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Why keep so much in a savings account?
September 12, 2021
7:14 am
savemoresaveoften
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savemoresaveoften, I would consider dividend yielding blue chips as equity investments, maybe you were saying the same in #114.  

Agree totally. To me, equity investments should be mainly dividend yielding blue chips, as they have lasting power. Utilities, banks, telecom fit that profile well.
A lot of millennials are chasing after the hot stocks, or keep trying to find the next Apple, Amazon, Spotify etc. To me one should only put a "fun amount" in the pursuit for the next 100X banger, and thats speculation not investments.

September 12, 2021
7:33 am
COIN
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savemoresaveoften said
Agree totally. To me, equity investments should be mainly dividend yielding blue chips, as they have lasting power. Utilities, banks, telecom fit that profile well.
 

Unfortunately, banks and telcos are favourite political targets. We need more successful companies, not less. NORTEL, RIM, Bombardier all crashed and burned.

September 12, 2021
9:01 am
Norman1
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Loonie said

Yes, the S&P investor would be at $136.41 by 1936, but the Tbonds would be up to 165.42 and the Baa bonds would be up to 219.62 . Further, the S&P investor would, according to standard advice, likely have held on, only to see that investment plummet to 85.04 the following year, whereas the other 2 were relatively unscathed. I think that what this illustrates, apart from the extreme volatility of the market in that time frame, is how hard it is for investors to plan. One time you tell them to hang in for 10 years, another time the cutoff measured is six years; and for yet another time it's 25 yrs. It seems you only want to look at years where you can show a cumulative gain.

Bill was mistaken about the 25 years as the result of looking at a price average instead of a total return index.

The S&P investor who was accumulating would continue to invest through 1929 and World War II. The S&P investor who was retired and decumulating would in the years surrounding 1936 to sell some of their S&P stocks to build their GIC's and bonds back up to 10 years of requirements. The remaining S&P stocks can then ride another downturn, if needed.

With at least 5 years of spending covered in GIC's, the decumulating investor avoided having to sell near the bottom in 1929 and in the years immediately afterwards. That's the point: Not having to sell at a market bottom.

When someone looks at where to put their money, particularly an older person, it's reasonable for them to want to have a justifiable sense of how long they might have to wait for a result that will handily exceed other less risky options.
In the time frame of the 1930s, 10 years, they would have been much better off with other investments, as they would at 6 years or 7 years.

That's not the way it works with stocks. It is not predictable like that. One will handily exceed other options overall. Our previous analysis found that one will lose money on the S&P in about 6% of the ten-year periods. The remaining 94% of the periods will make it all worthwhile.

I don't know which holdings in my portfolio will cost me money. I know I will regret buying 20% to 25% them. The other 75% - 80% will more than make up for the losers to return overall around 2X what I would have earned in GIC's and bonds.

You will say that the 1930s were a very unusual time and will not be repeated. I regard that as conjecture. We simply don't know. After the debacle of 2008, virtually every money manager and financial expert claimed they had not seen that one coming. This myopia can recur, again, and again. For all we know, the next crash could be even worse than the 1930s.

No-one saw 1987, 2000, or 2020 coming either. I had near 100% equity exposure through those three crashes. It actually doesn't matter that I didn't see them coming as the returns in the good years overcome the losses in the bad years and more.

I'm not sure why you keep talking about annuities, but there is nothing wrong with buying the insurance they provide, in principle. They have made a decent retirement possible for a lot of people who would otherwise have outlived their retirement income. But they are not going to help everyone and are less helpful to buy now, with low interest rates. Deciding for or against them involves a full assessment of one's income streams and their sustainability for the rest of one's life and is not simply a question of what their returns are. They also help protect against unscrupulous POAs.

I mentioned annuities to one relative who was in her 70's. She didn't like the idea of not getting the rest of her money back should she not live long enough.

A few years later, I attended her funeral. Passed away within a year of a terminal cancer diagnosis. She was nowhere near age 85. The financial loss would have been significant had she purchased an annuity.

Annuities allow one to spend and party as if one will die around age 85. If one survives past age 85, then they are great: One can continue to spend and party, after one's money would have ran out, with someone else picking up the tab!

Annuities are not so great for those who don't survive as long. If one doesn't survive to that age and the end is not quick, then one will realize how much money one has just lost.

September 12, 2021
9:34 am
christinad
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Your analysis assumes investors are perfect and that they've buyed and held the whole time. My argument is most investors aren't perfect - they sell when the market crashed or just sold in the wrong time in general. I think if most people were honest they've made mistakes in their investing career. The s&p 500 return isn't valid at all. Just to add fees on top of that and investment returns are supposed to be substantially lower going forward

September 12, 2021
10:27 am
christinad
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Also, I definitely think there is generational difference as to who benefitted from the stock market. Definitely someone who retired in 1932 and needed to start drawing down his portfolio didn't fare well The other crash I hear talked about is 1987. Sorry I have no hard facts.

September 12, 2021
10:32 am
christinad
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According to this 1966 was actually the worst year to retire

https://seekingalpha.com/article/2826286-revisiting-the-worst-times-to-retire-in-history-2014-update

Sorry i'm on my to dimsum and have some time on my hands!

September 12, 2021
1:15 pm
Bill
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I have no need of annuities, but my view would be it's a can't lose proposition for me (the person I'm concerned about) if I'm in danger of running out of money before death. I can eliminate that fear by buying an annuity, so that's a great deal, lifetime income security guaranteed, my financial worries gone, what could be better? The minute I'm dead the size of my estate is irrelevant to me, my life is over so there's no winner or loser issue, or counting up what could have been, at that point.

My limited experience with old people fighting for their lives in their last months is that the size of their portfolio is way down the list of what they're focused on at that point.

September 12, 2021
7:00 pm
Loonie
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I think Norman and I are on completely different tracks in this discussion and there isn't much hope of us coming to an agreement. Norman has a fundamental faith that the past will continue to repeat itself, and I don't. Although he said in an earlier post that annuities are an insurance item, not an investment per se, he now assesses them as a poor investment. He was right the first time.

You can create scenarios where people could possibly have survived the Great Depression financially intact (and no doubt some did) but, as christinad suggested, it would require making perfect decisions, not having to suddenly support your adult children or parents or both, not losing other income for years on end etc. - all of which happened to people at that time and still happen today although in smaller numbers.

I did read the earlier bit about the 6% failure rate over 10 year periods. I don't find it reassuring. It actually serves to demonstrate that a 10 year horizon is not long enough to be assured of coming out ahead. And I think the odds are reasonable that those odds will get worse, for the reasons I have mentioned earlier.

September 12, 2021
7:57 pm
COIN
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If I remember correctly, the Dow Jones lost 10 years of gains in the 2009 recession. Of course, it has regained all that and more in the years since.

September 12, 2021
8:24 pm
AltaRed
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COIN said
If I remember correctly, the Dow Jones lost 10 years of gains in the 2009 recession. Of course, it has regained all that and more in the years since.  

The DJI is a useless index BUT the better S&P500 did indeed have a negative return (in CAD terms) for the 10 year period ending on 1/1/2009 per http://www.ndir.com/cgi-bin/do.....de_adv.cgi
Shift to one year later ending 1/1/2010, and the 10 year period is still slightly negative.
Shift an additional year ending 1/1/2011, and it is almost break even.
One more year and the CAGR for the 10 year period is positive.

That was not remotely the case for the Canadian TSX Composite though over that time period and perhaps not for Europe (have not checked). It was positive for all 10 year periods. Basically, if one wants to cherry pick (data mine), certain periods can likely be found in any single equity market. Japan for sure.

You won't find that to be the case with a diversified global portfolio using the MSCI World Index and that is what one would more likely own, would they not? Maybe with more than 3% in the Canadian market for home country bias, but generally the MSCI Index overall. Something like Blackrock's XEQT or Vanguard's VEQT for example.

I recognize many of the members here are disproportionately focused on HISA and GIC and the bias is showing. That is okay but some caution is warranted though. A GIC/HISA heavy investment portfolio has not been working so well the past few years and it may not improve much going forward. There is some risk it could be negative post-inflation and after-tax for the next decade. I think one really should be diversified in some way across asset classes, even if equities are a relatively small portion of it.

September 12, 2021
8:42 pm
COIN
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The Japanese Nikkei 225 went from 100 in 1950 to almost 39,000 by December 1989 but has not gone north of 30,000 since.

https://www.macrotrends.net/2593/nikkei-225-index-historical-chart-data

September 13, 2021
4:50 am
savemoresaveoften
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This is my take:
History always repeat itself in terms of there will always be some outsized bull market, follow by some “unexpected event” that results in a sizeable correction. But market always find a way to bounce back, the cycle is roughly every 10 years give or take. (1987, 1997, 2008, 2019)
One should always have a diversified portfolio, with some exposure in good quality equities regardless of age. As drawdown becomes more important, adjust the percentage accordingly.
Rates will probably stay low (compare to historically), and even if inflation becomes an issue, central banks prob will use other tools (no clue what new tools they have) to combat it, and not just rising interest rate rapidly. This is based on my thoughts the world is drowned in debt, jacking up interest rate in a fast pace hurts all (govt, business, individual).
Just like when rates go to zero, QE was invented, instead of taking rates to deep negative territory. Similar ‘creative’ tool will be used to combat inflation when it’s needed.

September 13, 2021
9:23 am
Bill
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QE is nothing new, just a new way of same old "printing money". I don't share your optimism that there are new, magic ways out of getting out from under debt you can never repay.

True the world is awash in debt, but for every borrowed dollar there is a lender at the other end who records that dollar as an asset, a receivable, so that offsets the debt. I'm guessing the way out of the debts ultimately will be (aside from inflating it away) default, so Western world pension funds, global bondholders, etc will be left holding the bag. But let's keep the debt party going at least until the Boomers are gone!

September 13, 2021
9:00 pm
Norman1
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christinad said
Your analysis assumes investors are perfect and that they've buyed and held the whole time. My argument is most investors aren't perfect - they sell when the market crashed or just sold in the wrong time in general. I think if most people were honest they've made mistakes in their investing career. The s&p 500 return isn't valid at all. Just to add fees on top of that and investment returns are supposed to be substantially lower going forward

Not true. With ETF's, one can easily get within ½% of the S&P 500 total return.

If one wants to get even closer, there are brokerages now that offer commission-free trading. It is now possible for a retail investor to buy the actual 500 stocks that make up the S&P 500, without paying 500 x $50 = $25,000 in commissions it would have costed when I started investing.

Also, I definitely think there is generational difference as to who benefitted from the stock market. Definitely someone who retired in 1932 and needed to start drawing down his portfolio didn't fare well The other crash I hear talked about is 1987. Sorry I have no hard facts.

Perfection is not needed. That's why there is all that stuff about ten-year horizons and runways.

If one is retiring in 1932, it would be quite stupid to wait until 1932 to start selling some stocks to build up the five to ten years of money in GIC's and bonds. Should have starting selling in tranches at least five years before to have the five to ten years of funds by 1932.

It is obvious to me that when one sells just in 1932, one could be selling at a market bottom.

September 13, 2021
9:18 pm
christinad
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My point is investors aren’t perfect. They invest in high mer mutual funds, they fall for investment scams, they buy high and sell low. Maybe things have improved but i still think a large number are investing that way. The majority of investors won’t get near the s&p return-and didn’t get to that point in the past. I invest in index etfs but get tired about the portrayal of equities as a perfect solution. There are problems with them. I believe in a balanced portfolio and that includes the much maligned fixed income.

September 14, 2021
5:28 am
Patch002
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20 or so years ago I had a conversation with a wise retired businessman. At the time, mutuals were earning 15% or more annually for a few years. I asked him why he didn't invest in the high earnings funds but stuck to the lower earnings/lower risk funds. His answer was "it beats a GIC" (he liked Trimark funds). He was satisfied with earning just higher than a GIC with less risk.

Every asset class has it day in the sun. Now it may be equity, tomorrow it may be Cash. Thinking back to what the businessman said, today's "Selective" HISA beats a GIC then it's worthwhile to place assets in there.

Where are interest rates headed? If up, then the place to be is short-term interest bearing assets. With very few exceptions, businesses do not increase earnings in a slowing-down economy (no matter what Wall Street says).

September 14, 2021
5:29 am
Bill
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I agree, christinad, human behaviour needs to be factored into any analysis. I've always said you have to do what allows you to sleep well, i.e. the key is knowing yourself. What's the point of all your saving, investing, if not to have a satisfied mind at the end of it all?

If you are ruled by emotion at times of stress (most people, imo) then the risk is higher you'll do the wrong thing when markets gyrate, if you're cool and logical under fire (my observation/opinion is a small group of folks are like this) the markets might be a suitable place for more of your money.

September 14, 2021
7:06 am
Loonie
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christinad said
My point is investors aren’t perfect. They invest in high mer mutual funds, they fall for investment scams, they buy high and sell low. Maybe things have improved but i still think a large number are investing that way. The majority of investors won’t get near the s&p return-and didn’t get to that point in the past. I invest in index etfs but get tired about the portrayal of equities as a perfect solution. There are problems with them. I believe in a balanced portfolio and that includes the much maligned fixed income.  

A whle ago, for a year or two, WealthSimple folks tried to operate a DIY investment system where, for an affordable fee, they would coach investors in DIY using ETFs, walking them through the decisions and also the online work. They found that it was not workable for them because people still found the process too hard and required too much coaching. So, they quit offering it. And these were people who were motivated to learn.
It may be simple for some people, and obvious, but it can't be seen as achievable for the population in general, most of whom don't receive any coaching at all and many of whom seem to be primarily interested in the fast buck and believe themselves capable of outwitting the markets (to judge from many questions posed by a lot of newbies on this forum and other personal conversations). They are entranced by reports of last year's or last five years' or whatever of certain results with some particular investment and believe they can repeat or exceed this going forward. And then they make mistakes and lose money, bail out, and may repeat this process.
Presenting the investment process as a slam dunk that anyone could do is dangerous because it projects an unwarranted confidence in the ability and willingness of most people to navigate these treacherous waters.

Every year, usually during RSP season, journalists write articles about investments that have recently done extremely well. It makes good news copy , and the person who managed the fund or the investment gets a big bonus. Then the reader goes and buys them, and the next few years they do poorly, so the investor sells, and that is how so many people can easily lose money.

September 14, 2021
7:39 am
COIN
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A comment on poor performing mutual funds.

There are no or very few poor performing mutual funds over a longer period (say 5 years) and that is because mutual fund managers "kill off" poorly performing mutual funds early in their lives.

September 14, 2021
8:56 am
Loonie
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COIN said
A comment on poor performing mutual funds.

There are no or very few poor performing mutual funds over a longer period (say 5 years) and that is because mutual fund managers "kill off" poorly performing mutual funds early in their lives.  

It's true that mutual fund compnies don't like to sully their copybooks with poorly performing funds as they don't attract new money and will lose earlier investors. They migrate them into a different fund with different mandate, so that their history vanishes. The old one MIGHT have been just about to have a good year, but the new one could be in a very different place historically.
If you must buy a mutual fund, look for one that's been around at least ten years, and with a management team that is fairly stable. My theory is that managers who are well treated by their firms will likely stay longer and will do a better job. They won't be under so much pressure to jump on the latest fad.

Please write your comments in the forum.