How to Make Money in a Sideways Market

The stock market always goes up in the long run...or does it? It is commonly accepted that the stock market generally trends upwards over time so taking a buy and hold strategy should be effective. However, that has not been the case since the year 2000, and hasn't always been the case throughout history either.

The stock market has tended to alternate between periods of dramatic advances of 500 to 1000% during secular bull markets, and long periods of volatile, range-bound movement. What is disconcerting is that these periods can be as long as 15 to 20 years.  So what can YOU do to ensure your retirement plan or investment portfolio doesn't participate in this performance vacation?

The first step is to identify what rate of return you require to meet your future funding needs.  You will need the services of a financial advisor to help you with this.  Pension funds use the 25 year government guaranteed bond yield as their discounting figure for this calculation, which today is about 2.64%.  Therein lies the problem, using this low return figure would require such a large amount of annual savings relative to your annual income that it would be impossible for anybody to attain.  This means that you must accept some risk in order to attain a return that would make the savings requirement affordable.  I use a 6% return which would imply an asset mixture of about 60% stocks and 40% fixed income.

Whether that asset mixture actually attains that return depends on when you invest and how you allocate those savings throughout the business cycle.  In a range-bound, or sideways market, income is critical - you want to get paid to wait.  For this reason, dividend paying stocks should be your vehicle on the stock side of the ledger.  On the bond side, since government bonds pay so little, corporate bonds should be used.  Investing in corporate bonds requires specialized knowledge and enough money to properly diversify.  For these reasons you should use professional money managers.

During your accumulation period you should add to either the stock side or the bond side depending on which of these asset classes are better priced.  You should not automatically add in equal proportions. 

The bottom line is you need income producing investments that are professionally managed and to be careful to add more to the asset class that is cheapest throughout the economic cycle.  Today, that means avoiding government bonds, and instead seeking out high-yield bonds and dividend stocks.

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Current Seniors Need Not Worry About OAS Changes

The recent fuss over the federal government’s proposal to changing the OAS age qualification rules is much ado about nothing. First, there were no specifics offered and second, there was no indication that if a change were in fact made that it would apply to current seniors. From an actuarial perspective, it would be unrealistic to make the proposed changes without a lead time of at least 20 years, to allow those affected to make adjustments to their retirement plans. However, the OAS was never meant to be anybody’s retirement plan, it was meant as a modest safety net to help low income seniors.

Both the NDP and Liberals are trying to appear relevant in a world that has indicted the fiscal viability of big government. Social entitlement programs are largely responsible for a significant portion of the annual budget for many countries, including the United States. The demographic reality is that the aging baby- boomers are posing a funding challenge to all developed nation’s ability to maintain social entitlement programs. The slow train-wreck that is the Euro sovereign debt debacle is based primarily on excessively large government, with a bloated civil service, and run-away social entitlements. Greece is the poster child for this problem, however, the rest of Europe, including the prosperous northern countries are also feeling the pressure of these funding challenges. Here too, in North America the writing is on the wall. According to 2010 U.S. budget documents, social entitlement programs are approaching 60% of the annual federal budget.

In light of these demographic realities around the world, it is not only appropriate for the Canadian federal government to reassess the OAS, it is necessary to ensure the long-term viability of the program. It is better to have the discussion today and plan for a future with a long and gradual transition, than to be served a sudden and immediate cut or modification as is presently occurring in much of Europe. When many of these pension programs were created, few people lived much beyond 70 years of age, so pension funding at 65 wasn’t a significant issue. Today though, many in the Western world are living well into their 80’s and early 90’s.

This topic has brought much needed attention to the retirement funding crisis that most Canadians are ignoring because they think the government will take care of them. Virtually all pension funds in the world are underfunded as are most of Canadians’ retirement plans. It takes one million dollars to provide a $40,000 annual income for 25 years, yet few Canadians have RRSPs anywhere near that figure. The mainstream media advises people to focus on paying off their mortgages at the expense of ignoring their retirement plans. The government even permits Canadians to remove money from their retirement accounts to purchase a house. The focus on housing creates the unintended consequence of underfunded retirements. With a typical mortgage in the $350,000 range and a retirement funding liability of $1,000,000 or more, Canadians need to re-think their financial planning objectives. It is possible to incorporate both in a well thought out plan, but the emphasis needs to be on retirement funding.

If there is any blame to place on the federal government about the OAS trial balloon it is in their communications strategy. They should have provided more details instead of allowing the shrill voices of the opposition parties to dictate the discussion. The OAS benefit is unlikely to change for current seniors or those within 15 years of retirement, but those in their late 40’s need to start paying closer attention to their RRSPs and make small lifestyle adjustments today, in order to avoid major lifestyle changes during their golden years.
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How to Simplify Your Investments and Save Money

A few years ago, we met a prospective client who came to our office because he wasn't happy with the service he was getting from his existing financial advisor. He wanted to know how we would be different than the people he was already dealing with. As is our normal practice, we explained that before we could describe our service offering or make any portfolio recommendations, we first needed to have a complete picture of his financial affairs.
As we held our discovery session and summarized his net worth information the answer to his concerns became quite obvious. He had created seven different financial advisory relationships with a portfolio that was worth, in total, about $600,000. As a result, each advisor was responsible for less than $100,000. He complained that he never heard from these advisors except when they wanted to promote a certain investment. He had concerns about estate planning, market volatility, and succession planning for managing his financial affairs upon his demise, as his wife had no interest in financial matters. However since none of his advisors paid much attention to him, he was concerned that he would never be able to find somebody he could trust. In fact, he had trouble trusting ANY company or advisor as he wanted to diversify to avoid losing money.
In our mind, the problem was obvious - his account size at each firm was well below their radar for optimal account minimums and so he was being ignored. What many investors don't realize is the security of their portfolio has less to do with the firm they work with than their specific portfolio allocation. All wealth management firms in Canada belong to CIPF, the Canadian Investor Protection Fund which provides up to $1 million insurance protection. In addition, some firms operate in 'client name format' whereby the firm simply acts as an 'agent' not as a 'principle' in carrying out trades. In that type of advisory relationship, the firm does not actually hold any of the assets and must have the clients written authorization for every transaction. These firms do not require insurance coverage since they don't hold client assets. Ultimately, the protection for an investor lies in the asset mixture and diversity of the actual securities themselves.
Consolidating accounts into one large portfolio will not only result in greater attention, it will also allow for economies of scale, that is the fee structure will be lower than regular retail accounts. Furthermore, by having one advisor instead of two, three or more, you have one unified direction for your financial strategy instead of competing recommendations from multiple advisors.
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How to Save When You're Young, So You Have Money When You're Old

Financial Advice for Young Adults: Conventional Wisdom is Wrong!

How many times have you heard the phrase, 'your home will be the largest investment you ever make' or 'the first step to financial security is to pay off your mortgage early'?    I have heard this advice from most parents to their children and I see these general guidelines repeated over and over again in newspapers and articles on various internet sites.  They are propagated because they are 'safe' guidelines that will save the author from being ridiculed or represent the life experience or value system of most parents.  It is easier to go with the flow than against it, and it is easier not to take financial risks in life.  Well if you want to achieve financial success in life, IGNORE that traditional advice. If you want to succeed financially you need a different strategy.

Historically, those who have embraced this conventional wisdom about paying down mortgages have arrived at retirement with a paid off house and little money to spend on lifestyle.  If you want to take a 70% salary cut at retirement, keep following that advice.  If instead you want to enjoy an active and entertaining retirement read further.

The largest investment you NEED to make in your life is the funding of your retirement.  The average house price in the GTA (Greater Toronto Area) is about $486,000 in 2011 according to the Toronto Real Estate Board.  Now compare that figure to the amount required to fund a $50,000 annual income, assuming an inflation rate of 2.5%, for 30 years of about $2.2 million.  Do you get the picture? 

Now this does not mean that you completely ignore your mortgage balance and pay interest only, it means that since you will be receiving a lifetime of shelter from your home, then you can spread the cost of this shelter over the standard 25 year amortization.  More importantly, BEFORE you decide on how much house you would like to have, you need to base your decision on 80% of your take home pay. My experience as a financial advisor has shown most people cannot save enough because they bought too much house when they were first married.  This placed them behind the proverbial 8-ball and restricted them from the ability to accumulate wealth.

To ensure you build wealth and have enough to fund your retirement, the first 20% of your monthly income should be devoted to retirement savings (18%), and various forms of insurance (2%) to protect you from life's various risks of morbidity, critical illness, and mortality.  In addition, you should ensure you start with a 25% down-payment to not only save on the government insurance on your mortgage, but more importantly to make your mortgage payments more affordable and to have an equity cushion in your home value.

In Canada, only 5% of the population earns more than $100,000 per year or more, so if you want to achieve a financially successful lifestyle, you need to take your advice from those who comprise that small group.  Even better, take it from the even smaller group who earn more than $250,000 per year.  This elite group of income earners is populated primarily by university graduates and to a lesser extent, entrepreneurs.  Small business owners represent a large portion of wealthy individuals, and having a university degree increases the chances of somebody's small business venture in succeeding.  You can still have a successful small business without a university degree, but the odds are against you and you must be highly motivated, resourceful, and focused individual.

When you graduate from university, if possible, live at home for two years to accumulate your down-payment for your first home.  Save diligently during that period and invest it wisely seeking the guidance of a competent financial advisor. At the same time the first 20% of your paycheque should be invested for long-term wealth accumulation as noted above.  If you cannot live at home, then consider sharing a place with a friend or family member with the assumption that the arrangement will be limited to two years so you don't have a chance to sour the relationship.

There are three components to wealth accumulation: savings, rate of return, and time.  Of these three, 'time' is the most critical element because it is what allows for the compounding of your wealth.  Compounding of your investment returns is considered the 8th Wonder of the World by Albert Einstein.

One last thing, stop procrastinating, the time to act is not tomorrow, but today, so go get started!
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John Soutsos, Senior Financial Consultant, Investment Planning Counsel

Retirement is a 20th century Concept - But It Can Still Be Done

Prior to the 20th century, the majority of people lived and worked until they died, on their family farms.  With industrialization came urbanization and the specialization of labour.  Companies were formed, labour unions were established and eventually the concept of companies providing a lifetime pension to retired workers was implemented. Along with this came government retirement benefits.  With long periods of relatively stable interest rates and moderate inflation, companies and governments were able to establish actuarial calculations for required capital savings to pay retired employees until their demise. However, today's economic environment is challenging the ability of governments and individuals to fund a respectable retirement. It can still be accomplished, but traditional strategies and assumptions need to be cast away in favour of more savings discipline and dividend oriented investments.
With life expectancies in the late 60s and early 70s for most men back in the post WWII era and until the 1960s, financing retirement was affordable for most employers. However, with medical advancements, and widely available and affordable health care, life expectancies lengthened significantly.  In addition, globalization of trade created great competition, reducing corporate profit margins significantly. Additionally, Governments implemented a host of social entitlement programs over the last half century creating a great tax burden for their residents. 
The innovation of the birth control pill, caused a collapse in the fertility rate which has resulted in our population aging rapidly as we are unable to replenish our own population.
During the last 30 years, interest rates and inflation have ranged wildly with recurring economic crisis which has resulted in the inability of corporations to fund their pension plans. The responsibility of retirement funding has now been transferred to employees through the innovation of Group RSPs or Money Purchase/defined contribution pension plans, replacing the Defined Benefit Pensions.  Defined Benefit Pensions are now the domain of a small number of companies and government departments.
With short term interest rates of under 1% and 10 year bond yields in the range of 2%, the amount of money required to fund a 20 to 30 year retirement has ballooned to levels most residents have little chance of achieving by saving exclusively in bank-offered guaranteed investments and bonds.
It is now the norm for most savers to invest in stocks, bond, commodities, mutual funds and other market-oriented investment vehicles.  Where once investors lacked access to financial information, they now have too much to sort and digest, let alone understand and place into perspective. That plus the volatility of the stock market the last decade has left most investors scratching their heads and what to do next.
With the leading edge of the baby-boomers now turning 65, this 20-year large cohort will be moving through the retirement years for the next 30 years.  This, plus near-zero interest rates,  have created a retirement funding crisis.
In place of government bonds, investors need to embrace dividend-oriented investments and corporate bonds. Most importantly, people need a competent financial advisor to help them maintain perspective at all times and not panic into major asset allocation changes at the wrong time.
Most people have not saved enough to fund their retirement, instead having focused on lifestyle and housing expenses.  Retirement funding requires a 20-40 year commitment to saving and investing wisely.
It is critical for investors to seek out a competent financial advisor to assist them in creating a retirement plan, utilizing a comprehensive and well-structured portfolio management system.  For optimal results, people should strive to save 15 to 20% of their take-home earnings for retirement.  If that seems like a great deal, consider that if this sacrifice doesn't occur during your working years, the cut in pay when you reach retirement can be over 60% as the average Canadian will only receive $12,000 from government retirement programs.
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John Soutsos, Senior Financial Consultant, Investment Planning Counsel