Should you speculate with your retirement portfolio?

Should you speculate with your retirement portfolio?

Should you speculate with your retirement portfolio?

“…if you really can’t refrain from buying individual stocks, then set aside 10 percent of your investment portfolio for stock picking while keeping the remaining 90 percent in a diversified basket of indexes.” – Andrew Hallam, speaker, index investor, author of The Millionaire Teacher.

You can check out my last interview with this Millionaire Teacher here.

While I don’t fully subscribe to Andrew’s thinking that 90% of an investor’s portfolio needs to be in indexed funds, I do align with him with my own 5-10% speculation guideline.

I mean, as far as I know (and from the folks I’ve learned from on their successful financial journeys), most millionaires simply don’t trade stocks. Sure, there are some out there. But the vast majority of folks who have accumulated wealth, even when they invest in individual stocks, own such businesses for many years. They would own said companies over a multi-year period like they have purchased real estate or any land. They may have some early conviction, and then simply let their winners ride.

Such is the case of a 30-something investor who invested in Tesla stock almost 8 years ago.

From that article, the investor:

“I currently own 14,850 Tesla shares with a cost basis of $58 per share. My initial was 2,500 shares at $7.50 per share in March of 2013. This initial purchase cost me $19,000 and is currently worth about $2.2 million.”

Amazing…

Of course, this doesn’t happen to everyone. Hardly.

But the point is, numerous studies, reports and articles have shown that on average, the more you trade, the less you make after taxes and fees.

That doesn’t mean you can’t speculate nor at least have a small portion of your portfolio in some riskier plays for potential reward.

Do you speculate with your retirement portfolio?

“Fun money” is an apt term for monies you can afford to lose. I mean, nobody wants to lose money on purpose of course but there is always an undeniable trade-off when it comes to investing.

Risk and return and related.

Higher risks can signal a higher potential return. Higher risks taken can also signal flat-out failure.

I was curious to hear about how some retirees or semi-retirees invest and keep speculation in their portfolio.

So, I reached out to author, blogger and columnist Jon Chevreau for his thoughts including how much he speculates in his own portfolio, at age 67.

Jon has already contributed to My Own Advisor a few times.

You can check out his Victory Lap Retirement ideas in this post below.

Victory Lap Retirement – Review and Giveaway

Jon also highlighted how indexing and individual stock selection can co-exist in retirement harmony here.

Passive and active investing can exist in retirement harmony

More case studies and retirement essays from folks that have been there, done that, can be found on my dedicated Retirement page.

Retirement

Jon, welcome back to the site to discuss this interesting topic!

Glad to be back Mark.

In our last post Jon, we talked about low-cost ETF investing, investing in stocks and more in your Victory Lap Retirement book.  

Let’s back up a bit…

What should Canadians consider before Do-It-Yourself (DIY) investing? I mean, it’s not for everyone including those in retirement right?

No, DIY investing is probably not for everyone: some need good advice and like most things in life, you get what you pay for.

If you need a full-service advisor or a fee-based advisor that can add value not just on investments but on tax strategies, estate planning, retirement income, insurance and the like, then paying on the order of 1% a year of assets is not unreasonable. On the other hand, with interest rates so low, the more you can save on the fixed-income portion of a portfolio the better. That applies doubly to retirees, who should have a good percentage of their investments in fixed-income (say 40 to 60% depending on objectives and risk tolerance.) I often tell retired readers that if all they use is a discount brokerage in order to hold a Vanguard or iShares asset allocation ETF, that can be a good compromise: you get the equivalent of near professional stock-picking prowess via indexing, asset allocation and rebalancing all for a very good price; and you could then hire a fee-only financial planner for specific guidance outside that pure investing realm.

(Mark: you can find many of those asset allocation all-in-one ETFs here.)

Seems wise Jon.

So, given some aspiring retirees might not want to invest entirely alone, what good options might be available to help them out (beyond blogs like yours and mine of course)!? Ha!

I often direct new or aspiring retirees who are worried about the shift from wealth accumulation to generating regular retirement income to the books by good Canadian authors like Moshe Milevsky, Daryl Diamond and Fred Vettese. Sites like yours and mine probably have reviewed these. There are also several retirement planning software packages that are worth considering; ViviPlan, Cascades and Retirement Navigator, to name three I once reviewed in a Globe & Mail article.

(Mark: you can find many references to those authors and their books below.)

Daryl Diamond – Your Retirement Income Blueprint

Fred Vettese – Retirement Income for Life

Fred Vettese – The Essential Retirement Guide

Moshe Milevsky (with Alexandra Macqueen) – Pensionize Your Nest Egg

I’ve written about my plan to “live off dividends” and distributions in the early years of semi-retirement, while working part-time, to mitigate any negative sequence of returns risk.

As someone who is in their semi-retirement years, is that being overly cautious? What are your personal thoughts/approaches on trying to mitigate poor sequence of returns risks?

Market timing is always fraught with uncertainty so I tend to suggest sticking to your asset allocation plan and adhering to a relatively cautious variant of the 4% Rule. I’m cautious so personally start with a 3% rule: that is, whatever amount you have invested I try to withdraw only about 3% of the value per year. Hopefully, some combination of interest, dividends and capital gains will generate most of that 3% and if sometimes it means breaking a bit into capital, then accept that. We don’t live forever and the occasional down year from a stocks bear market will soon enough be followed by some very good years, even like 2020 largely turned out to be. In bad years, be frugal and eschew travel if necessary; in good years, live a little but at least keep investing in your TFSAs. Diversification and asset allocation are our friends but keep in mind the Asset Allocation ETFs are mostly focused on the big three asset classes of stocks, bonds and a bit of cash.

With all this money printing by central banks to cope with COVID-19, I like to include some inflation hedges and so keep maybe 10% in precious metals/gold/silver/platinum and real estate is a good asset class for 5 to 10%, through REIT ETFs that can currently be acquired at bargain prices.

(Mark: Does the 4% rule still make any sense?)

I own a few REITs for that hedge myself – some REITs do seem very cheap now.

Jon, I’ve long since argued that any path to financial wealth should be largely boring – save, invest, stay the course, focus on equities, diversify, minimize fees – and you should end up more than OK after a few decades of this simple path to wealth-building. 

Yet the rise of cryptocurrencies, the recent tech boom, and other investing alternatives has me thinking there is absolutely some room for some/a small bit of speculative plays in a portfolio. So, I have a few questions for you.

First, what is your stance on that? I mean, how much should retirees speculate in their portfolio if at all?

Some believe retirees shouldn’t speculate at all but any retiree counting on current GIC rates will need a much bigger portfolio for that than when interest rates provided a reasonable return. Personally, even as I near age 68, I still invest a lot in technology stocks and lately I have even dipped my toes into cryptocurrencies.

Cryptocurrencies and Bitcoin seem to be on the rise again as institutions try to cope with near-zero interest rates, so a 1% up to 3% position in cryptos might work for some. This is much easier now that there are Bitcoin and Ethereum funds trading on U.S. and now Canadian stock exchanges: you may find that 1% quickly turning into a 2% position, at which point you can sell half or let it ride for still bigger gains. But as always, don’t speculate with more money than you can afford to lose.

As for tech stocks, I was an early investor in the big FAAMNG stocks, perhaps because of my former journalistic life as a high-tech reporter. Any passive investor with an S&P 500 index fund will have 25% in the big tech stocks anyway, but you can make an extra bet through the QQQ ETF (Nasdaq 100). If you want a more focused actively managed approach to tech and innovation, try the ARK ETFs, which provide exposure through U.S. exchanges to next-gen Internet, robotics and AI, some Fintech and the genomic/biotech revolution. These recently became available in C$ versions through the Emerge funds.

OK, secondly, how much do you dabble in speculative plays yourself and in what?

I wrote about this recently in MoneySense.

Apart from the above investments, I will speculate small amounts in smaller mostly U.S. tech stocks, some will just be doubling down on the ARK holdings; others may come from newsletters. The most useful one I’ve found is Paul Mampilly’s Profits Unlimited, who introduced me to both the ARK ETFs as well as the Grayscale Bitcoin and Ethereum funds. So far, so good. I don’t tend to bite much on IPOs, although I did buy in on the first day on AirBnB, as it was a Mampilly suggestion and so much he has recommended has worked out. Before that, I sadly passed on the Google IPO and only bought into Facebook some months after its IPO, once it had fallen in value. I have so far passed on DoorDash. I did buy some Snowflake since our last chat Mark, and if it pulled back significantly I’d consider buying just a bit more.

But all these speculations involve very small amounts of money. When my wife mocks me for this, we joke that if they soar, we should have bought more; if they fall, “well we only bought $1,000 worth” or whatever the amount was. But I enjoy this stuff and have lots of good sources of information: I wouldn’t recommend that most retirees act this way: they’d be better off with managed money or Asset Allocation ETFs for their core portfolios.

Lastly, as someone who has successfully navigated (and reported on) many market ups and downs over the years, what final nugget of investing advice do you have for aspiring retirees in the coming years – based on your own lessons learned? What should they be mindful of?

Remember the mantra of most DIY investors: nobody cares more about your money than you do. If you enjoy investing and researching and see it as a form of profitable entertainment, then indulge yourself but only after you have secured the core: remember “explore” should be at most 10% of a total portfolio. If you don’t enjoy all this or have experienced significant losses, then be humble and either get a professional you can trust to manage your money, or go the asset allocation ETF route mentioned earlier. Further still, perhaps consult with a fee-only planner to establish the optimum asset allocation for your age, risk tolerance and investment objectives.

On that note, the Vanguard VRIF may suit many in retirement, assuming you can live by the 4% Rule and their 4% annual payout target (not guaranteed) and its 50/50 mix of stocks to fixed income.

Should you speculate (a bit?) with your retirement portfolio?

I can’t speak for you but I know when it comes to our portfolio, we avoid speculative plays for the most part.

Will I rule out Emerge funds or other investments entirely? Ha. Heck no. I might invest in those funds at some point myself but I’ve already largely identified these stocks I want to buy more of this year in particular.

When it comes to my own plan, I see no reason to speculate more than 5% in any individual stock and likely never more than 10% in any speculative play or sector fund.

The things that can make you wealthy can be the same things that can make you poor!

This is why I believe speculative plays should always be a small portion of any portfolio. This approach has worked well for us to date, and I suspect it will help us in our financial future.

A big thanks to Jon for his insights and contributions to the site once again. You can find Jon in various MoneySense columns, contributions to Motley Fool Canada, and of course at his Financial Independence Hub.

Investors, do you speculate in your portfolio – including in retirement? If so, how much do you wager?