Investing in a world like this

  By Guest Blogger Sinan Terzioglu

.

Like millions of others I’m a big fan of Warren Buffett.  One of his most famous sayings is “Rule number 1: Never lose money.  Rule number 2: Never forget rule number 1.”  I think about these rules often.

Most investors should not hold individual securities, at least until they have built a balanced and diversified foundation to provide pension-like retirement cash flow.  How large that foundation should be depends on goals and circumstances but a good starting point is to aim for 30 times annual expenses.

Aside from the much higher risks in holding individual securities is the downside in holding these securities in registered accounts like RRSPs and TFSAs. We only get so much room in these, so they should be managed with a lot of care.  Most people lack employer pension plans so the responsibility is theirs to create and responsibly manage their own pension-like retirement portfolio.  Of course nobody buys individual securities thinking they’re going to lose money but the reality is the odds of suffering a loss are significantly higher than most realize.

I was recently asked: “I bought a marijuana stock a couple of years ago and it fell over 50% and now it’s bounced off the lows but I’m still down a fair bit.  I should average down because it’s so much cheaper and it has to go back up, right?”

Questions like this worry me.  Averaging down often results in throwing good money after bad and compounds the loss.  Most are better off to cut their losses and move on especially if a position has already become a decent portion of their portfolio.  Over the last 20 years, we have seen a handful of Canadian stocks that briefly became the most valuable companies listed on the TSX only to suffer catastrophic losses.  Twenty years ago Nortel Networks was the darling of the Canadian market before causing billions in losses.  A decade later Research in Motion (now Blackberry) fell from stardom and more recently Valeant Pharmaceuticals (now Baush Health) crashed, along with a countless number of energy and mining stocks.  When you lose 50% on a position you need a 100% return just to get back to even.  Think about the lost opportunity cost of the missed compounding.  That adds up to big money over the long term.

The odds of success holding individual stocks is a lot worse than most think.  Professor Hendrik Bessembinder of Arizona State University studied data on ~25,300 stocks listed in the U.S. for the period 1926 through 2015.  He found only 4% were responsible for the overall net gain in the U.S. market over those 90 years.  The other 96% collectively matched one-month Treasury bills over their lifetimes. 57% of stocks failed to even match one-month Treasury Bills.  More than half delivered negative lifetime returns.  Building and holding a diversified portfolio not only significantly reduces your odds of suffering losses but also significantly increases the chances of owning some of the super stocks that create incredible wealth over the long term and carry the indexes higher.

A new investor asked: “The markets are at an all-time high.  Do you think it’s a good time to be building a portfolio right now?”

Fact is, it’s never been a bad time to start investing when your time horizon is many years out.  When markets are hitting all-time highs one should certainly be cautious about valuations.  Twenty years ago when the tech bubble burst, valuations were astronomical.  Many outfits were not even profitable.  There are some tech companies trading today that remind me of that euphoria but I’m not concerned as the main drivers of the US market are by far the most profitable corporations ever, now trading at very fair valuations given their growth.  In 2019, companies in the S&P 500 index bought back nearly $1 trillion of their own shares.  Over the last five years Apple bought back ~US$250 billion worth.  That equates to consuming all of Royal Bank, TD and CIBC stock with just five years of free cash flow.  This is not a time to be fearful of owning index ETFs that hold a basket of cash cows like this.

Another client asked: “Do you think I should cash out after this run up?  The recent geopolitical tensions and now this coronavirus really scare me.  I just feel like it would be prudent to take risk off and go to cash.  If we get a pull-back I can buy cheaper and if we don’t I can always just buy back in”

Yes, we live in an uncertain world and must manage risk at all times.  From a portfolio perspective we start with balance, diversification and position sizing.  But the biggest risk is ourselves.  Over the years I have seen many investors get in their own way and attempt to time the market.  Most need to grow their savings at a rate that outpaces inflation and the best chance one has of achieving that goal is to craft an investment plan and stick to it. Time in the market is by far more important than timing the market.  The most successful investors know that patience and maintaining a long term perspective is critical.

By the way, a little over 40 years ago BusinessWeek published this:

The market was weak for a few years after this was published but then started an incredible run. Including dividends, the S&P 500 advanced 7,000%. Now imagine you were in your 20s, 30s or 40s in the 1980s and held off investing after seeing that publication.

Anything can happen in the short term but over a few decades the equity market has always produced very significant gains including periods of war, countless recessions and economic shocks. The best financial advice you can give to your children, grandchildren, nieces and nephews is to start as early as possible, stay invested and continue buying over time.  Maximize tax advantaged accounts and stuff TFSAs with growth ETFs.  Most importantly don’t lose money.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.   

 

76 comments ↓

#1 Blog Bunny on 01.26.20 at 11:40 am

Oh bunny, am I first ?

#2 Don Guillermo on 01.26.20 at 11:46 am

#57 Camille on 01.26.20 at 6:55 am
So the hedge fund that you and I can invest in is probably going to not be very good. I guess that’s the point. And Warren Buffett is a value investor, not a hedge fund, just like you and I. And some drive Porsches because they deserve to while others do not
*******************************************

You must have one of those “Who deserves to drive a Porsche” decoding wheels. Nice!

#3 Apocalypse2020 on 01.26.20 at 11:50 am

One exception:

Average down on all canned goods that go on sale.

And given the cataclysmic crisis looming ahead of us, look for Best Before dates of at least February 2022 on all canned goods. The small number of us that survive the next year will need at least two years of food supplies to have any future.

#4 Dr V on 01.26.20 at 11:59 am

“Most importantly don’t lose money.”

I believe Garth advises the biggest danger is not losing money, it’s running out of money.

#5 Yukon Elvis on 01.26.20 at 12:35 pm

A husband and wife Chinese spy team were recently removed from a Level 4 Infectious Disease facility in Canada for sending pathogens to the Wuhan facility. The husband specialized in coronavirus research.
https://www.cbc.ca/news/canada/manitoba/chinese-researcher-escorted-from-infectious-disease-lab-amid-rcmp-investigation-1.5211567

Virus-hit Wuhan has two laboratories linked to Chinese bio-warfare program
https://m.washingtontimes.com/news/2020/jan/24/virus-hit-wuhan-has-two-laboratories-linked-chines/

Canadian government scientist under investigation trained staff at Level 4 lab in China
https://www.cbc.ca/amp/1.5307424?__twitter_impression=true

#6 Dave on 01.26.20 at 12:44 pm

Does Garth get mad if you have less then 5 posts?

Heard he is a testy in his old age.

#7 MF on 01.26.20 at 12:47 pm

6 Sail Away on 01.26.20 at 11:50 am

Humans are animals yes.

But from a biological perspective our cells are different than many “other” animals. The viruses that are able to invade the cells of these “other” animals cannot do the same in a human being……..unless one human being gets close, like real close, or, ingests the virus directly…and one of those viral cells in the animal contains a mutation that allows it to change its shape slightly and invade a human cell. Boom. Here’s a novel virus none of us has immunity to and many of us are susceptible to, like the Wuhan strain.

MF

#8 Another Deckchair on 01.26.20 at 1:08 pm

Sinan – Interesting: “point is to aim for 30 times annual expenses.”

Hmmm – the 4% rule (Trinity study et. al.) is 25 times, some financial people say “$20.00 saved for every $1.00” which is 20 times, and Garth’s saying “1 million should throw off 60k” if I remember correctly, which is about double your number.

Why did you choose 30 times? You seem to have a good head on your shoulders, and I tend to listen in cases like this. If you can, and have the time to answer, why did you put that number down?

#9 cmj on 01.26.20 at 1:13 pm

Thanks for the grounding financial info, Sinan. I didn’t realize how much further ahead an investor would be if they chose the S&P 500 vs individual stocks
I have invested in the markets for over 40 years and was glad to find this blog and channel my money into ETFs and diversify. However, the market is quite high and we don’t have as long a horizon as others. Therefore, 20% is in GICs and the rest in ETF equities

#10 Sail Away on 01.26.20 at 1:39 pm

It is baffling that people would pay hedge funds when they can share in the world’s greatest investor’s portfolio by buying Berkshire, and pay nothing for the management.

Totally illogical.

I consider Berkshire a pseudo index on its own, and also usually mirror its choices in individual equities. That’s worked out quite nicely.

The annual AGM pilgrimage is always fun. Lodging can be expensive, though- starting around $350US / night. Totally worth it.

#11 SoggyShorts on 01.26.20 at 1:41 pm

#51 Yanniel on 01.26.20 at 12:35 am
#29 SoggyShorts on 01.25.20 at 7:39 pm
#11 Yanniel on 01.25.20 at 3:38 pm

4.) I’ll have just one ETF in my account at a given time.

I assume the account will be your TFSA or RRSP? Otherwise, you’d constantly realize all of your capital gains, right?

As for backtesting without data on VEQT etc using the couch potatoe portfolios would be pretty close I think.

#12 Yanniel on 01.26.20 at 1:43 pm

For the curious blog dog. “Paradigms shifts” by Ray Dalio contains a couple of tables summarizing the main asset classes nominal/real returns by decade.

Equities in the long run are pretty lucrative. Yet they can be in the dog house for full decades. Ex, in the 70th and 2000th equities had negative real returns. In the 30th equities ended up being flat.

#13 NoName on 01.26.20 at 1:47 pm

Tiger Woods, skill level – expert, luck level – none…

https://twitter.com/Breaking911/status/1221501892355874822

#14 FreeBird on 01.26.20 at 1:50 pm

“The best financial advice you can give to your children, grandchildren, nieces and nephews is to start as early as possible, stay invested and continue buying over time. Maximize tax advantaged accounts and stuff TFSAs with growth ETFs. Most importantly don’t lose money.”
—————————
Agreed, and avoid debt esp consumer. I’ve tried with mixed results incl a younger friend who’s a single parent working two jobs in health care. Good at it and loves it but surrounded by the push to spend. I used the analogy of it being better to own a $20 wallet and have $200 to put in it then vice versa and to have their taxes reviewed by a good accountant at least once. Even tried to plant a seed by showing how much investing a few hundred a month over 10, 20 years at ~5-6% could add up to and how much better a place they’d be in by retirement. Left it with them. Found out they told a co-worker for shock value. OK. And…fast forward they confirmed the financial apathy polls show by saying they’ll prob need to work forever. Oh well, think the debt advice got in. I tried.

#15 Yanniel on 01.26.20 at 2:10 pm

#11 SoggyShorts on 01.26.20 at 1:41 pm
#51 Yanniel on 01.26.20 at 12:35 am
#29 SoggyShorts on 01.25.20 at 7:39 pm
#11 Yanniel on 01.25.20 at 3:38 pm

4.) I’ll have just one ETF in my account at a given time.

I assume the account will be your TFSA or RRSP? Otherwise, you’d constantly realize all of your capital gains, right?

—-> That’s correct.

—-> One of the purpose of the backtest would be to estimate the average number of anual trades; so that I can gauge the tax impact in non-registered accounts. But I am not hopeful.

—> I am also considering capping the min equity allocation at 20% even if the model says 0%. My hope is to get something from mean reversion. This thing might end up being useless but I’d like to see.

As for backtesting without data on VEQT etc using the couch potatoe portfolios would be pretty close I think

—-> I was leaning towards dissecting VEQT and use the funds underneath. But even those core funds have no so long histories.

#16 Stan Brooks on 01.26.20 at 2:11 pm

That run in the stock market aligns/correlates perfectly with the depreciation of the USD against gold (dividends excluded).

As far as currencies are depreciating the stock market is the place to be. Also every inflation protected asset including real estate (unless overpriced 5 times as in GTA/Vancouver) might be a good hold in long run.

As our illustrious and obviously very incompetent central banker says (in an interview with extremely odd behavior which kind of makes you doubt your own sanity) : increasing interest rates by even 5 % will not impact house prices (?!?), interest rates will go down, the future is clear:

Interest rates at zero or negative, inflation of necessities, including food and rent increasing in high single/low double digits, banks charging fees for deposits. For a decade or two, picture that.

Pensions and fixed income ‘indexed’ at 1 %.

Enjoy,

#17 SoggyShorts on 01.26.20 at 2:35 pm

#51 Yanniel on 01.26.20 at 12:35 am

I used https://www.canadianportfoliomanagerblog.com/calculators/
to get the returns for VEQT before it was launched:

2015 10.30
2016 10.25
2017 13.93
2018 -3.59
2019 21.15

I don’t know about the MER or dividends for the above though

#18 Sail Away on 01.26.20 at 2:42 pm

#7 MF on 01.26.20 at 12:47 pm
6 Sail Away on 01.26.20 at 11:50 am

Humans are animals yes.

But from a biological perspective our cells are different than many “other” animals. The viruses that are able to invade the cells of these “other” animals cannot do the same in a human being……..unless one human being gets close, like real close, or, ingests the virus directly…and one of those viral cells in the animal contains a mutation that allows it to change its shape slightly and invade a human cell.

———————————

Sure, that’s just species-ism. There’s nothing inherently special about human cells versus other animals.

Many cat illnesses won’t transmit to humans or dogs similarly and vice versa.

Viruses, bacteria and parasites adapt over time, since killing your host is a poor long-term survival tactic. Many are multi-species such as mad cow disease, rabies, parasitic worms, flus.

It is just a matter of time until another plague hits humans. Very unlikely it would take out everyone, though. Similar to diseases introduced to rabbits in Australia that wipe out 99%… then the naturally immune 1% repopulate.

#19 @careeraftschool on 01.26.20 at 2:52 pm

I agree that most people should have a portfolio of ETF’s instead of individual stocks but that isn’t the best way to teach our kids about investing and financial markets.

I recommend buying shares (1 share each) in 5 to 10 companies the kids know and understand. Never sell them. This is a good starting point. Over the years some stocks will tank, some will go up, some will increase dividends and some will cut. This will set up the kids for decades to come. It’s then they will learn the importance of diversification and balance.

#20 Paddy on 01.26.20 at 2:56 pm

Sinan
Great point made about contribution room in registered accounts!
It boggles my mind how many people aren’t aware of how contribution room works in TFSA/RRSP….i.e: “if my stocks go down, I’ll just get the room back next year”………..”uhhhh, no buds, that room is gone forever unless you find some winning stock that goes up again”…..WHAAAAAT!

Don’t hold individual stocks in your TFSA/RRSP/LRSP,etc
If you wanna be a smart ass and try to beat the market, then do so in a taxable trading account….

#21 Yanniel on 01.26.20 at 3:00 pm

#17 SoggyShorts on 01.26.20 at 2:35 pm

Thanks. I’ll look it up later.

#22 Remembrancer on 01.26.20 at 3:22 pm

#5 Yukon Elvis on 01.26.20 at 12:35 pm
A husband and wife Chinese spy team were recently removed from a Level 4 Infectious Disease facility in Canada for sending pathogens to the Wuhan facility. The husband specialized in coronavirus research.
https://www.cbc.ca/news/canada/manitoba/chinese-researcher-escorted-from-infectious-disease-lab-amid-rcmp-investigation-1.5211567
———————————–
And where does it say that biological materials were transferred?

Any link between Wuhan and YVR condo prices to share maybe?

#23 Marc Roger on 01.26.20 at 3:23 pm

“RRSPs and TFSAs: We only get so much room in these, so they should be managed with a lot of care. ”

Good words.

#24 SoggyShorts on 01.26.20 at 3:48 pm

#19 @careeraftschool on 01.26.20 at 2:52 pm
I agree that most people should have a portfolio of ETF’s instead of individual stocks but that isn’t the best way to teach our kids about investing and financial markets.

I recommend buying shares (1 share each) in 5 to 10 companies the kids know and understand. Never sell them. This is a good starting point. Over the years some stocks will tank, some will go up, some will increase dividends and some will cut. This will set up the kids for decades to come. It’s then they will learn the importance of diversification and balance.
************************
There are a few things that I don’t like about this approach.
1. There’s a very high probability those 5-10 stocks will fail to beat the market, but if for some reason they hit a jackpot that goes up 500% they will learn the exact opposite lesson you hope to teach.
2. If they don’t hit that jackpot it’s just a waste of money- a virtual/practice portfolio should accomplish the same thing you are aiming for.
3. “5-10 companies that they know and understand? What does that mean? Hours upon hours of researching P/E ratios, dividend histories, industry macros, etc? That seems like a lot of wasted time when the answer will almost always be “Don’t buy individual stocks unless you have insider information, in which case: don’t get caught”

I don’t have kids, but if I did the simple lessons would be:
♦”Look at these fancy professional hedge fund dudes that lost the bet.”
♦”Just keep adding to your VGRO until you have a few hundred K, then look into an advisor(Robo or real)”
♦”Check out this blog about dogs”

#25 TF on 01.26.20 at 4:28 pm

Past performance is not indicative of future gains.

Reminds me of the people who were told to get a second and 3rd house. Right at the top.

Like seeing a 7000% gain.

Along with Buffets rule are you familiar with the “hot hand” theory?

#26 just a dude on 01.26.20 at 4:39 pm

Sinan,

Great post. Thank you.

#27 Treasure Island CEO - 112,323,434.88 Offshore on 01.26.20 at 5:02 pm

It has never been a better time to buy? Where have I heard that before?

Anyways, this article trending on pocket goes against Garth’s logic of renting.

Millennials Love Zillow Because They’ll Never Own a Home

Millennials are stuck renting, which, even with a decent landlord, research shows is destabilizing and mentally unhealthy compared with home ownership.

#28 @careeraftschool on 01.26.20 at 5:03 pm

#24 SoggyShorts on 01.26.20 at 3:48 pm
There are a few things that I don’t like about this approach.
1. There’s a very high probability those 5-10 stocks will fail to beat the market, but if for some reason they hit a jackpot that goes up 500% they will learn the exact opposite lesson you hope to teach.
2. If they don’t hit that jackpot it’s just a waste of money- a virtual/practice portfolio should accomplish the same thing you are aiming for.
3. “5-10 companies that they know and understand“? What does that mean? Hours upon hours of researching P/E ratios, dividend histories, industry macros, etc? That seems like a lot of wasted time when the answer will almost always be “Don’t buy individual stocks unless you have insider information, in which case: don’t get caught”

My responses

1) Some stocks could hit 500% or more and THAT is the lesson I am trying to teach them just like some could go to zero. That is why I prefer around 10 stocks. I would personally stick with blue chip stocks that pay a dividend.

2) This is exercise is not a waste of money if they don’t hit a jackpot. They will learn something. 1 share each of 10 Canadian blue chip stocks would generally be cheaper then 1 University class with textbook & supplies. Ask a parent or current student to confirm. Virtual accounts don’t teach you anything because there is no skin in the game. That’s why they haven’t taken off. Try to play poker with no money on the line and see what happens.

3. Understanding a company could be as simple as understanding how they make money. Show a kid long lineups at Starbucks, Tim Hortons and McDonalds and they get it. A cup of coffee costs 5 cents and these companies sell it for $3 to $4. Don’t need a CPA to figure out they have great profit margins. Also companies can’t fake dividends, cash has to be deposited into the investors account. If a company grows that dividend consistently then they must be doing something right. Most Canadian banks have paid dividends and raised them for around 150 years. Yes, 150 years.

#29 30x annual expenses on 01.26.20 at 5:13 pm

Hi Sinan, garth has said in past 1 million for stock portfolio. So I need 60k per year so you saying 1.8 million a person should have?
Thanks
Curious George

#30 SoggyShorts on 01.26.20 at 5:16 pm

#25 TF on 01.26.20 at 4:28 pm
Past performance is not indicative of future gains.

It reminds me of the people who were told to get a second and 3rd house. Right at the top.

Like seeing a 7000% gain.

Along with Buffets rule are you familiar with the “hot hand” theory?
**********************
Isn’t it “Past performance is not a guarantee of future performance.”?

The difference is important as past performance is actually a pretty good indicator most of the time with enough data.
E.G. “The market goes up most of the time over long periods”
but not
“Yesterday stock XYZ gained 10% so tomorrow it probably will too”

As for “hot hands” it again depends on the data and how you are interpreting it.
E.G. “When tossing a coin I’ve been getting heads a lot, I’m on a role- bet on me to get heads the next toss” is obviously a fallacy.
But an Advisor like the bearded one who has consistently returned an average of 7.x% with reasonable volatility to clients could also be considered to have hot hands(since he’s beating hedge fund managers), and I’d happily bet on him continuing to do so.

#31 Dave on 01.26.20 at 5:24 pm

Your analysis is flawed. First of all, if only 4% of stocks were responsible for the majority of gains, then holding index funds would be a poor investment, as you would have the other 96% of stocks that supposedly didn’t make money. Second, you cite risky stocks, pot stocks, tech stocks like Nortel, going under. If you hold conservative blue chip Canadian dividend paying stocks, the longer term picture is far different. How many of the big 5 Canadian banks of gone under? None, what about the telcos and the cable companies? Railways? And why do you think it is necessary to refrain from individual stocks until you have a huge sum of money? You can diversify adequately with 20-25 stocks, so even with a few hundred thousand one should be able to do this.
As far as timing, other than short term horizons, one should generally invest when they have the money.

#32 Stan Brooks on 01.26.20 at 5:32 pm

‘We live in an uncertain world’ is putting it mildly.

The news from China is not good at all. This thingy apparently spreads without detectable symptoms.

+ other bad news:
https://www.businessinsider.com/kobe-bryant-dead-helicopter-crash-in-calabasas-california-2020-1

Tomorrow I am going to light a candle of pure bee-wax as it seems praying is pretty much what is left at this point, unless you count on authorities; seeing the central banker in action: good luck with that.

#33 TurnerNation on 01.26.20 at 5:54 pm

All the new guys are out this weekend.

I’ve been pounding the table, that the 2020-2021 things will be moving SO fast. (I mean it’s not like there a global plan or something…I don’t leave even my breakfast to chance).
We’ve forgotten all about Iran and now it’s a global sun virus. And January is still on.
Always global.
What’s next. The noose is tightening. Always they like restricting our travelling.

#34 Stone on 01.26.20 at 6:05 pm

Most investors should not hold individual securities, at least until they have built a balanced and diversified foundation to provide pension-like retirement cash flow. How large that foundation should be depends on goals and circumstances but a good starting point is to aim for 30 times annual expenses.

———

I’m curious to know how many people get to 30 times annual expenses invested. I have a suspicion it’s very, very, very low as in only 1% low. Otherwise, Garth wouldn’t say over and over that it’s not about losing money but running out of it that’s the biggest risk.

#35 crowdedelevatorfartz on 01.26.20 at 6:40 pm

@#5 Yukon Elvis

Sooooo, dont mess with Canada?

#36 Yanniel on 01.26.20 at 6:41 pm

#24 SoggyShorts on 01.26.20 at 3:48 pm

#19 @careeraftschool on 01.26.20 at 2:52 pm
I agree that most people should have a portfolio of ETF’s instead of individual stocks but that isn’t the best way to teach our kids about investing and financial markets.

I recommend buying shares (1 share each) in 5 to 10 companies the kids know and understand. Never sell them. This is a good starting point. Over the years some stocks will tank, some will go up, some will increase dividends and some will cut. This will set up the kids for decades to come. It’s then they will learn the importance of diversification and balance.
************************
There are a few things that I don’t like about this approach.
1. There’s a very high probability those 5-10 stocks will fail to beat the market, but if for some reason they hit a jackpot that goes up 500% they will learn the exact opposite lesson you hope to teach.
2. If they don’t hit that jackpot it’s just a waste of money- a virtual/practice portfolio should accomplish the same thing you are aiming for.
3. “5-10 companies that they know and understand“? What does that mean? Hours upon hours of researching P/E ratios, dividend histories, industry macros, etc? That seems like a lot of wasted time when the answer will almost always be “Don’t buy individual stocks unless you have insider information, in which case: don’t get caught”

I don’t have kids, but if I did the simple lessons would be:
♦”Look at these fancy professional hedge fund dudes that lost the bet.”
♦”Just keep adding to your VGRO until you have a few hundred K, then look into an advisor(Robo or real)”
♦”Check out this blog about dogs”
—-
This are notes I wrote down as I listened to a podcast between Chris Brightman and Meb Faber.

Chris described the portfolio he is telling his kids to use (unverified). He called “Dad’s cookbook”.

The approach makes sense to me; but I don’t know if I had what it takes to not re-balance this thing and to keep it going for decades.

Notes:

Use 10 ETFs that create a broadly diversified portfolio.

1. US Equities,
2. Developed Ex Us
3. EM
4. REITS,
5. Commodities,
6. TIPS,
7. Government Bonds,
8. Bank Loans,
9. EM Debt,
10. High Yield Bonds.

Allocate same amount of money initially. Then:

Accumulation phase: Start automatic deposits each month. Each full monthly contribution goes to the ETF with the lowest market value. You are over rebalancing, putting the money in the one that’s cheapest. Continue to do that on auto for about the next 40 or 50 years and when you retire you will retire more than sufficient assets last you the rest of your life.

De-accumulation (Retirement) phase: reverse the process. When making withdrawals, pick and sell the one of the 10 that has the highest market value.

Start saving now, buy a diversify portfolio, always maintain a diversify portfolio, make your additions to the asset class that are cheapest, in the de-accumulation phase systematically sell what’s most expensive.

#37 Yukon Elvis on 01.26.20 at 7:13 pm

#35 crowdedelevatorfartz on 01.26.20 at 6:40 pm
@#5 Yukon Elvis

Sooooo, dont mess with Canada?
…………………………….

Don’t mess with bugs.

#38 crowdedelevatorfartz on 01.26.20 at 7:18 pm

@#27 Flotsam Beach ga-zillionaire
“Millennials are stuck renting, which,….. research shows is destabilizing and mentally unhealthy compared with home ownership…..”
+++++++

Bwahahahaha

Lets me guess.
The “research” was paid for by our beloved and trustworthy Real Estate cartel ?

Thanks for the laugh.

#39 Smoking Man on 01.26.20 at 7:31 pm

Koby, Daughter, and the Others.

Tragic…

My God help you and your families..

#40 Camille on 01.26.20 at 7:32 pm

Don, so intuitive of you, Hahaha. Yes, I was feeling my decoder wheel was saying some shouldn’t drive Porsches, being underserving. Thank you for pointing that out. I am humbled. To today… you can have your assets properly managed for 1%, if you have a million or more. The manager will hold individual stocks and bonds, so as not to bear additional costs. And BMO sells mutual funds with various asset mixes and charges 1.5%, with some additional one-time costs.
And with a little interest rate risk, bonds are set to return 2X stock returns, for the month of January, and are insurance against a stock drawdown. I’m very superstitious, and hope I haven’t jinxed that trade.

#41 Sinan Terzioglu on 01.26.20 at 7:33 pm

#8 Another Deckchair on 01.26.20 at 1:08 pm

Sinan – Interesting: “point is to aim for 30 times annual expenses.”

Hmmm – the 4% rule (Trinity study et. al.) is 25 times, some financial people say “$20.00 saved for every $1.00” which is 20 times, and Garth’s saying “1 million should throw off 60k” if I remember correctly, which is about double your number.

Why did you choose 30 times? You seem to have a good head on your shoulders, and I tend to listen in cases like this. If you can, and have the time to answer, why did you put that number down?

I chose 30 times as a starting point but its not a one size fits all as it depends on what age you plan on retiring and many other factors. With the FIRE movement today and many aiming to retire in their 40’s and 50’s one has to ensure they can support themselves/families for up to 5 decades. Having enough growth and income every year to cover your basis needs is great but there are going to be a lot of unexpected expenses over a few decades and some potentially very expensive ones so better to plan to have more than enough vs just enough.

– Sinan

#42 Ronaldo on 01.26.20 at 7:44 pm

Good article by Conrad Black

https://nationalpost.com/opinion/conrad-black-what-did-canadians-do-to-deserve-this-government

#43 Sinan Terzioglu on 01.26.20 at 8:06 pm

#31 Dave on 01.26.20 at 5:24 pm

Your analysis is flawed. First of all, if only 4% of stocks were responsible for the majority of gains, then holding index funds would be a poor investment, as you would have the other 96% of stocks that supposedly didn’t make money. Second, you cite risky stocks, pot stocks, tech stocks like Nortel, going under. If you hold conservative blue chip Canadian dividend paying stocks, the longer term picture is far different. How many of the big 5 Canadian banks of gone under? None, what about the telcos and the cable companies? Railways? And why do you think it is necessary to refrain from individual stocks until you have a huge sum of money? You can diversify adequately with 20-25 stocks, so even with a few hundred thousand one should be able to do this.
As far as timing, other than short term horizons, one should generally invest when they have the money.

There have been several studies with similar conclusions so ‘my analysis’ is fact. Most retail investors attempting to build portfolios of individual stocks do not put in the necessary time and effort to adequately research and monitor their portfolios. They take on far more risk than they realize. I agree that the Canadian banks and Canadian railways are incredible companies and investments but there are many more that are not. Take a look at how many financial companies and cable companies have gone bust in the US. Take a look at the long term charts of widely held Canadian energy names such as Suncor and mining names such as Barrick Gold. You could have included these in your portfolio of 25 stocks and wished you hadn’t. Unless one spends the necessary time analyzing and understanding balance sheets, cash flow statements, attends shareholder meetings and continually stays on top of their investments they are far better off owning diversified ETFs because they can achieve very similar results with a lot less risk and effort. Again, if one puts in the time and effort it can be rewarding but obviously most people will not.

– Sinan

#44 Nonplused on 01.26.20 at 8:17 pm

The thing I worry about in a world like this where so many investment decisions have become more or less automatic, like index ETF’s for example, is how much of the valuation is real and how much is just a feedback loop.

For example TSLA seems to have no road to profitability and no proprietary technology, and they don’t sell very many cars. Yet they are worth more than GM. GM was building electric cars far before TSLA even existed but they abandoned the effort because they couldn’t sell them. They couldn’t even lease them. You think they don’t have the technology to compete if the electric car eventually takes off? So who in their right mind is buying TSLA at these valuations? Well, funds. They have to own it because of its market cap, even though it must go bankrupt before it ever turns a profit.

I think there is still something to be said for “value investing”. When you follow an index, well you are buying both ends of the cow.

For example if we had a fund that invested in all manner of government bonds, should we treat Illinois the same as the Fed? Nope.

But value investing is hard to do. You can’t really tell whether a particular company has a good future or is lying. Yellow Pages was a good example. They didn’t see Google coming, and went from a blue chip dividend stock to a 10 for 1 reverse split in a couple of years. Or Bre-Ex, which turned out to be a total scam. Or RIM, which got eaten by a music player with a new chip.

But I don’t know that you eliminate the back end of the cow just by buying the whole thing. You’ll still end up weighted to a bunch of crap. The problem is that it is really hard for most people to tell which end of the cow they are fondling. I am sure there are people who can do it, but they don’t work on my account, they work for Buffet.

#45 SoggyShorts on 01.26.20 at 8:20 pm

#28 @careeraftschool on 01.26.20 at 5:03 pm
#24 SoggyShorts on 01.26.20 at 3:48 pm

1) Some stocks could hit 500% or more and THAT is the lesson I am trying to teach them just like some could go to zero. That is why I prefer around 10 stocks. I would personally stick with blue chip stocks that pay a dividend.

*************************
I’m missing something.
You personally go for blue chip.
Blue chips afaik never get 500% gains.

So if you let your offspring pick 10 companies either you coach them into your way or you let them go and they might hit a lucky jackpot, but you can’t have both.

Realistically if you only pick 10 stocks or even as low as 5 stocks as per your initial idea, you should never get a 500% return on one unless it’s a super risky bet, and I wouldn’t think you’d want that in such a small portfolio.

#46 Apocalypse2020 on 01.26.20 at 8:24 pm

BREAKING NEWS

US attacked in Iraq.

https://www.cnn.com/2020/01/26/politics/rocket-hits-us-embassy-compound-baghdad/index.html

Things come together in unexpected ways. Total chaos could be coming quickly.

Expect it.

PREPARE

#47 SoggyShorts on 01.26.20 at 8:27 pm

#40 Camille on 01.26.20 at 7:32 pm

And with a little interest rate risk, bonds are set to return 2X stock returns, for the month of January, and are insurance against a stock drawdown. I’m very superstitious, and hope I haven’t jinxed that trade.

****************************
Which bonds? Which Stocks?
I’m seeing XIU & XUU at 3% for stocks and I don’t know of any bonds that will be at 6% YTD

#48 Yanniel on 01.26.20 at 8:45 pm

#8 Another Deckchair on 01.26.20 at 1:08 pm

That topic of how much to save for retirement blows my mind. I personally save/invest each penny I can because life can happen in a way for which non of those rules apply. The articles below show the complexity around those topics.

https://blog.thinknewfound.com/2019/04/the-path-dependent-nature-of-perfect-withdrawal-rates/

https://blog.thinknewfound.com/2017/09/butterfly-effect-retirement-planning/

#49 SoggyShorts on 01.26.20 at 8:59 pm

#8 Another Deckchair on 01.26.20 at 1:08 pm
Sinan – Interesting: “point is to aim for 30 times annual expenses.”

Hmmm – the 4% rule (Trinity study)

*******************************
The Trinity study is very flawed.

1. So far we can only gauge the success or failure of cohorts that started retirement up until 1989 for a 30-year horizon. There’s a solid chance that many of those retiring around the 2000 bust won’t make it since they are STILL underwater now in real terms.

2. It only does 30 years (or less). With increasing lifespans and earlier retirements, this is no longer enough.

3. Retiring when markets are at low valuations is good because the markets have more room to go up, but in an environment like ours where everything is pretty expensive, there is a lot of room to go down. If you were to only simulate the historical scenarios where CAPE>20 then the failure rate of 4% withdrawals rises dramatically.

I got hooked on the 4% rule a few years back and planned to have FIREd already by now but after taking a deeper look at it decided to put in a couple more years and reduce to a more conservative 3.65% withdrawal rate.
Note: My personal SWR of 3.65% is based on many factors such as CAPE, pensions(OAS&CPP), asset allocations, legacy(I don’t have kids, so dying with greater than $0 is a win) and expected longevity.

Each person’s case will be a little different.

If you are interested in a much more thought out version of the Trinity Study I strongly recommend
https://earlyretirementnow.com/safe-withdrawal-rate-series/
the source of basically everything I posted above.

And he even has an incredibly robust spreadsheet where you can get your own “safe withdrawal rate” based on all of your personal factors.

#50 crazyfox on 01.26.20 at 10:16 pm

No Sunday piece from Garth. What happened, had a meeting with someone from China and down with the flu?

#51 Dave on 01.26.20 at 10:29 pm

“#31 Dave on 01.26.20 at 5:24 pm

Your analysis is flawed. First of all, if only 4% of stocks were responsible for the majority of gains, then holding index funds would be a poor investment, as you would have the other 96% of stocks that supposedly didn’t make money. Second, you cite risky stocks, pot stocks, tech stocks like Nortel, going under. If you hold conservative blue chip Canadian dividend paying stocks, the longer term picture is far different. How many of the big 5 Canadian banks of gone under? None, what about the telcos and the cable companies? Railways? And why do you think it is necessary to refrain from individual stocks until you have a huge sum of money? You can diversify adequately with 20-25 stocks, so even with a few hundred thousand one should be able to do this.
As far as timing, other than short term horizons, one should generally invest when they have the money.

There have been several studies with similar conclusions so ‘my analysis’ is fact. Most retail investors attempting to build portfolios of individual stocks do not put in the necessary time and effort to adequately research and monitor their portfolios. They take on far more risk than they realize. I agree that the Canadian banks and Canadian railways are incredible companies and investments but there are many more that are not. Take a look at how many financial companies and cable companies have gone bust in the US. Take a look at the long term charts of widely held Canadian energy names such as Suncor and mining names such as Barrick Gold. You could have included these in your portfolio of 25 stocks and wished you hadn’t. Unless one spends the necessary time analyzing and understanding balance sheets, cash flow statements, attends shareholder meetings and continually stays on top of their investments they are far better off owning diversified ETFs because they can achieve very similar results with a lot less risk and effort. Again, if one puts in the time and effort it can be rewarding but obviously most people will not.

– Sinan”

I agree and if one has hundreds of thousands invested, it makes sense to either spend the time to ferret out these companies or subscribe to an investment newsletter with a good track record. I’ve done the latter with an average return of 9 percent over 10 years.

#52 Sail Away on 01.26.20 at 11:10 pm

Here’s your piece of happy climate news:

https://www.kdlg.org/post/623-million-bristol-bay-s-2018-salmon-season-largest-ever

2019 was also a bumper year, but not the biggest ever.

Nice to know it’s not all doom & gloom, eh? Actual data is always helpful as well.

#53 Sail Away on 01.26.20 at 11:18 pm

#46 Apocalypse2020 on 01.26.20 at 8:24 pm
BREAKING NEWS

US attacked in Iraq.

https://www.cnn.com/2020/01/26/politics/rocket-hits-us-embassy-compound-baghdad/index.html

PREPARE

———————–

Lucrative news if you own Lockheed Martin or other US defense contractors.

#54 Hal Burton on 01.27.20 at 12:17 am

“Never buy a stock until your balanced portfolio produces a retirement equivalent income? After 40 years of saving in a B/D portfolio you might reach a million if your lucky. With consumer inflation raging at 20%p/a , where will other 5 million come from to achieve a living standard?

If you’d started saving 40 years ago the models indicate you would have a bit under a million, but $60,000 p/a 6% vaunted return) is no longer a comfortable retirement. Not by a long shot.

You need growth, the only way you can get that is in the stock market. Buffet might have said “never lose money” but in fact he’s lost a lot.

Now, what’s wrong with buying growth with companies like CP Rail and many others that doubled and tripled in the past five years? CP is no phony gold score or flighty battery farm. Real companies that produce real things and pay a dividend is the way to go.

#55 Don Guillermo on 01.27.20 at 1:01 am

#50 Don Guillermo on 01.27.20 at 12:56 am
#40 Camille on 01.26.20 at 7:32 pm
Don, so intuitive of you, Hahaha. Yes, I was feeling my decoder wheel was saying some shouldn’t drive Porsches, being underserving. Thank you for pointing that out. I am humbled
*******************************************
Nice response Camille. I think we could get along! Fee base investing is the way to go

Oops, Meant fee based. Sounded too much like freebasing.

#56 Fortune500 on 01.27.20 at 1:17 am

Oh no! Two guest bloggers in a row. Say it ain’t so Garth! It’s happening … now where will I go?

#57 Jim Beem on 01.27.20 at 6:15 am

China estimates 44 thousand infected with Wuhan worldwide with many incubating and not showing symptoms.

https://www.aljazeera.com/news/2020/01/china-battles-coronavirus-outbreak-latest-updates-200127021414201.html

Canada hasn’t confirmed a single case? Miracle? The truth will hit the fan soon enough.

#58 Apocalypse2020 on 01.27.20 at 7:36 am

2nd case of the virus now in Toronto. It is quite normal to see this with a disease outbreak, but understand this is literally what is meant by going ‘exponential’. The multiplier effect will be much more obvious in the days ahead, especially since it appears that China has not been telling everything it should.

https://www.thestar.com/news/gta/2020/01/27/second-presumptive-case-of-coronavirus-confirmed-in-toronto.html

This is just the ‘calm’ before the storm.

PREPARE

#59 IHCTD9 on 01.27.20 at 8:21 am

#34 Stone on 01.26.20 at 6:05 pm

How large that foundation should be depends on goals and circumstances but a good starting point is to aim for 30 times annual expenses.

———

I’m curious to know how many people get to 30 times annual expenses invested. I have a suspicion it’s very, very, very low as in only 1% low. Otherwise, Garth wouldn’t say over and over that it’s not about losing money but running out of it that’s the biggest risk.
___

30X sounds like a solid number, I don’t think you’d want it to be much less than that unless you have a pension or two on top.

Ms. IH and I have been throwing modest amounts into investments since our mid 20’s, and it so far appears hitting 30X expenses is completely doable. It also helps having low projected expenses.

I agree not a large percentage of Canadians will hit that number given that half the country appears to be permanently broke. I think many could have though, given different decision making.

#60 crowdedelevatorfartz on 01.27.20 at 8:25 am

Welcome to the the land of the Dinosaurs.

https://www.citynews1130.com/2020/01/26/uber-surrey-fines-bylaw/

The Taxi cartel (once again)has proven it is strong in Surrey.
BC’s Lower Brainland has been dealing with an archaic taxi licensing system for decades.
Each municipality has its own licensing system , which the taxi ownership monopoly wants protected at all cost.
They are major contributors to politicians of all walks and stripes.

Apparently Surrey By-law Enforcement arent busy enough handing out parking tickets….it took 4 of them to “catch” a “pigeon”.

And govt officials wonder why the taxpayers treat them with absolute disgust.

#61 crowdedelevatorfartz on 01.27.20 at 8:37 am

My my.
The hysteria is ramping up in China.

https://www.reuters.com/article/us-china-health-reward/china-county-offers-reward-for-identifying-people-from-virus-hit-wuhan-idUSKBN1ZQ1BN

#62 Frank on 01.27.20 at 9:04 am

Great article Sinan! As someone who is in the accumulation phase, it is always helpful to be reminded that the best time to invest is when you have the money.

#63 Sail Away on 01.27.20 at 9:46 am

#60 crowdedelevatorfartz on 01.27.20 at 8:25 am

Apparently Surrey By-law Enforcement arent busy enough handing out parking tickets….it took 4 of them to “catch” a “pigeon”.

And govt officials wonder why the taxpayers treat them with absolute disgust.

———————————–

Fartz, I thought you’d be cheering the bylaw officials based on your approval of Van council voting to expropriate the Sahotas private property for $1.

What gives? One much larger abuse is fine but the other isn’t?

#64 James on 01.27.20 at 9:58 am

Investing is something that you have to stay focused on constantly. You need to keep this second job going 24/7/365 just to stay ahead of the curve. I find it exhausting but satisfying. I have winners and I have losers. Some of my pics are meh and some are phat.
VZ, T, IBM, PFE, INTC, MRK, XOM, and of course APPL. The last one I worry about so it may be time for a dump for me.

#65 Not So New guy on 01.27.20 at 10:05 am

#38 IHCTD9 on 01.25.20 at 8:29 pm

#16 Ustabe on 01.25.20 at 5:25 pm
——-

I find small towns sometimes have a huge disparity in their budgets for the same services.

The City I pay taxes to, 50K pop. 8.4% of the budget for Fire and Police.

Sudbury taxes, 165K pop. 32% of the budget for Fire and Police.

Both have city Fire and OPP – why almost 400% more in Sudbury?

==================================

To venture a guess I would say that because there would tend to be more serious crime in a larger population, more resources would need to be allocated to policing

I don’t think that would account for all of the discrepancies but I’m sure it would account for some

#66 James on 01.27.20 at 10:10 am

#58 Apocalypse2020 on 01.27.20 at 7:36 am

2nd case of the virus now in Toronto. It is quite normal to see this with a disease outbreak, but understand this is literally what is meant by going ‘exponential’. The multiplier effect will be much more obvious in the days ahead, especially since it appears that China has not been telling everything it should.

https://www.thestar.com/news/gta/2020/01/27/second-presumptive-case-of-coronavirus-confirmed-in-toronto.html

This is just the ‘calm’ before the storm.

PREPARE
_________________________________________
Didn’t this start of in a slow protracted outbreak as well.
I do recall it didn’t end well.

https://www.youtube.com/watch?v=lO8EJQzkYxg

#67 IHCTD9 on 01.27.20 at 10:54 am

#42 Ronaldo on 01.26.20 at 7:44 pm
Good article by Conrad Black

https://nationalpost.com/opinion/conrad-black-what-did-canadians-do-to-deserve-this-government
___

What would you think of a buddy who worked part time at Timmies who was talking about buying a new C8 Corvette, a new SXS, and basically never shut up about all the stuff he was going to do – but you knew his paycheque was only 250.00/wk?

Well, that is what we got in Ottawa right now. Lots of talk, but no money to make any of it happen.

I have to laugh when I hear about all the SJW/Climate crap the Libs are planning on. I’m totally rolling on the floor when I hear they would like to cut taxes and help the middle class, while making the “rich” pay for it.

From where I stand, the Libs have made some intergalactic policy errors resulting in everyone and their brother getting 4 and 5 figures worth of tax free handouts every year. Trudeau has ensured that half the bloody working population is not paying income tax anymore. Meanwhile, tens of thousands of Canadians laugh at the CRA while working/renting under the table worry free. Everything Trudeau does results in less revenues for the government, and more debt for the few remaining taxpayers he has left.

I am sure the Libs will soon understand what they must do.

LOL! Yeah right!! Not going to happen of course, which means 4 years from now my bro and I will have (another) 190+ Thousand worth combined of taxes returned to us by these goofs in Ottawa. No problem, I like new trucks; but the rest of you kids better watch the currency if Canadians have dispensed with fiscal Conservatism. Don’t think it can’t happen here someday, 20 years goes by fast. Make sure you pay attention unless you want to live under IMF imposed austerity measures and pay 15.00 for a large double double.

#68 Phylis on 01.27.20 at 10:57 am

I understand the 30X is an initial target, but does that assume a Canadian that maxes tfsa, rrsp and non reg? I would think so, since getting there without filling the first two i see very few reaching 30x as a typical Canadian. Basically i’m wondering how taxes were included in the number and if this was derived from an American study. If i recall, you did some time there.

#69 LP on 01.27.20 at 11:56 am

#65 Not So New guy on 01.27.20 at 10:05 am

Years ago, when I worked in Guelph, there was always a large discrepancy between the published figures for population and the actual population number. The reason I was given: there is provincial legislation that says a community must have “x” number of firefighters/police officers per 10,000 people. A community that was able to conceal the number of its citizens was able to have fewer police officers/equipment and fewer firefighters/equipment. Thus, the costs for those two services could be lower than they should have been.

#70 IHCTD9 on 01.27.20 at 12:50 pm

#65 Not So New guy on 01.27.20 at 10:05 am

To venture a guess I would say that because there would tend to be more serious crime in a larger population, more resources would need to be allocated to policing

I don’t think that would account for all of the discrepancies but I’m sure it would account for some
___

Yes, some of it. The population in my area is quite old, so what you see is the Police twiddling their thumbs while the Paramedics are running their @sses off. Fire hasn’t got much to do either, 2-3 buildings on fire per year along with the odd bush fire – but they seem to be doing more and more Paramedic type work these days.

I googled crime in Sudbury, and it does look like it has climbed significantly in the last 3-4 years. Going to be real tough on homeowners up there if they can’t get a handle on it quickly. I read that the Sudbury City budget is funded 47% by Property taxes alone.

Windsor is even worse – a 500K home will run you almost 9 grand/yr in Property taxes alone. Add in sewer and water and your are supporting City Hall to the tune of near 12 grand per year! Yeah, I think I’ll be renting lol! They’re seeing big house appreciation too! Are there like piles of high paying jobs out there?!

#71 SoggyShorts on 01.27.20 at 2:01 pm

#59 IHCTD9 on 01.27.20 at 8:21 am
#34 Stone on 01.26.20 at 6:05 pm

30X sounds like a solid number, I don’t think you’d want it to be much less than that unless you have a pension or two on top.

+
#68 Phylis on 01.27.20 at 10:57 am
I understand the 30X is an initial target, but does that assume a Canadian that maxes tfsa, rrsp and non reg?

**********************************
There’s a calculator for that
https://docs.google.com/spreadsheets/d/1QGrMm6XSGWBVLI8I_DOAeJV5whoCnSdmaR8toQB2Jz8/edit#gid=0

Based on my inputs I need to save 27.4x expenses in order for the backtesting to show zero failures historically. If I went with a simple
25x the failure rate was 5.08% historically and I found that unacceptable.
23.5x spending was 11.8% fail,
22x goes up to 38% fail,
21x is 51% fail
20x is 62%fail

So you can see how devastating an unexpected expense could be to your retirement.

Sinan is right, 30x earning as a goal is pretty good advice- much better than 25x

#72 SoggyShorts on 01.27.20 at 2:05 pm

#71 SoggyShorts on 01.27.20 at 2:01 pm

Another way to look at how bad the 25% “rule” is:

If you are wrong about your expenses and end up spending 19% more than you thought, then the failure rate(running out of money before heartbeats) jumps from 5% to over 50% historically.

#73 Tea4Two on 01.27.20 at 2:27 pm

…of course the stock market doesn’t lose out to inflation, because it is reflection of the REAL inflation rate!

#74 Blood & Honour on 01.27.20 at 2:36 pm

DELETED

#75 Blood & Honour on 01.27.20 at 2:40 pm

DELETED

#76 Sold Out on 01.27.20 at 3:11 pm

Um, #74 and 75 are more than a little racist.