Weekend Reading – Reader questions, early retirement, 2.4% rules, all weather portfolios and more #moneystuff

Weekend Reading – Reader questions, early retirement, 2.4% rules, all weather portfolios and more #moneystuff

Hey Everyone,

Welcome to my latest Weekend Reading edition where I share some of my favourite articles from the week that was across the personal finance and investing blogosphere.

I hope you are keeping well…

Earlier this week, I partnered up with a fan of this site and avid investing writer Mat Litalien to share the top Canadian stocks to weather the COVID-19 market crisis. Thoughts on those companies? Any U.S. companies on your radar as well?

As a preview for next week, I have another very detailed retirement case study to share – so stay tuned for that! In the meantime I have LOTS of great financial case studies to check out here.

Please stay well, stay safe and enjoy this Weekend Reading edition as always.

Mark

Weekend Reading

Armchair Financial Canada wondered about various all weather portfolios. He landed on the “Comfy” portfolio:

Comfy Portfolio April 2020Thoughts?

Great stuff over at PlanEasy.ca on the impact of saving vs. spending. Incredible how creating a disciplined, early savings habit will deliver phenomenal results over time. 

I enjoy reading about various early retirement plans, to see how mine might stack up. The Dragons on Fire recently posted theirs.

They have an asset allocation of “…roughly 70% stocks and 30% bonds, and the bonds have helped insulate us somewhat from the market declines.” They also wrote that “based on 2020 projections (and before my part time consulting job), our dividends/interest/part-time work (aka, “core income”) would cover 80 plus percent of our expenses.”

That’s very good.

Personally, (and I’m probably too conservative though), I wouldn’t want to even semi-retire until we reached our Crossover Point. Regardless…I’m not ready to retire in my 40s. I want to work full-time and I enjoy my latest role at work. 

The Crossover Point for investors

Excellent read here by FI Physician about the coronavirus (COVID-19) becoming the common cold, eventually. I’ve been thinking about this for weeks now and I agree we need to screen our most vulnerable/those at higher risk. It’s what we do with other diseases and illnesses and that only makes logical, financial and risk-based sense.

Not sure how I missed this one in a Weekend Reading edition but Cheesy Finance highlighted a few beer and personal finance parallels.

I can’t imagine this…

Oil and Gas Trading

Dale Roberts has a fine list of recent articles in his Weekend Reads edition. To answer his question, I don’t think there will ever be a “normal” again. Just a new normal living with COVID-19 and the rise of other viruses. This won’t be the last pandemic…

On Financial Independence Hub, more Americans are very worried about retirement as unemployment concerns balloon.

A reader recently asked me about what U.S. healthcare stocks I intend to buy more of. Well, I already own JNJ, PFE and ABBV. I’m currently DRIPping >1 share each every quarter. I would like to own considerable amounts of MDT and MRK in the coming years. For the interested, I use iShares U.S. Healthcare ETF IYH to skim the U.S. healthcare stocks I want to own directly. Here are the top ETF holdings as of this week:

IYH April 23, 2020

Financial guru Wade Pfau hinted the COVID-19 pandemic has absolutely slashed the 4% safe withdrawal rate. What’s the so-called rule now?

“I did some updates in mid-March; and for an investor taking a moderate amount of risk, I put out 2.4% as my equivalent of the 4% rule. That’s still about the same today.”

Sounds like sage advice from this early retiree that ignored the 4% rule on his path to financial independence.

If you want to learn about the Smith Manoeuvre Frugal Trader has you fully covered. My only concern with this approach is the leverage. Unless you have a small mortgage and/or you’re VERY good with leverage I don’t think you should pursue it. In high cost of living areas, such as Toronto, Vancouver, even Ottawa now; potentially leveraging tens or hundreds of thousands or more *I’ve heard of folks leveraging > $250,000* is a significant financial risk. I would be worried if I ever lost my job or had a health scare, I would put that financial burden on my spouse if I wasn’t managing the leverage well. Thoughts on the SM approach? 

Reader question of the week (adapted for the site):

Hi Mark:

I love reading your blog and all the great information you help provide. Keep up the good work.

Mark, what can you tell me about a Vanguard ETF with the initials VDIGX and if you recognize it, is that a good ETF for my portfolio? Thoughts?

Thanks for your questions folks. Keep them coming.

Yes, I do recognize VDIGX and after a quick search I found this is a U.S. mutual fund that invests in large-cap dividend paying stocks.

“The fund focuses on high-quality companies that have both the ability and the commitment to grow their dividends over time. One of the fund’s risks is the possibility that returns from dividend-paying stocks will trail returns from the overall stock market during any given period. Another risk is the volatility that comes with the fund’s full exposure to the stock market. An investor with a well-balanced, long-term portfolio who seeks exposure to dividend-focused companies may wish to consider this fund.”

Reference, Vanguard VDIGX.

The management expense ratio is low (which is great) but there is a minimum investment of $3,000 USD to own fund units. You would also need to confirm with your discount brokerage if you can even own VDIGX inside your registered accounts (RRSP, RRIF, TFSA) (potentially not as a U.S.-listed mutual fund) since I assume that is where you’ll invest your U.S.-listed assets. Not all brokerages are created equal!

For insights on what to own where, check out this post for asset location preferences in various accounts. This will make you a tax efficient investor.

Also, given the blue-chip stocks held in the fund’s top stock holdings, you could consider owning those stocks directly for income and growth. No doubt you’ll find at least a few of those stocks in many dividend investor portfolios!!

Instead of paying $3,000 minimums to buy fund units, to avoid the minimum investment threshold, I think you could consider U.S. dividend Exchange Traded Funds (ETFs) instead, such as VIG. Most Canadian discount brokerages will certainly allow you to own BMO, iShares, Vanguard and other ETFs in registered and taxable accounts. You’ll get more diversification from such ETFs anyhow.  

To see what I mean, here is my list of top dividend ETFs to consider for income and growth – to earn cash for life. 

You’ll also need to be mindful of converting CDN <> USD. So, consider Norbert’s Gambit for that. 

That said, total return matters. That means the growing combination of dividends, capital gains, interest and more is essential for wealth-building.

All the best with your decision, your strive for additional income and diversification, and thanks for your readership.

Save, invest in low-cost products, and prosper!

Use my Deals page where I can save you money, as in hundreds of dollars with Bank of Montreal, Questrade, or you can have $50,000 managed free for a year with ModernAdvisor.

For example…

Use my promo code MYOSF to save big when opening your BMO SmartFolio account!

BMO SmartFolio

Stay well, and as always, Happy Investing!

Mark

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

12 Responses to "Weekend Reading – Reader questions, early retirement, 2.4% rules, all weather portfolios and more #moneystuff"

    1. That’s what I recall as well, no U.S.-listed mutual funds inside a Canadian investment account but potentially things have changed and I would need to call a few brokerages to confirm. Thanks for that Gail 🙂

      Hope you are doing well.
      Mark

      Reply
  1. Hey Mark, Great selection of articles to read as usual.
    I have a comment on your comment about the Smith Manoeuvre. You stated, “leveraging > $250,000 or more is a significant financial risk. I would be worried if I ever lost my job or had a health scare, I would put that financial burden on my spouse. As such, I never followed it. ” Which is totally fair, but I think it misrepresents the SM strategy a little.

    When you start the SM you are not leveraging anything, gradually over time (20 years?) your non-deductible debt is converted to deductible debt that is fully invested. So by the time you have $250,000 in deductible debt, more than likely your assets have grown nicely and you could potentially liquidate them and completely cover that debt, including capital gains and potentially some profit.

    Furthermore, during the gradual transferring process that takes place each and every mortgage payment, you are not required to put in any additional cash. Nor do you need a cash-flowing asset to pay the interest, which is capitalized. So a life event, like a job loss or health scare, you would still be required you to make your basic mortgage payment. Nothing changes if you’re using the SM.

    Anyway, I realize the SM adds additional risk as with any leveraging strategy. But I think the general misconception is that you all of a sudden have a large debt to have to service, and there’s risk in that if you can’t pay the interest. Or the market is down and you are underwater on your portfolio. Lots of people confuse the SM strategy with a borrowing to invest strategy.

    I am no expert, that’s for sure. FT did a great write up on MDJ, if people want to learn more, they must read the new book by Robinson Smith that was released last year.

    Cheers, Stay well.

    Reply
    1. Hey Money Mechanic – great to hear from you…

      Sorry, I should have been more clear. I recognize that the SM is a process whereby as HELOC room is available, you can draw on it, invest the funds in a taxable account, yada, yada. I updated my wording since I noticed after reading it, it did not clarify for me my discomfort with this process while highlighting the risks for many.

      Frugal Trader, and a few others, are very financially disciplined. Far more than most. I mean, most people do not, will not, or could not build a $1 M portfolio by age 40. The SM was not the only reason he got there 🙂 That said, he felt making his mortgage interest tax deductible among all the other things he was doing was going to lead to financial success – and it did. I applaud him for that. He has done so well and he continues to be a role model for others…

      Yes, by time you have $250,000 in deductible debt, more than likely your assets would have grown nicely and you could potentially liquidate them and completely cover that debt, including capital gains and potentially some profit. Yet, for most of Canada, given what we are going through now where financial literacy is an issue – do we really see most folks striving to do the SM?

      I think it’s a GREAT process and ingenious for a Canadian tax code work around (like Norbert’s Gambit) but I would simply caution folks to do the SM since most people are not good with leverage. 🙂 We see that playing out now sadly….

      Thoughts?

      I love your counterpoints by the way. Always good for a healthy discussion!

      Stay well my friend,
      Mark

      Reply
      1. I think we should probably clarify that the SM is best carried out with the assistance of a professional financial planner. As you said, financial literacy is an issue. Even among DIY investors the SM has tax, mortgage and investment considerations that can be complicated. Not to mention the psychological side, having the stomach to consistently follow the strategy every month, every year, regardless of market volatility for 20 odd years. The mathematics of the strategy work out fantastic with the basic assumptions that you’re in a 30-40% tax bracket, and the market goes up 5-8% over the 20 years. That’s a lot to commit to even for the most hardcore of us in PF.

        Now, I will say that because of the lack of financial literacy, the lack of savings, and high levels of debt. An argument could be made that the SM is exactly what the ‘average’ Canadian family needs. Assuming the strategy is done properly, the investor is coached through the rough times, and it is done for the entire 20ish year amortization. A family that is living at it means, could be creating an investment portfolio without additional cash flow, and they’re not increasing their leverage while doing it. That’s 20 years of compounding on investment, and accelerated mortgage paydown, and juicy tax returns every year. Wow, I sound like a marketer for Robinson, he better come by and drop of some quarantine beers for me…

        So to answer your question. No, I don’t see most folks striving to do the SM as a DIY strategy. And most should be cautioned away from a DIY approach because of all the moving parts and the psychological fortitude it requires. But as you said, those with the financial discipline will be rewarded long term.

        The SM is always an interesting topic, and there’s reasonable positions on both sides of the fence. Leverage will always be a touchy subject in PF, done right it is a powerful wealth builder, done wrong…it’s ugly.

        Cheers

        Reply
        1. “I think we should probably clarify that the SM is best carried out with the assistance of a professional financial planner. As you said, financial literacy is an issue.”

          I think that’s a good recognition of the problem but also opportunity.

          Most people (say >80%) couldn’t care less about really improving their personal finances. Otherwise, you wouldn’t need these tens of thousands of personal finance books – and there really isn’t anything new in most books anyhow 🙂

          I’m listening to the podcast as I reply! You guys did a great job. I know you interviewed him before on FI Garage. I’m putting it in my next Weekend Reading edition.
          https://exploreficanada.ca/podcast/028-smith-manoeuvre-case-study-robinson-smith/

          Stay well!
          Mark

          Reply
  2. Don’t forget about stocks like Stryker- with Boomers aging there’s a growing demand for joint replacements, and they sell all kinds of other medical equipment like stretchers and hospital beds

    Reply
  3. Thanks for featuring us Mark! We appreciate the shout out.

    I realized we I didn’t mention in the post, but if you also count the dividends in our retirement accounts, we have over 100% of our expenses covered through dividends. The 80% I mentioned is just via our taxable accounts. Yes I can’t technically access those retirement dividends, but from an entire portfolio view dividends actually do cover 100% of our costs. Regardless, given that we also have 5 years of CDs with cash, we feel pretty good about weathering this downturn. And we have a good amount of flexibility to adapt and cut costs if needed.

    Stay safe and well!

    Reply
    1. That’s excellent re: dividends covering your 100% costs. I hope to be there in a few years.

      See you at the next FinCon assuming it happens?

      Stay well.

      Cheers,
      Mark

      Reply

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