2/3), what are your thoughts on the slicing of the pie?

A basic CP is 50/50 CDN stocks/bonds. More "aggressive" is 25 bonds, cdn equities, US equities, international equities.

Since the DB pension could be considered the bond , or fixed income of your retirement I am thinking of a CP 100% equities.

My question is then how would you cut things up? I just finished reading Bogle's Little book of common sense investing. He says to put everything in a US total market fund/ETF. Obviously this book is written for americans. I dont think I would want 100% of my money in the CDN market. IMO it is too small, and our index can become distorted if a Nortel, or Potash becomes over weighted, plus we really dont have any Cokes, or PG's.

I am thinking along the lines of 50% US, 25 CDn, 25 international as a starting point.

I dont know if I would worry about currency neutral funds or not.

Your thoughts?

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OntFA

· #2 · Oct 14, 2009

bean438 said:
Assuming a DB pension of 60% of your best 5, indexed to inflation (2/3), what are your thoughts on the slicing of the pie?

A basic CP is 50/50 CDN stocks/bonds. More "aggressive" is 25 bonds, cdn equities, US equities, international equities.

Since the DB pension could be considered the bond , or fixed income of your retirement I am thinking of a CP 100% equities.

I would suggest that you first take a hard and honest look at the creditworthiness of your employer. If last year taught us anything, it's that you can't assume that your DB plan is 100% safe to the full extent of your stated benefits. And there is always the chance that the plan changes or is grandfathered with all future benefits funded with a DC plan.

bean438 said:
My question is then how would you cut things up?

I think you don't make it too fancy. I would not take your asset mix and then subtracting the DB value from the bond component. I would have done that in my early days but it's been 10-15 years since I've done this. Most people can't handle 100% stock portfolios. Also, it makes more sense to let your asset mix be driven by the ultimate objectives of this pool of money - and work backwards into what asset mix is appropriate.

bean438

Discussion Starter · #3 · Oct 14, 2009

I am confident my DB plan is safe. Local municipal gov't plan, lots of cash, well managed, plus enough morons who work for 40 years and then die 1-2 years after retirement to keep the plan healthy.

I do not want to discuss armageddon situations. I just want to discuss the best way to invest the CP.

I am already 100% stocks, and have tolerated things well. I am exploring a passive approach and do not believe a bond component is useful in a CP.
Thus I am exploring different ways to split things up.

The main objective would be to get the most growth out of the CP.

OhGreatGuru

· #4 · Oct 14, 2009

Given that you have asecure DB plan, 100% equity is not unreasonable, if you can tolerate the market swings.

Personally I think you are overweighting US Equity. Yes our marekt is samll, but teh long-term performance of CDN market, adjusted for currency, stands well in comparison to US & International. The mantra of "diversify internationally" is based on a superficial look at the stock foreign stock indexes, not on the average returns of foreign funds you can actually buy in Canada. Also, unless you are planning to retire outside the country, you want your retiremnt assets in CDN dollars. I still don't like the looks of US economy in short term, but if you still a long way from retirement, look at 33%/33%/33%.

OntFA

· #5 · Oct 15, 2009

OhGreatGuru said:
Given that you have asecure DB plan, 100% equity is not unreasonable, if you can tolerate the market swings.

Tread carefully. We don't know how large this person's DB pension is (yes it's a generous plan but it only accumulates to a big amount if the accumulated pensionable service is long) and we don't know how large the liquid portfolio is. So, it's not clear that 100% stocks is suitable at all.

With a goal of "maximum growth", that implies you don't expect to need or want any income from this portfolio. If true, it's possible that 100% stocks is okay. But I come from the school of linking real goals to asset mix, not just maximizing how much risk can be taken. Food for thought...

bean438

Discussion Starter · #6 · Oct 15, 2009

Guru good point about having most of your money invested where you will be retiring. I guedd this is why Bogle says 100% us.

OntFA of course I will want income. At the end of the day, whatever your style of investing, all that really matters is how much ends up in your bank to spend. You either sell fund units or shares, or you live off interest or dividends.

OntFA

· #7 · Oct 15, 2009

bean438 said:
OntFA of course I will want income. At the end of the day, whatever your style of investing, all that really matters is how much ends up in your bank to spend. You either sell fund units or shares, or you live off interest or dividends.

Okay but this is my point. You start with your end goal and work your way back. Simply jumping head first into equity markets may not be in your best interest and you may be taking on more risk than you need. Either way, once you start using your portfolio for income, you'd better be nowhere close to 100% stocks unless your needs are low enough that you can live on 2/3rds of the dividend income spun off by the stock portfolio. Otherwise, you'll need a balanced portfolio of some kind.

scomac

· #8 · Oct 15, 2009

OntFA said:
once you start using your portfolio for income, you'd better be nowhere close to 100% stocks unless your needs are low enough that you can live on 2/3rds of the dividend income spun off by the stock portfolio.

Explain this statement more thoroughly please? Why do you imply that you can only spend 2/3 of the portfolio income of a stock portfolio, yet an apparently higher percentage is OK if you use a mixture of bonds and stocks?

bean438

Discussion Starter · #9 · Oct 15, 2009

ont, i wouldnt expect to live off of any dividend income from a CP portfolio.
With any mutual fund you have to sell units to get what you need. Living off the pile.
Not true if you are talking stocks though. Currently i invest for growing dividends, not having to ever live off the pile.

If you DCA over time with a CP, you should be able to redeem 4% to live off of, DCA in reverse.

I will be promoted up 2 ranks by the time I retire, giving me 60% of a higher income for pension. Currently I can live on my salary. Based on 60% of my current salary, and having no mortgage, no RSP contributions, and no TFSA contributions, my retirement take home income will give me more cash flow then I currently have now in todays dollars. No RSP/TFSA needed.

It will be extra money for me. I currently invest 100% stocks (dividend growth). I didnt panic and sell when the world was coming to an end, banking on the fact that people will always drink Coke, smoke, need deoderant, soap, toothpaste, eat at McDonalds, use a bank etc.

I am simply exploring the passive index fund/ETF strategy, and what way to divide my funds with a DB pension factored in.

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OntFA

· #10 · Oct 15, 2009

scomac said:
Explain this statement more thoroughly please? Why do you imply that you can only spend 2/3 of the portfolio income of a stock portfolio, yet an apparently higher percentage is OK if you use a mixture of bonds and stocks?

Admittedly I made this comment too quickly and without enough explanation (it was past my bed time). So, good on you for calling me on it. My 2/3rds was probably overly conservative but the idea was to live on something less than the initial dividend income. My reasons for this are:

- Most investors tend to chase yield and do not pay enough attention to dividend safety or stability.

- The 2008 market reminded us that no matter how safe a dividend appears to be, a dividend can be cut or eliminated - even if it's not permanent.

- In my experience, most individual investors do not choose well when picking individual stocks.

bean438 said:
If you DCA over time with a CP, you should be able to redeem 4% to live off of, DCA in reverse.

Okay, so what is a "CP" exactly? I keep looking for what that means and I didn't see it expanded anywhere.

bean438 said:
It will be extra money for me. I currently invest 100% stocks (dividend growth). I didnt panic and sell when the world was coming to an end, banking on the fact that people will always drink Coke, smoke, need deoderant, soap, toothpaste, eat at McDonalds, use a bank etc.

I won't bother trying to promote the idea of asset class diversification since clearly you have no interest in it. But that doesn't diminish the value of the concept.

bean438 said:
I am simply exploring the passive index fund/ETF strategy, and what way to divide my funds with a DB pension factored in.

Try CDZ for Canada or SDY for the U.S. Both follow the Dividend Aristocrats index of dividend growers.

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bean438

Discussion Starter · #11 · Oct 15, 2009

CP=couch potato

I have done very well picking stocks. Their value fluctuated quite a bit, but the dividend income (the reason i buy them) has ALWAYS been higher than the previous year, even after GE and PFE cut my income.

I diversify among stocks, not among asset classes. Risk is in the price you pay, not the asset class.

Bonds suck, as do GIC's. Real estate, gold, commodities will do no better than inflation (long term).

OntFA

· #12 · Oct 15, 2009

bean438 said:
CP=couch potato

Duh - thanks. Should have caught that one.

bean438 said:
I have done very well picking stocks. Their value fluctuated quite a bit, but the dividend income (the reason i buy them) has ALWAYS been higher than the previous year, even after GE and PFE cut my income.

I diversify among stocks, not among asset classes. Risk is in the price you pay, not the asset class.

Bonds suck, as do GIC's. Real estate, gold, commodities will do no better than inflation (long term).

That's excellent. Assuming this is true then, what I don't get is why an apparently skilled stock picker is coming to a discussion forum for advice and why you're considering index funds/ETFs? If you're as good as you say, you'll not do as well by being more thinly diversified through funds and the fees will reduce your total return exponentially over time.

bean438

Discussion Starter · #13 · Oct 15, 2009

I am entertaining the idea of a passive strategy that's all.
TD e funds have very low fees, and indexing is the only mutual fund option that would be right for me.

Am I a skilled stock picker? I have been successful so far. In terms of stock price, I was hammered just like everyone else, so I would say no.

Dividend income on the other hand I have done well as I have never lost money, yet. My income has always been higher than the last year.

Dividend growth investing is not infallible , nor is my stock picking. (2 dividend cuts). This is why I dont buy just 1 or 2 stocks. But this strategy makes sense to me, and I have done well at it. Who knew GE would cut its dividend even after the CEO said they would not?

Even WEB makes mistakes, so why should I expect to not make a few bad choices?

But I am always learning and was interested in a CP portfolio. (I just assumed people would pick up on the CP abbreviation, but I too dont get them sometimes).

Having just read Bogles book, i wanted to explore.

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OntFA

· #14 · Oct 15, 2009

bean438 said:
Even WEB makes mistakes, so why should I expect to not make a few bad choices?

Having just read Bogles book, i wanted to explore.

Skilled investors make lots of mistakes. I wasn't suggesting you were claming to be infallible. But I still got a different impression than what you've posted this last time.

Bogle wouldn't advocate ETFs but I would refer you back to the passive ETFs focusing on dividend growth. I'm not recommending them but pointing you in the direction of products that seem to be in line with what you want.

OntFA said:
Try CDZ for Canada or SDY for the U.S. Both follow the Dividend Aristocrats index of dividend growers.

bean438

Discussion Starter · #15 · Oct 15, 2009

You got a different impression??? Huh?

What Boggle advocates is indexing. Primarily via mutual funds, but he mentions ETF's are OK provided that you do not develop a trader's mentality.

He also frowns upon the ETF slicing up everything into little slices, allowing people to "play the market/gold/real estate/whatever"

The Vanguard total US ETF has an MER of .09 which is very cheap. Nothing wrong with an ETF so long as it is used properly.

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