GICs: The problem with playing it safe Will corporate bonds give her the boost she needs? | GIC discussions | Discussion forum

I don't have an issue with the allocation splits but certainly do with the fixed income seletions. The cash component should be in a 5 yr GIC ladder since this is the 65 age to 75 age allocation. The CBO ETF pays hardly nothing as well. If this is for the medium term (age 75 and beyond), it should at least be in a medium term corporate bond ETF. Or better yet, all of the $140k beyond the near term could be in the Mawer Balanced mutual fund.

I am not as knowledgeable as some, but I don't find this article very satisfactory.
I am in awe of people who can sit there and make such bold-faced assumptions UPON WHICH THIS WOMAN'S SURVIVAL DEPENDS. Perhaps "awe and shock" would be a better way of putting it.

More often than not, people are looking for some kind of guaranteed, and preferably quick, fix, to a messy situation. And this one is no exception. Does it never occur to these people that there may not be ANY reliable fix when you're 59 years old?

We are not told exactly how much she lost, except that it was 40% of her stock portfolio. She has since been selling it all off. I have no problem with selling off the high-priced mutual funds.

However, to turn around and now put 25% of what's left right back in strikes me as nuts. The PH&N fund which has been recommended has a MER of 1.23% (higher than ETFs) and is rated by PH&N as "medium" risk, whereas this person says her risk tolerance is "low". Further, the risk of this fund has been amply demonstrated: it had significant losses in 2007, 2008, and 2011, and flat returns in 2004 and 2005. The return since inception in 2000 is -1.0% and the 10-yr return is 2.9%. The "advisor" advocates that this be used to fund the medium (15 to 25 yrs) and longer term (25+yrs). I can't think of a single reason to use this investment for this goal, especially given the track record for the last 14 years. Not to mention the fact that not everybody will live that long, and they may need to access their funds sooner rather than later for health care. Need I say any more on that?

The Mawer fund, although it has done much better in the past, has a similar MER and is rated by Mawer as "medium to high" risk. See above.

The advisor tells her she can expect an average 3.8% return overall. I doubt this, actually, since there is no reason to think much if any of that is coming from the 12.5% invested in PH&N. Safety is an overwhelming concern for this person, given her past experience and relatively small assets. If your expectation is only 3.8%, and you have to take significant risks to even hope to get that, it just doesn't seem worth it to me. I think it would make much better sense to forget the equities recommended, and put a healthy chunk of the money into longer term bond mix, not a fund, but rather the actual bonds, so that you know exactly what you are going to get. If she spreads out this investment, it won't be that much worse than the 3.8% which she may never see anyways, and she will sleep better at night - or should.

I too cannot make any sense out of the 1yr GIC. We are not told when Heather plans to retire, but, given her financial concerns and perky appearance, it seems reasonable to assume it will not be any time soon, so there is no known need for the cash in one year. The only explanation I can think of is that we are perennially told that rates will go up "next year". I guess this advisor is a true believer. However, in fact, we know nothing about how and when rates will move, and, as AltaRed has said, the only protection is a laddered investment.

If she really wants to get into equities to some extent, then for heaven's sakes let it be focused on established dividend producers. Failing that, a good (truly) balanced fund with an excellent track record of weathering the ups and downs, if there is one; if there isn't, then STAY AWAY.

This strikes me as a prime example of a "boiler plate" solution which does not take into account the person's real circumstances. It's a common one too. It makes me cringe when I hear these people say that in order to reach such-and-such goal you "must" take higher risks. What you need to do is be realistic and adjust your goals, particularly when you have relatively little to begin with. If you want to take risks, use your entertainment budget and buy lottery tickets. I am disappointed that MoneySense would put this forward. It's the less exciting portfolio that often wins the race. And perhaps it is for these reasons that kanaka put this in front of us?

It also makes no sense to consider all this without looking at what sort of retirement income she will have from CPP, OAS and her defined benefit pension plan. There should be some reasonable inflation protection in this package. Maybe the alleged "need" to take more risk isn't even real.

Oh, you're right, I mis-read defined contribution as defined benefit. My mistake. DC is not as reliable as DB.

I think the equities investment is where we would disagree, though, AltaRed. I don't see how anyone "has to" take the risk of equities. I know this is what is commonly said, and I find it very worrisome. The risk of losing principal is just too real, and she has already experienced it once. Why go down that road again, and at a time when she is even more vulnerable? If she was naïve enough to let herself get into that position once, what's to stop it happening again?

I know people who manage on OAS, CPP and GIS (all of which are indexed to inflation) plus little more than 10% of the cash that this woman has. They don't take vacations but they have kept their house and have enough to eat, watch cable TV and so on - and have been living this way for 20 years already. One of them worked FT to age 73. They would like to have more money. So would everybody. But they don't, and they have adjusted. "Heather" has more than they do. They would consider her rich.

If you are going to live another 25 years or more, then you are likely in good enough shape that you can work past 65. We all have to learn to live within our means. It's most unfortunate that she lost the money earlier, but it's gone. If she needs or wants more money than conservative investments allow, I think she should look for more income - perhaps work part time in retirement, share her house, work longer, maybe move to somewhere less expensive, get rid of a car and do car-sharing, etc. Postponing retirement anywhere up to age 70 will result in a significant increase in her CPP and OAS income and does not depend on individual investment decisions.

So not to lose sight of the original question, corporate bonds via the CBO ETF will not provide the boost needed. CBO is too new (5 yrs) to make a judgement and the circa 3.5-4% annual performance of the past 5 yrs occurred during the last gasps of the bull market in bonds. It's current YTM is only 2.1% before deduction of MER of 0.27%. A GIC ladder outperforms with a shorter duration than CBO's 3 yr duration.

Edited for grammar

Brian said

Before condemning all equities, it would be useful to know what she was invested in that she lost 40% in 2008. While there was a bad drop in market values in 2008, quality stocks, e.g. cdn bank shares, cdn insurance co shares (Manulife, Great West Life, SunLife,), utilities (Telus, BCE), and others eg Power Corp, Power Financial etc. etc. etc. have MORE than come back and continued to pay excellent dividends and continue to pay regular dividends which are increased fairly regularly. The trouble is when people panic and sell at big losses for no reason, then they incur guaranteed losses.

Well, Brian, I have to disagreed with you on this regard. It's easier to say than holding a portfolio by losing sleep. I can quote you a long list of companies which never come back. But that's no the point. The stock market look fantastic now I still remembered that the day manulife cut dividends, GE went below $5. And even Ontario teacher pension funds cut loss on Bell Canada and since then BCE started reversal.

The points are most of small investors won't do well because they are facing high frequency trading machines now, and I just don't want to say "market manipulation". Just be careful of those sure-wining buy and hold strategies.

I would say "capital preservation" is more important than "chasing return" when "saving for retirement".

I had decided not to get into the question of why Heather had sold off her stock market investment when it tanked. At best, it was simply a bad decision, as in "buy high, sell low", which she would have done better to have delayed. At worst, she had some really inappropriate investments that would never have served her well.

The reason I decided not to get into it is because, in the end, it's irrelevant. What matters now is that she has $200,000 remaining, and she is starting from square one with that money and must make the best of it and not repeat her errors.

She says explicitly that she is looking for low-risk investments. The stock market, especially at record highs, is never, in my view, a low-risk investment for someone with such limited assets. The advisor in the story has suggested medium to high risk stock market investments by the standards of their issuers. Dividend payers with an excellent track record might be an option for some small portion of her assets, as I said above, but anyone who invests in the stock market needs to accept the fact that things can go wrong. Everyone thinks they can tolerate some risk of decline, and especially that other people should be able to tolerate it, until it actually happens. Only Heather can make that assessment. She needs to be presented with a couple of options in terms of plans, with risk/benefit clearly and objectively presented. This did not happen with this advisor, and rarely happens with any advisor as far as I have seen.

Nobody can bank on living 25 years at this stage of life. Most of the advice that is being considered here is based on averages and projections, but in order to have averages you have to have outliers. Nobody can ever project stock market returns of any kind reliably. Perhaps I should repeat that. if you're depending on projections, you must accept the possibility that they will not pan out. Even if it were theoretically possible to project future returns, everyone would be on board, and this would ensure that they were not fulfilled, so it's totally impossible.

This is all fine unless you actually need the money at some specific point in time. Nobody can predict when that will be, and costly health crises are more common among retirees.

I am looking right now at a friend who has recently been diagnosed with a terminal illness. She will not likely survive more than a year. She is only in her early 70s but had every reason to think she might live well into her 90s as both parents did. She now needs all her money for attendant care and so on. If she had money in equities and this happened to be a bad year when one might like to let it sit until the market recovers, she would be completely SOL on that portion. Some people might want to take that risk, but others might not. Unfortunately, the plans offered do not identify the risk. It is assumed that somehow this will all work itself out in time, but time is not on everyone's side.

A conservative investor may not need the stock market. It really depends on a full assessment of their particular situation. Unfortunately, in Heather's case, we were not given all the details. Why take risks you don't have to at this stage of life? Not everybody will live to their late 90s to ride out the bumps. The next one might take longer than 4 years.

I'm not convinced that retirement years are the time to wait things out.

We were told that Heather also has a defined contrib pension plan. I don't know much about those, but it might make the difference between poverty and not. In any event, nobody was suggesting she put the entire 200,000 at risk, so she will have more than CPP and OAS. In Ontario, there is also GIS for people who don't have enough to get by; not sure how other provinces deal with it.

If she extends her working years, her CPP and OAS will increase significantly, up to age 70. It could mean an extra 4000+.
She could also consider an annuity at some point in the future for some of her money. It sounds like she is a single person, so would not be discounted by joint life provisions. Annuities are not terribly popular at the moment due to low interest rates but they can be a very good deal if people take the time to look at them. The contributions to the policy from people who die earlier than they had hoped are put towards paying the ones who survive, so that prevailing rates are only part of the story.

Another factor: she presumably has at least 5 more years in which to sock away more money.

I'm sure that among all of us, we could devise a much better plan than the person who did and who presumably makes a living out of so doing!

How come kanaka isn't talking??

Brian said

Before condemning all equities, it would be useful to know what she was invested in that she lost 40% in 2008. While there was a bad drop in market values in 2008, quality stocks, e.g. cdn bank shares, cdn insurance co shares (Manulife, Great West Life, SunLife,), utilities (Telus, BCE), and others eg Power Corp, Power Financial etc. etc. etc. have MORE than come back and continued to pay excellent dividends and continue to pay regular dividends which are increased fairly regularly. The trouble is when people panic and sell at big losses for no reason, then they incur guaranteed losses. If she was holding quality stocks and quickly sold them off at their lowest point, (in panic) then that was a really bad and unnecessary decision. We need to know a bit more to make an informed decision here.
....

I read the MoneySense article and suspect that was exactly what happened. She looked at her monthly or quarterly statements in 2008 and saw the value of her stock portfolio go down by 40%. I saw the same 30% to 40% drop in my stock portfolio value too.

I didn't panic. She did. She started selling and turned her paper losses into actual losses.

Brian said
....
I also agree she needs to have some equities (at her "relatively" young age) that are quality companies and pay good dividends and should be kept for the long term. I don't think bonds are the answer - in fact high interest daily savings at 2% and even 3% (when you can get it) might do better than bonds.

Agreed. I think the advice given for her by the money coach Annie Kvick is sound:

1. One-third of her money in cash (savings accounts and GIC's) for 6 years to 16 years from now when she's 65 to 75;
2. Another third of her money in 70% fixed income and 30% equities for 15- to 25-year time horizon for when she is 75 to 85; and
3. the remaning third invested 50% in fixed income and 50% in equities for 25+ years from now when she's 85 and beyond.

I agree with this statement from the article:

Vancouver money coach Annie Kvick says losing 40% of your portfolio when you’re five to 10 years from retirement is stressful. But investing her entire portfolio in GICs and bonds is risky because Heather could lose her nest egg to inflation, or even outlive her money entirely.

One may not risk losing dollars and cents having money in GIC's and savings accounts. But, one risks losing substantial purchasing power of that money when inflation exceeds the after-tax return from them. For example, if my returns end up 1% behind inflation for 25 years, I will lose 1 - (1 - 0.01)^25 = 0.2222 = 22.22% in purchasing power.

I am quite aware of DB and DC pension plans. That was not my point.

There was no indication whether she had a DC pension plan in addition to her self-directed RRSP or whether the self-directed RRSP was really a group RRSP and is the DC pension plan. Like most things, it depends on definitions used by the writer and/or how sloppy the writing was.