For a few years now I’ve been inspired by early retirement. It’s something we’re working towards and getting closer to every month. Through running this blog, I’ve been fortunate to meet a number of fine folks who are willing to share their own financial stories with me – many of them rather successful ones. Today’s post is another interview with a savvy investor who has proven passive investing works – and very well at that.
- Name: Grant
- Age: 63
- Family status: living with partner
- Retired: not yet (because he loves his job)
- Retirement plans: will “quit when I find another hobby I’d rather do.”
Grant, why passive investing for your approach?
Well, I think I’ve made just about every investment mistake in the book including investing in tax shelters, tips from friends, high fee mutual funds, and employing high fee active managers. Then a few years back a friend of mine sent me the movie “Passive Investing: The Evidence” which really opened my eyes to what goes on in the wealth management industry, and then helped me get set up with a couch potato portfolio of Exchange Traded Funds (ETFs). So now I’m a die-hard passive indexer, but have only been doing this for a few years. I became quite interested in the topic and have read around about personal finance and investing quite a bit in recent years.
What is or was your savings rate, to get to your “comfortable” pre-retirement nest egg?
My savings rate is currently 20%, although it has been higher in the past, about 50% at one point, when my income was higher and I realized I needed to make up for past mistakes. I’m very lucky to have a reasonably high income which can make up for a lot of mistakes and high fees.
Let’s come back indexing. Tell us more about your approach, your stock allocation and this strategy.
Prior to the movie I mentioned above (and you linked to), I outsourced my investing to an active manager. Since I changed my ways, I’ve been 100% indexed. I have a globally diversified portfolio of stocks and bonds with an allocation to REIT’s and a small cap value tilt with a 60/40 stock/bond asset allocation. I invest this way because the peer reviewed financial literature on this topic, which is very wide and deep now, shows that passive indexing will give the vast majority of people the best outcome when compared with other strategies. It also appeals to my personality in that I like to keep things simple. Jack Bogle says “Simplicity is the master key to financial success” and that really resonates with me. If I were setting up my portfolio again, to make it simpler, I think I’d dispense with the small cap value tilt and REITs (Real Estate Investment Trusts), and just use ETFs like these: VCN, VXC and VAB. But to change that now would have some tax consequences for me so it’s fine as is. I don’t have a gambling bone in my body, so I don’t feel the need to have a play account, so I don’t own any individual stocks.
Unlike me! Grant, you’re a reader of this site. You know my hybrid approach my now – dividend investing and index investing. What do you make of it?
I think dividend investing is a very good strategy and will get many people where they want to go, even if it is not optimal from an efficiency point of view. The most important part of investing is behaviour – avoiding behavioural errors – especially the “big mistake” of selling out in a market crash. The focus on dividends helps people deal with the price drops during a crash and stay invested.
I would agree…
….and people like getting a dividend cheque in the mail every quarter. One issue I do see with my dividend growth investor friends (you as well Mark) is they could be poorly diversified, particularly when it comes to US and international equity, so their portfolios are higher risk than they ought to be. As you write about on your site with your investing updates, this higher risk may come with less total return. Total return investing looks at factors beyond yield. Once you look beyond yield, you will likely have better returns over time. That’s the key reason why dividend investing falls short. Nevertheless, it’s very important to choose the strategy you are most comfortable with, as you must be able to stay the course through market crashes that are guaranteed to occur from time to time. I do think, though, that dividend investors should bench mark themselves against the appropriate risk adjusted indexes, or even just the broad market indexes, just to see how they really are doing.
I do Grant. Looking at XIC (S&P/TSX Capped Composite Index) for the last 5-years, that’s been about 2% total return. I’m running triple that.
Time will tell Mark! 5 years is a very short time period for benchmarking. You really need at least 10 years, preferably 20 years to really know you have equaled or outperformed the market. Also, a dividend etf, or large value index is a more accurate, or what is called “risk adjusted” bench mark for a dividend focused strategy. I do think your game plan is a very good one. You are confining your dividend investing to the Canadian market, I think in your taxable account, to take advantage of the favourable tax treatment of Canadian dividends, and you’re gaining global diversification with low-cost ETFs. If I were you, though, I’d ditch the Canadian stocks and roll them into VCN and be done with it! But if your hybrid approach helps you to stay the course, it’s a winner.
What will your income sources in retirement be?
My partner and I will have income from Canada Pension Plan (CPP), Old Age Security (OAS), Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs), and taxable investing accounts. My partner has a modest government pension and I will have my CCPC (Medical Corporation), which will also provide income. My partner is retired already, and financially I could retire also, but I really like my job. So, the plan is to continue with it for a while yet, likely becoming more part time in future years. My job is really my hobby now. I’ll quit when I find another hobby I’d rather do.
30- and 40-somethings today struggle with the mortgage paydown versus investing debate – often. As someone who is financially free and working because they love it (not because they have to) what is your advice to us?
I think it’s important to take a balanced approach on this, paying down some of the mortgage and putting some towards retirement savings. I think it’s a mistake to ignore retirement savings when you are young as you are missing out on many years of compounding which is very valuable. I like the 50/30/20 rule – 50% of after tax income on needs (food, shelter, transport), 30% on wants, fun things, and 20% for retirement savings. Buying a house is difficult now without the help of the Bank of Mum and Dad, but resist buying more house than you can afford. As for the TFSA/RRSP, for incomes up to about $50,000 use the TFSA. For higher incomes use the RRSP, and put your RRSP-generated refund back into the TFSA. Always save and invest the RRSP refund though.
I’m leaning on some sort of cash wedge approach to fund our retirement Grant. What are your thoughts on this, safe withdrawal rates and more?
We plan to use a total return approach with a cash wedge along the lines as described in Dan Bortolotti’s article “A better way to generate retirement income”. We plan to spend up to 5% a year, rising with inflation, depending on how the market performs known as the guardrail approach as described in this video.
The 4% rule, which came out of Bengen’s research in 1994, covered the worst case scenario, so that all the other times you’d end up with money left over, sometimes a lot, when you die, so you could have spent a lot more. We like the idea of spending more earlier in retirement when we are healthy enough to enjoy it. We ‘d like to leave some money to nieces and nephews (we have no kids) and to charities, but as Allan Roth says, it makes no sense to be the richest guy in the graveyard.
Great point, you can’t take it with you. Any final words of wisdom for aspiring retirees?
I’d say, spend less than you earn, invest the difference in a globally diversified portfolio of index funds/ETFs, stay the course and avoid debt. Simple but not easy, but those are really great financial rules to live by.
There’s an interesting concept in finance called the marginal utility of wealth. That means that as your income increases your happiness goes up, but it levels off at a certain point after which a higher income does not result in more happiness. It turns out the research shows that this level of income is about $75,000 per year. With a higher income you can buy more toys, but not more happiness. As Charles Kingsley, an English priest, University Professor, historian and novelist, and friend of Charles Darwin said “We act as though comfort and luxury were the chief requirements of life, when all we need to make us really happy is something to be enthusiastic about.”
Lots of wisdom in this post and I want to thank Grant for sharing his investing story with My Own Advisor – thanks for being a fan of the site and continued success with your hobby. I wish you well.
Got any comments for Grant? What do you make of his investing choices? Share a comment below.