This week on Heart of Your Money, I’m diving into the nitty-gritty of creating a portfolio that works for YOU! I’ll be discussing…
– What assets you should have
– The do’s and don’ts of planning
– And SO much more!
There is no one-size-fits-all approach to retirement, and this episode talks all about that! Episode 50 has a piece of advice for everyone.
Hey there. Welcome back to another episode. This is number 50. Today, I want to talk about what you need in your portfolio. We’re going to talk about the three basic asset types. Now, your portfolio, it doesn’t need to be complicated. It’s not magic. And it’s also not very exciting. Your portfolio is going to be specific to your own needs.
And what I mean by that is what is your risk tolerance? Maybe you are a low-risk investor, and maybe your neighbour is a medium to low risk. Everyone’s going to be different. Also, one of the questions that helps with what to put in your portfolio is your timeline. Someone a few years away from retirement and someone ten years away from retirement, those are going to be two completely different things in their buckets.
And there’s three main types of investments in everyone’s buckets, and this is what I want to talk about today:is the fixed income, equities, and cash. Those are the three basic things. Now, when we decide what goes in your buckets, we look at all of your assets. That means your pension is considered, especially a defined benefit pension.
Don’t disclude that. That is huge. That’s that pension that pays a life annuity, that pays you each month. The different buckets you have are going to help decide that part of the formula of how much fixed-income, how much equities, how much cash. That’s going to help you decide what you want to know and take stock of everything you have. Your RSPs, your tax-free savings accounts, your non-registered assets, CPP and OAS – that’s included in the entire big picture.
On a side note, that’s why it’s really hard to have a little bit of everything everywhere because when you’re going to do your planning, you need to know about everything and think about the tax. So I’m going to share that each one of these buckets has different tax consequences. Your TFSA is different than your RRSP.
When you go to take out, there’s a different tax. Your non-registered bucket is different than both of those, it has its own tax consequences. And each one of these buckets can have those three things I said, fixed income, equities, or cash. The answer to what you put in the bucket will depend on the tax consequences right now and also in your retirement.
So that is going to make up how much. Should fixed income be 40%, 50% or less? Should your equities be higher or not? How much cash you need. It’s all going to depend on the tax, down the road, in the future. And also knowing when is that going to start? Give or take a little bit.
So I’m going to share a secret with you, right now. It is something that just totally irks me, and I see it all the time. It’s the sign of a lazy financial advisor. I know I’m going to get hate email again on this from a couple of advisors, but here it is. When you complete your risk tolerance discussion, and it’s decided together with your advisor that you are, let’s say, for example, you are a conservative investor.
Then the advisor puts you in a fund called the conservative fund. They put that same fund in all of your buckets, all across the board. So that means your RRSP has a conservative fund, your tax-free savings account has the conservative fund, your non-registered account has the conservative fund. Everything has a conservative fund.
I see this all the time. No tax planning, no future retirement tax planning. Just mindless, the same fund in everything. Okay. Yeah. It’ll work. It’ll do the trick for you, right? You’re still going to get some growth if that’s your risk tolerance, and let’s just say, okay, it doesn’t just have to be conservative.
Let’s say you are a balanced investor, which is low to medium. Okay. So then it’s the balanced fund in every single one of those buckets. That is straight, lazy, the same fund in everything, your RRSP bucket, your TFSA, non-registered. No. Let’s think about your future taxes because fixed income has different tax consequences in each of your buckets.
Let’s do some forward planning and use all of your buckets differently, depending on the tax and investment. You can still be that, for example, conservative investor, but we are going to strategically think of each investment for each bucket and your retirement taxes. Lazy, lazy, lazy just having it all across the board.
The chances are you probably didn’t even have a financial plan. You didn’t have a retirement income plan. You weren’t seeing the taxes until age 96. And I know these are estimates, but there is no actual forethought or plan. Without that planning thought, that shows retirement income and taxes. How do you know?
I can tell you right now that if you have a non-registered account and they just put that exact same fund in there, I’d like to see your T3 and T5 slips at the end of each year, which means you’re probably paying on investment income. Anyway, I could go on a long rant. That’s not the purpose of this, but I just wanted you to know the secret that you can actually put different things in different buckets, but still have the outcome of being a quote-unquote conservative investor or a balanced investor. It just takes some planning and thought.
Okay. Enough of that rant back to the breakdown of the basic three things in your portfolio – equities, fixed income and cash. So what is fixed-income? That can be GICs, those guaranteed income certificates or bonds.
And one of the questions a lot of people ask is, “tell me about bonds, what are they?” They are loans to companies or governments that get paid back over time with interest. And you actually know what that interest is. It’s preset. They’re considered to be safer investments than stocks, but they generally have lower returns.
Since you know how much you’ll receive in interest when you get these bonds, they’re referred to as fixed-income investments. The fixed rate of return for them can balance out the riskier investments that you have, like the equities, which are stocks. And there are different types of bonds.
There are your regular government bonds, but there are also corporate bonds, and they’re rated A, B, C or AA. It’s about the risk of those corporate bonds. So think about a really good strong company that’s been around for many years has strong cash flow and dividends. They might want to put out a bond to gather some extra cash to maybe merge or take over another company, and they pay a higher interest rate than government bonds.
So that’s something to think about that’s also considered a fixed-income.
The other one I mentioned, equities, is also known as stocks. So equities represent ownership in a publicly-traded company. So think of a stock company that we all know, and I’m just throwing this out here. I’m not at any point suggesting that you buy it. It just comes to mind, we’ve got our Microsoft companies, we’ve got our Facebook is one. Definitely not telling you to go out and buy that one, but think of these companies that are on the stock market. That is an equity.
The owner of the equity shares is entitled to a portion of the company’s profits, either in the form of dividends or capital gains, when the value of a company stock increases. So the idea is you invest in these companies, you know they’re going to grow, or they pay a really good dividend. Think of the banks. They’re paying great dividends.
It’s a little pricey to buy the stock, but you get rewarded with, if there’s growth, they then pass it on to the people that own it with some dividends. I love the saying, “better to own the bank than owe the bank.” Anyway, these equities these buying up these companies, they do have a higher rate of return than the bonds, but they also have a higher risk.
So your funds will have a handful of different equities to help diversify. You don’t want to be just the single one owner of one stock. If there are ups and downs in the market. Think about if that stock company has a, oh, I don’t know. I’m going to throw out there maybe there’s a sexual harassment case against the CEO.
And then the CEO has to leave. All of a sudden, the market share just completely drops because all the owners, everybody that owns the stock are selling because the stock market’s dropping in that company. All of a sudden you are now vulnerable to that one action of that company. That’s why we have to diversify. That’s why we have to have a handful of different equities.
And you want to have it in different sectors, different locations, geographically as well, different companies. You want to make sure that you’re not just eliminating other areas because we need to diversify. Equities are generally considered a medium-type risk.
There are higher risk. Higher risk is more speculative. It’s more concentrated into one section. And there’s more volatility and ups and downs with equities, especially, different than bonds, but the classic, this is that classic case risk versus reward. They have a higher rate of return, and over time equities do perform well. You just have to be able to wait the time out with your good picks.
The other asset type I mentioned was cash. We know what that is. And cash is queen in my house. And if you’re a male, cash might be king to you, but either way, it is liquid, and it is a necessity, no returns, no growth, but also no loss.
That’s actually not true. So the loss is actually our inflation rate right now, which is extremely high. The highest it’s been in many years. Don’t quote me. I thought I saw the highest it’s been in 30 or 40 years. So as things cost more to buy every year, especially this year, we actually lose money if we’re squirrelling it under our mattress for a long time. Every year, we lose approximately 2 to 3% because of inflation. Things cost more.
But our cash hasn’t grown at all. It’s just stayed there. So we need to spend more of our cash to just buy things. We need cash, though, so I’m not telling you not to have any. An emergency fund is vital, something liquid. I call this the sweet spot of how much cash for emergencies we need to be comfortable with.
Each person is going to have a different number that they think is needed. Okay. I’ll share a little bit of a quick story about this cash. When I talk about sweet spots and everybody having a different amount to feel comfortable, this is a classic example. My sweet spot is nothing near this fellow that I met with, the rancher.
His sweet spot was crazy high, meaning he needed to have a high amount of cash. He explained that, and he’s a rancher in Southern Saskatchewan. And you never know when you’re going to see a bull that you just got to buy. He had to have approximately a hundred thousand dollars in a safe at home, just in case he found the perfect bull on a Sunday and he can’t make it to the bank.
So his sweet spot was so far out there compared to mine. But I can’t question it. He’s not wrong. As long as, looking at his portfolio and everything that is specific to him, that was his sweet spot. Now I did suggest that, does the safe work? Is it bolted in your house? Maybe you should put that in the bank, but that’s a whole other different conversation. But I was pretty floored. And so I always joke, well around you never know when you’re going to see a bull, you’ve got to buy.
Back to these three assets, they’re generally going to make up your specific prescription in your investment portfolio, the overall everything. Remember, we’re thinking about your CPP and OAS. Those are life annuities. Your defined benefit pension is a life annuity.
So then you’ve got to think about how that plays into your prescription and how much fixed-income you need, and how much equity. The higher amount of equities, the higher the risk you might have. But you also have that reward over time with the higher return.
Remember, you’re not going to need all of your investments in a few years, meaning you’re not need to cash everything in. When you retire, you plan to take out some over the course of 30 years, and therefore you’re going to need some equity in there. Because you need it to last, you need that growth. You’ve got to beat inflation.
Bonds might just keep you up with inflation. You’re going to have to have equity to get you through and past and get some growth. Because, if inflation is two or 3%, your bonds are getting, you know, two, three, three and a half percent. Okay, yeah. You’re keeping up with inflation, but how are you going to get you to that 30 years with growth? Risk used to be equities and stock market, and that has completely changed.
Warren Buffett tells us, now the risk is not being invested in the stock market. So you’re going to need some of that equity to get you the growth for the long term. Your monthly income, though, is going to come from a different spot. And this is where your fixed-income comes in.
Leave the equity to grow. Just let it sit there and do its thing. It’s going to grow in your sleep, over time. But your fixed income is where you’re going to start to take your retirement income from. And then you’re also going to have a little piece of cash in there for when you know what hits the fan is, especially in a downturn in a low market.
You only lose money when you sell at a loss. So if you can have where you’re getting your retirement income from a place that’s flat and fixed income, maybe making the only couple of percent, plus you also have your cash reserves. So that, when a market goes down, you are not selling from a place of a loss, of a negative five, or a negative 10% in a correction, or a negative 15%.
You’re leaving it to sit and recover. But you still need that equity piece. So your prescription of how much fixed-income you’re going to need is dependent on how much you need each year, each month, and how much you want to put into that spot. And then slowly selling over time and changing that prescription so that your equity becomes just a little bit less and less over time.
But remember, if you’re just retiring, you’re going to need money for 20, 30 years. I also want to leave you with the thought that this is the important piece. Your advisor should be explaining why you have each asset type in your portfolio. They should be sitting down, and I know your eyes might glaze over, and you might not be interested, but they should at least explain to you and have somewhere that you feel confident you have an idea of your specific prescription and why it’s set up like that.
This’ll help you when the markets are swinging or down. You’ll be less panicky and maybe be less inclined to start tweaking and messing with your investment choices and strategy. You’re going to know, okay, here’s my defense plan, here’s my breakdown. And I know why I have this fixed income, and I know why I’ve got this equity, and I see it move up and down, but it’s okay. It’s just going to sit there and do its thing.
There’s a saying that has stuck with me, and it’s proven “investment always does better than the investor.” What that means is that we are emotional people, and we start changing things up and making changes, when most often, we just need to stay the course and stay with the investment allocation because it’ll do well if you let it.
That’s it. That’s all I wanted to leave with you guys today. If you have any questions, send me a note at [email protected] Until next week, take care.