Investment Goals: 2017

It’s that time of year where we start looking at investment goals for the new year.

I didn’t really have any goals F2016, except to become a member of, which I’m happy to say that I was successful in accomplishing! I also mentioned in several posts in F2016 that up until recently I had lost focus on my investment portfolio. Well, for F2017, I plan on changing that trend.

To that end, the goals!

Goal 1: Increase TFSA Contributions

I have been an infrequent contributor to my TFSA for the past 2+ years. To pay off my business school loan, and to purchase a new house with my family, I made some significant withdrawals. Taking into account the $5,500 contribution limit for F2017, I have a little over $40,000 in contribution room in my TFSA. My goal for F2017 is to contribute to at least 50% of that limit, or $20,000.

Goal 2: Minimize Taxes

My investments fall into five investment books: a taxable margin account, a tax-free account, a tax deferred account, a certificated account, and a LIRA. My second goal for F2017 is to minimize taxes by consolidating investments into my tax deferred and tax-free accounts, where it is sensible to do so.

Selecting which investments go into tax sheltered accounts is not a trivial task. On the one hand, moving investments from my taxable account will defer any taxes payable (in the case of my RRSP), or eliminate taxes completely (in the case of my TFSA). However, tax sheltered accounts have a disadvantage in that any losses cannot be used to offset capital gains. This means that I will have to take a close look at the investments to ensure they are good fit to go into an account where I am unable to do any tax loss harvesting. Put another way: I have to ensure I am comfortable (financially, and psychologically) to move investments, confident that they will not go down in value to the point where I sell them at a loss.

That said, Goal 1 and Goal 2 are complementary: by moving investments from my taxable margin account to my tax-free account, I can easily come within throwing distance of Goal 1.

Moreover, by moving my US investments from my margin account to my tax deferred RRSP, I will reap an immediate 15% cost avoidance: US based stocks are not subject to the (15%) withholding tax on US dividends, which means I will receive the full amount of dividends from my US holdings.

Goal 3: Rebalance my Total Fund to my Target Allocation

When I started investing in earnest in F2012, I had a very rigid target allocation. The past few years I have deviated very far from that. So my third goal (and arguably the most important) will be to revisit my investment policy statement, and determine the appropriate asset mix for my investments.

Goal 4: Increase Passive Income by 5%

As I am a dividend investor, passive income is my primary goal for investing. Following my December 2016 results, I will be baselining my F2016 income, with a goal of beating that income by 5% this year.

I plan on accomplishing this goal through three key strategic activities:

  1. Re-allocation. I know for a fact that my portfolio is overweighted in some areas. Once I complete Goal 3, I will be reallocating funds to other holdings, to increase exposure to some of my more successful dividend holdings.
  2. DRIP Investing. I plan on increasing exposure to DRIP investments, as they provide a frictionless vehicle for quickly growing dividend income.
  3. TFSA Contributions. As mentioned with Goal 1, I plan on increasing my TFSA exposure. This increase will undoubtedly bring more passive income into the total fund.

Goal 5: Update and Expand Investment Research

Many of my investment research posts are horribly out of date. As the calendar year is starting, many companies I follow will be releasing their annual results in the coming months. I plan on updating all of the companies I follow based on F2016 results. Moreover, I am targeting to analyze at least four new companies this year.

And there you have it; the F2017 goals! I would love to hear what everyone else’s goals are for F2017.

Onwards and upwards!

The Great Pension Experiment Part III: One Year Review

This is part 3 of a 3 part series I have entitled "The Great Pension Experiment", which details my analysis on what to do with a defined benefit pension plan payout. The first two parts may be found here: Part I, Part II.

It has been one year since I started off on The Great Pension Experiment. I feel that this is a useful experiment because it leverages real world results in a closed environment. Because the funds are in a LIRA, I am unable to add or withdrawal funds, so any losses must be recouped “internally” by better investments.

In Part II I made the claim that, based on the Assertive Couch Potato Portfolio, over a 25 year time horizon I would be able to grow the portfolio to a point where I would be able to generate over $600/month in passive income, assuming a 4.00% yield. It has been 12 months since that claim, so lets see how we’ve done after one year.

When the portfolio was first opened, I set it up with a blend of 25% fixed income, 25% Canadian Equities, and 50% of non-Canadian Equities:

Ticker Num Shares Weight
Cash $22.50 cash 0.035%
VCN.TO 600 25.204%
VXC.TO 1065 49.741%
VAB.TO 633 25.020%

Originally I had intended on re-balancing the portfolio semi-annually (i.e. every six months), and in retrospect, this was a stupid idea. Cash was building up in the portfolio slowly, but sitting there idle until I had a chance to re-balance. Due to the already high number of shares, any dividends and/or distributions from the holdings would be in excess of the current price of those shares. Because of this, I should have been using synthetic drips right from the start! Accordingly, in September 2016 I set up my brokerage to re-invest any dividends received directly into additional shares. This ensures that money is not sitting idle, and because the investments are via synthetic drip, I receive additional shares commission free.

That said, as of October 2016 (one year), the portfolio sits at:

Ticker Num Shares Weight
Cash $106.88 cash 0.156%
VCN.TO 603 26.351%
VXC.TO 1109 49.224%
VAB.TO 634 24.270%

For the year ending October 31, 2016, I received $1,485.24 in dividends/distributions ($123.77/month). The portfolio as a whole has grown from an initial investment of $64,723.32 in cash to $68,468.29, which represents a 5.648% total return. This is actually pretty impressive, since the first half of the fiscal year (From November 2015-April 2016), the portfolio was in negative territory:

Period Ending Open NAV Close NAV Return % TTM Return %
2015-11-30 $64,723.32 $64,489.47 (0.361%) (0.361%)
2015-12-31 $64,489.47 $64,460.13 (0.045%) (0.407%)
2016-01-31 $64,460.13 $63,015.30 (2.241%) (2.639%)
2016-02-29 $63,015.30 $61,782.64 (1.956%) (4.543%)
2016-03-31 $61,782.64 $63,695.25 3.096% (1.588%)
2016-04-30 $63,695.25 $63,523.47 (0.270%) (1.854%)
2016-05-31 $63,523.47 $65,380.00 2.923% 1.015%
2016-06-30 $65,380.00 $65,168.21 (0.324%) 0.687%
2016-07-31 $65,168.21 $67,560.62 3.671% 4.384%
2016-08-31 $67,560.62 $67,887.23 0.483% 4.888%
2016-09-30 $67,887.23 $68,275.76 0.572% 5.489%
2016-10-31 $68,275.76 $68,468.29 0.151% 5.648%

I had bought into the portfolio at a peak in 2015, and the market had a clawback shortly after. As a result, the portfolio lost money for the first six months. I did take the opportunity during that period to top off the VXC shares whilst I had some excess cash from distributions, which in retrospect was a wise choice. Buying when the market is in a downturn helps to dollar cost average down, ultimately increasing future returns.

The portfolio is more or less at the target weighting if you round to the nearest whole number, and because of this I see no need to buy or sell additional shares at this time. Hypothetically, if the portfolio were to keep this pace for another 24 years, even at a 5.000% return we would generate approximately $736/month in passive income. So based on simple extrapolation (i.e. assuming constant returns for the next 24 years), we are right on track.

That said, I am going to ignore the portfolio for another six months, and will revisit in May of 2017 to see if any rebalancing is required. Until then, the next update will not be until December 2017. Here’s hoping that the portfolio continues to provide excellent returns at that time.

Onwards and upwards!

Portfolio Update – November 2016

Before I begin, there was a minor issue with the October update benchmark numbers. I had made an error in the benchmark passive income: Vanguard’s VAB declared an October dividend, but the actual payment date was in November 2016. This means that my actual income in October surpassed the benchmark income by an even wider margin.

I’ll jump straight to the chase and say that November was a disappointing month. Odd, because following the winning of president-elect Trump, US markets were on a tear. Unfortunately, my Canadian holdings did not do as well.

Portfolio Monthly Returns as of November 2016

The benchmark return was 0.912%, but my total fund was -0.413%, more than a 1% difference. My LIRA portfolio came in at a respectable 0.902%, and the 0.010% variance I can attribute to tracking error. The TFSA portfolio dominated at +2.522%, but my margin account was pummeled at -4.918%! Inspecting the margin account, this somewhat makes sense: it is 2/3 in Canadian equities, which came in at -8.898%, which was the primary source of the losses.

But, as a long-term buy and hold investor, you’ve got to take the bad months with the good months. My TTM is still exceeding the benchmark:

Portfolio TTM Returns as of November 2016

Total fund TTM is 7.989%, while the benchmark is 6.705%: so when you take into account all ups and downs over the past year, we are still doing pretty well.

Of course, let’s remember that I am a dividend investor, and that is where I count the majority of my returns. November was a good month: total income was practically double the benchmark income (97.514% more to be exact), and TTM income is also exceeding the benchmark, by 7.918%.

Portfolio Monthly Income as of November 2016

Portfolio TTM Monthly Income as of November 2016

As I have just started to aggressively focus on my portfolios again, I don’t expect to have stellar returns in the short-term. However, as I plan out my F2017 goals, I expect that to change.

Onwards and upwards!

Exco Technologies Ltd. (XTC.TO) Analysis – F2016 Update

I last reviewed Exco Technologies earlier this year, and at the time had recommended them as a buy. Exco recently announced their audited financial results for the 2016 Fiscal Year, so now is a good time to update the analysis to see if this recommendation holds.

Let’s take a look at the aggregate recommendation criteria:

Criteria Value Threshold Pass?
Strong financial condition Current Ratio 2.03 1.50 YES
Earnings Stability Number of most recent years of positive EPS 6.00 3.00 YES
Earnings Stability Number of consecutive years of negative EPS 2.00 1.00 NO
Dividend Growth Compound Annual Dividend Growth 16.57% 2.00% YES
Share Price Growth Compound Annual Share Price Growth 10.59% 3.00% YES
EPS Growth Compound Annual EPS Growth 35.25% 3.00% YES
Moderate P/E Ratio P/E 10.81 15.00 YES
Moderate P/BV Ratio P/BV 1.84 1.50
Moderate P/E*P/BV Ratio P/E × P/BV 19.93 22.50

We can review the EPS, dividend, and free cash flow metrics first, since these speak to some of the fundamental cash flow attributes of the firm:

10 year Dividend, EPS, and Free Cash Flow per Share Growth

Compound annual dividend growth for the trailing 10 years has increased from 14.88% in F2015 to 16.57% in F2016, which was accompanied by an increase in the quarterly dividend to $0.07/quarter earlier this year. EPS compound annual growth has dropped a little: in F2016 the growth is now 31.23%, down from 33.03%, using F2007 as a base year. This does not concern me, as growth is still on an upward trajectory, and as you can see from the data, free cash flow per share is growing at a healthy pace.

As an aside: in F2015 when calculating CAGR of EPS growth I used a reference year of F2005, which gave me a CAGR of 12.32% between F2005 and F2015. However, because F2006 had a negative EPS, this makes comparables difficult. For comparison purposes. I have used a CAGR from F2007-F2015 vs F2007-F2016 when comparing EPS growth rates.

The other reason I am not concerned about a minor drop in EPS growth is the dividend payout ratio:

10 Year Dividend Payout Ratio vs EPS and FCFPS

In F2016, the dividend payout ratio against EPS and free cash flow per share was 24.13% and 26.80% respectively. F2015 had a payout ratio against EPS of 23.86%, and a payout ratio against free cash flow per share of 45.78%. Even though the payout against EPS has gone up in F2016 (because the dividend rose faster (17.39% year over year) than EPS (16.10% year over year)), at 24.13% there is still ample room for dividend increases in the long run. In other words: I am not concerned about the dividend being impacted in the foreseeable future.

I remain neutral on my views of overall profitability strength:

10 Year Profitiability Strength

Revenue has been going up year over year, however the growth in that revenue has dipped somewhat in F2016 (YoY growth in F2015 was 35.31%, while it was only 18.20% in F2016). Profit margins have remained consistently above 8.00%, which is a positive sign: Exco has managed to keep profit margins above this support level for the past three years. But, with the acquisition of AFX (discussed below), I expect revenue growth to match or exceed F2016 by this time next year.

From a valuation perspective, the company is still relatively cheap:

Graham Number as of 2016

The Graham number is sitting at a very healthy 19.93, which is below our threshold of 22.50. If you recall, when I analyzed the company based on F2015 financials the Graham number was 37.87, but at the time of my review it was sitting at 13.72 based on forward EPS at the time. So it has gone up relative to my last valuation, but is still cheap in my eyes. In fact, I doubled my position earlier this week when there was a dip to the low $10.00/share range.

Reviewing the annual report, the company came in under the consensus F2016 EPS: actual EPS was 1.12, vs. a mean forward estimate of 1.14. However, even at 1.12, this was a 16.10% increase over the previous year. Exco completed the acquisition earlier this year of AFX Industries LLC which added significantly to its revenue streams on a go forward basis, to the tune of 11.40% for their consolidated sales revenue for the year. This acquisition also saw the overall debt load of the firm go up: net debt went from $21million in F2015 to $110million in F2016, $100million of which was related to the acquisition. Overall however, I feel that this is a positive story for Exco since it has already added to their overall sales revenue.

Two other points to consider for Exco are the currency exchange rate, as well as the effects of president-elect Donald Trump. A weakening Canadian dollar has been very favourable for Exco:

Over the year, the US dollar averaged 7% higher ($1.32 versus $1.24) against the Canadian dollar contributing $15.2 million in sales to the current year. Similarly, the Euro averaged 5% higher ($1.46 versus $1.41) against the Canadian dollar contributing $5.7 million to sales.

Source: 2016 Annual Report

With regards to the president-elect, if he does go through with moving more jobs into the US and/or increasing duties (or completely eliminating NAFTA), I am not sure what this will do to Exco exports from Canada to the US: as the US is a key trading partner, there may be a material impact on the quantity and dollar value of goods shipping from Canada to the US. That said, Exco is making serious movements in other parts of the world:

  • AFX is a key supplier to BMW, giving them access to European markets
  • Operations in Thailand are giving them a launchpad to better penetrate the Asian market

Activities such as this lessen my worry about impacts of the president-elect at this point: even if there are material changes to NAFTA, with Exco’s Canadian customers, and access to other markets such as Europe and Asia, will mitigate any effects.

With the above in mind, I maintain my recommendation of buy for Exco Technologies Ltd.

Disclosure: Long XTC.TO as of December 9, 2016.

Cost Avoidance: The Indirect Dividend

Earlier this year I was helping my brother out with his financial planning, and one key element of the planning was to cut expenses. Cutting expenses is an important factor of any planning session, since any reduction in expenses boosts your disposable income by an identical amount: save $5.00, and you suddenly have $5.00 to redeploy elsewhere. At the time, he was paying $14.95/month in banking fees at a major Canadian bank, which equates to $179.40/year. When I asked him why he paid the fees, he really didn’t have an answer. Like many individuals, he took fees as a given–albeit a horrible one–and paid them every month. With some nudging, we managed to move all of his accounts to Tangerine, and he now has an extra $14.95 every month in his pocket. By the way, if you decide to open up your own account at Tangerine, please use my referral key: 16176076S1 .

Of course, it is not always possible to move all of your banking. I have the lion’s share of my accounts at Tangerine, however I also have an account at BMO because my mortgage is with them, I have a US Dollar Chequing account there, and I use BMO InvestorLine as my discount brokerage. Having an account there just makes things easier. But, even having an account, there are ways to avoid the monthly fees. For my own plan, if I keep a minimum balance of $2,500 in the account, the fees are waived.

Now, I gave that bit of background, because Bank of Montreal is increasing the minimum balance you require to waive fees as of December 1, 2016. Here is a snaphot (as of November 29, 2016) of the proposed fee increases:

Plan Current minimum balance New minimum balance Difference $ Difference %
Practical $1,500 $2,000 +$500 +33%
Plus $2,500 $3,000 +$500 +20%
Performance $3,500 $4,000 +$500 +14%
Premium $5,000 $6,000 +$1,000 +20%

As with everything, the need to pay for fees is all about opportunity cost. As a consumer, I have two choices:

  1. Pay a monthly fee, and use the minimum balance as I see fit.
  2. Do not pay a monthly fee, and lock up the minimum balance with BMO.

Let’s look at the annual banking fees, relative to the minimum balance to avoid paying those fees:

Plan Monthly Fee Annual Fee Minimum Balance (Old) Cost Yield (Old) Minimum Balance (New) Cost Yield (New)
Practical $4.00 $48.00 $1,500 3.2% $2,000 2.4%
Plus $10.95 $131.40 $2,500 5.3% $3,000 4.4%
Performance $14.95 $179.40 $3,500 5.1% $4,000 4.5%
Premium $30.00 $360.00 $5,000 7.2% $6,000 6.0%

In the above, the Cost Yield column represents the percentage cost based on the minimum balance, to avoid paying the fees. So, for the Plus Plan, by keeping $2,500 in the account, I am avoiding $131.40 in fees per year, or 5.3% of the locked in money. Put another way: if I can find an investment that pays me at least 5.3%, I would be better off taking the $2,500, investing it in the investment, and using the proceeds to pay off the monthly fees. However, that 5.3% doesn’t take into account taxes. My marginal tax rate on dividends is 25.38% according to the tables on, so in reality I need to find an investment that yields at least 7.0% (since 7.0%, less 25.38% taxes, would yield me 5.3%).

Now, years ago when I was faced this decision, it was hard to find an investment that would guarantee me 7.0% return (with an acceptable level of risk). The other wrinkle was that many ETFs or companies pay dividends quarterly, which means the income stream from the investment would be “lumpy” relative to the frequency of payments. But with the increase in BMO’s minimum balance, things change. Here are the updated tables using the December 1, 2016, minimum balances:

Plan Monthly Fee Annual Fee Minimum Balance (new) Cost Yield (new) After Tax Cost Yield (new)
Practical $4.00 $48.00 $2,000 2.4% 3.2%
Plus $10.95 $131.40 $3,000 4.4% 5.9%
Performance $14.95 $179.40 $4,000 4.5% 6.0%
Premium $30.00 $360.00 $6,000 6.0% 8.0%

My specific plan is the Plus plan, so I now have two choices: find an investment which gives me a guaranteed 5.9% return on $3,000 (which would give me $177.00, or $132.07 after taxes), or keep $3,000 locked at BMO, and avoid $131.40 in annual fees. Given that this $3,000 is a good place to stash emergency funds, and I wish to preserve safety of principal, at this point I feel it is still safer to keep the “ransom money” with BMO to avoid the fee. It is because of the savings that I call this the “indirect dividend”: I can either claim a dividend by investing the capital, or I can save the fee by locking the money away. Either way, I am “making” money off of locking away a fixed amount of capital.

Of course, there are ways to improve the above analysis. For one, if I purchased the shares in my TFSA, then there would be no tax implications, so I could focus on the Cost Yield, not the After Tax Cost Yield. Another possibility is preferred shares, which I spoke of in an earlier post. Over the next few weeks I will continue this analysis to see if there is a better way to obtain overall higher returns.

Onwards and upwards!

The Great Pension Experiment Part II: Analysing my Options

This is part 2 in a 3 part series I have entitled “The Great Pension Experiment”. This will detail my analysis on what to do with a defined benefit pension plan payout, after leaving my previous employer.

I am a big fan of Monte Carlo analysis (MCA). In a nutshell, when performing an MCA we run a test a fixed number of times, using a controlled set of inputs, and observe the results.

I had mentioned on my previous entry that I felt I could do better than the $600 per month defined benefit pension that OPTrust was offering after I left the company. But, how would I quantify this?

I wanted my LIRA to be as simple as possible, to run virtually effortless. Because of this, I elected to use one of the Couch Potato model portfolios, specifically the one using ETFs. Within these options, given my 25+ year time horizon, I elected to use the Assertive Portfolio, which has the following composition:

  • 25% of the Vanguard Canadian Aggregate Bond Fund ETF, VAB
  • 25% of the Vanguard FTSE Canada All Cap Index ETF, VCN
  • 50% of the Vanguard FTSE All-World ex Canada ETF, VXC

The weighted average expense ratio of this portfolio is 0.18% as of November 2016, and the returns are pretty impressive:

  • 1-year return: 7.20%
  • 3-year return: 12.61%
  • 5-year return: 8.91%
  • 10-year return: 6.24%
  • 20-year return: 7.10%
  • Lowest 1-year return (2008-03 to 2009-02): -24.95% (2008 financial crisis)

To perform my analysis, I elected to take the lump sum from OPTrust, and run an MCA on it to see what the projected monthly income would be in 25 years, if I had used the Assertive Portfolio. To do this, I ran 100,000 iterations on 25 years of growth in the portfolio, using randomized returns. Here is an example of one set of returns:

Year Start Value % Gain End Value Implied Annual Income Implied Monthly Income
1 $64,723.32 14.17% $73,893.95 $2,955.76 $246.31
2 $73,893.95 0.01% $73,900.28 $2,956.01 $246.33
3 $73,900.28 12.32% $83,007.73 $3,320.31 $276.69
4 $83,007.73 10.53% $91,747.31 $3,669.89 $305.82
5 $91,747.31 4.52% $95,898.44 $3,835.94 $319.66
6 $95,898.44 17.83% $112,995.45 $4,519.82 $376.65
7 $112,995.45 16.41% $131,536.76 $5,261.47 $438.46
8 $131,536.76 4.38% $137,296.97 $5,491.88 $457.66
9 $137,296.97 -0.97% $135,964.84 $5,438.59 $453.22
10 $135,964.84 20.16% $163,378.55 $6,535.14 $544.60
11 $163,378.55 0.01% $163,400.53 $6,536.02 $544.67
12 $163,400.53 8.39% $177,102.35 $7,084.09 $590.34
13 $177,102.35 9.17% $193,336.09 $7,733.44 $644.45
14 $193,336.09 8.17% $209,128.33 $8,365.13 $697.09
15 $209,128.33 5.86% $221,377.33 $8,855.09 $737.92
16 $221,377.33 9.18% $241,700.87 $9,668.03 $805.67
17 $241,700.87 -3.10% $234,207.49 $9,368.30 $780.69
18 $234,207.49 -14.21% $200,925.08 $8,037.00 $669.75
19 $200,925.08 8.71% $218,421.90 $8,736.88 $728.07
20 $218,421.90 -7.81% $201,370.49 $8,054.82 $671.23
21 $201,370.49 -0.48% $200,408.22 $8,016.33 $668.03
22 $200,408.22 -3.10% $194,196.40 $7,767.86 $647.32
23 $194,196.40 -2.32% $189,688.02 $7,587.52 $632.29
24 $189,688.02 6.79% $202,574.08 $8,102.96 $675.25
25 $202,574.08 10.31% $223,467.86 $8,938.71 $744.89

In the above, the % gain is a random gain for the portfolio based on an average return of 8.29%, and a standard deviation of 7.96%. The implied annual income assumes I could take the ending value of the portfolio, and buy an annuity or other similar (set of) instrument(s) to generate 4% of annual income. I believe 4% annual income, if you are not concerned with growth, is incredibly doable in the market.

But wait, where did that 8.29% average return, and 7.96% standard deviation come from? And what do they mean?

If you take 15 years of returns for the couch potato model portfolio, and do some statistical analysis on that data, you will end up with an average daily return of 0.032%, which equates to an average annual return of 8.287%. Moreover, those same daily returns have a standard deviation of 0.503%, which is 7.959% annualized. (For annualizing, I assume there are 250 active trading days in the year: 52 weeks @ 5 days/week, less 10 days for various holidays). Now, because the model portfolio asks for VAB, VCN, and VXC, and those ETFs are relatively new, I used iShares Core S&P/TSX Capped Composite Index ETF (XIC), iShares Canadian Universe Bond Index ETF (XBB), iShares MSCI World Index ETF (XWD), and iShares Core S&P 500 Index ETF (CAD- Hedged) (XSP) as proxies:

  • For the period of October 29, 2009 to December 31, 2015, I used a blend of 25% XIC, 25% XBB, and 50% XWD.
  • For the period of April 15, 2002 to October 28, 2009, I used a blend of 25% XIC, 25% XBB, and 50% XSP.

The ETFs listed are iShares ETFs. The XWD is the equivalent to VXC, but prior to October 29, 2009, there were no ETFs I could find that were all-world excluding Canada ETFs. Moreover, the period I chose covers the tail end of the dot-com bubble, as well as the massive 2008 financial crisis. Doing this provides more real world examples. In fact, looking at the above table you can see that in this iteration, in years 18 and 20 the sample has massive declines of -14% and -8% respectively! I feel this is an accurate representation of what could happen.

The average and standard deviation play into each iteration of 25 years. In the table above, the “% Gain” column will be, on average, 8.29%, and vary with the standard deviation of 7.96%.

Now, if we pull this all together:

  • Create the table above 100,000 times
  • Take the final 25 year implied monthly income from each iteration
  • Plot a histogram

We get the following:

Implied Monthly Income From a LIRA at 4% After 25 Years of Growth

The above histogram shows that we have a 16% probability of having total monthly income less than or equal to $786. Put another way: we have an 84% probability of having implied monthly income greater than $786. If we take this a little further, we have an approximately 7% probability of making at most $600, or a 93% probability of making at least $600.00. But wait, OPTrust’s defined benefit income would be $600/month. I have only a 7% chance of not beating OPTrust’s defined benefit pension! Screw you OPTrust, I’ll take my chances.

So, based on my Monte Carlo analysis, using 13 years of historical returns on a portfolio of 25% Canadian Equities, 50% non-Canadian Equities, and 25% Canadian Fixed Income, I took the plunge to invest all of my money from OPTrust into my LIRA, using the couch potato portfolio. That was almost a year ago. In my next post, I’ll speak to the first year of actual results.

Onward and upward!

Portfolio Update – October 2016

October was not a stellar month, but like a ship through a storm, slow and stead wins the race. Here are the graphs for October 2016.


On a monthly basis, I was trending below the my benchmark, The Canadian Couch Potato Assertive Portfolio. For October, that portfolio returned a gain of 0.02%, and the total fund return for my own experienced a loss of 0.70%. However, my certificated portfolio managed to beat the benchmark handily, clocking in at 1.74%, a clear winner.


On a trailing twelve month basis, overall I am still beating the benchmark. The Assertive Portfolio benchmark for the last twelve months returned a gain of 7.14%, whilst my total fund returned 10.20%, a handy 3+% increase over the benchmark. I expect this trend to stabilize over the coming months, as some of my large sales earlier this year to fund some major purchases start rolling off of the TTM calculations. But for now, my key Margin, Total Portfolio, and TFSA measures are beating the benchmark.

In September I set up automatic synthetic DRIPs in my LIRA account to automatically re-invest dividends as they become available. The synthetic drip allows me to constantly grow the portfolio whilst negating commission costs, reducing the overall amount of cash in the portfolio (which I consider a massive point of friction, since the cash sits there generating zero returns). October was the first full month of synthetic DRIP in the LIRA account, and as the months move forward, I expect the LIRA to exceed the benchmark, since the LIRA is investing monthly, but the benchmark is only designed to re-balance every six months (which is an accurate representation of what may happen in the real world).


Reviewing the passive income statistics, the benchmark portfolio returned $204.15 in passive income, and my own passive income exceeded that by 83.74%, which was a great accomplishment.


On a trailing twelve month perspective, I am still exceeding the benchmark in total passive income. Benchmark TTM passive income was $5961.89, and the TTM passive income of my own portfolio beat that by 4.40%. The makeup of my portfolio has changed since I started maintaining it on a regular basis again, however the weightings of major dividend players are still low relative to the portfolio as a whole. I expect TTM passive income to level off relative to the benchmark, but within the next twelve months I expect to be in a position to beat the benchmark on a monthly basis as I re-weight the portfolio for a more even income allocation.

I have set up a number of recurring OCPs to automatically invest in my certificated account on a monthly basis. Specifically, Telus, Emera, Fortis, and Bank of Nova Scotia are now receiving automatic contributions from my paycheque every month. While this is a drag on disposable income, because these are all strong dividend players, I expect the long term gains to far outweigh the short term pain of not having “play money”.

Onwards and upwards!

The Great Pension Experiment Part I: Background

This is part 1 in a 3 part series I have entitled "The Great Pension Experiment". This will detail my analysis on what to do with a defined benefit pension plan payout, after leaving my previous employer.

Up until 2015, I worked for the OPSEU Pension Trust, a major pension plan in Ontario, and had the benefit of a “golden pension”, or a Defined Benefit Pension.  These pensions are considered the gold standard in the pension industry because the total payment that one receives upon retirement is guaranteed, regardless of what happens in the markets.

However, towards the end of my tenure at the company, a new CEO came in, and there were a number of changes with upper management. As a result of these changes, there was a large amount of restructuring as the company made attempts to streamline processes and change the long term strategic goals and organization of the firm. As with any restructuring, there are causalities, and my department was no different: my entire department was explained away, and I left the organization.

Due to pension law in Canada, when an employee leaves a company, they are given three options with the money that is with the company for their future pension:

  1. Leave the money with the company, and at age 65, start taking a pension.
  2. Transfer the money with the company to your new employer’s pension plan. In this way, any deductions which were taken off of your paycheque whilst with employed with the former company, would carry forward with you to your new company. The caveat to this is that it is not the actual deductions which would transfer, but the commuted value of those deductions.
  3. Transfer the commuted value of your pension to a Locked In Retirement Account.

Before continuing with the background information, it would help to get some terminology out of the way..

The commuted value of a pension is an actuarial calculation which states what the total value of your pension in the future is worth today. To give a very simple example, assume you received a pension of $1,200/year ($100/month) starting at age 65, and given your actuarial profile, you would live to the age of 85. Given that, the total payments you would receive would be:

     \begin{align*} \text{total value} & =\$1,200/\text{year} \times \text{20 years}\\ &=\$24,000 \end{align*}

But, that $24,000 is the value of the pension as you receive in the future; to be accurate, you have to discount that back to the present day. If we extend our example to assume that we have a discount rate of 5.25%, and we are currently 50 years old, this means that the first annual pension payment of $1,200 (i.e. when you turn 65) has to be discounted back 15 years at the discount rate of 5.25%, or \frac{\$1,200}{(1+5.25\%)^{15}}. The next payment would have to be discounted 16 years, or \frac{\$1,200}{(1+5.25\%)^{16}}. If we do this for all of our payments to age 85 (our assumed death age), then the present value of the pension is then:

\text{total present value}=\frac{\$1,200}{(1+5.25\%)^{15}}+\frac{\$1,200}{(1+5.25\%)^{16}}\cdots\frac{\$1,200}{(1+5.25\%)^{35}}

And if we do the math on this, we find that our $1,200 annual pension at age 65 is worth $7,353.54 in today’s dollars.

The example above is very simple, and a more true calculation would discount each (monthly) payment by the discount rate. Also, the assumption that the pension would last for 20 years is based on a number of actuarial tables, etc. But at the end of the day, the commuted value is the present day value of all future pension payments.

The other item to discuss is the Locked In Retirement Account, or "LIRA" for short. A LIRA functions much like an RRSP, with the following key differences:

  • Under normal circumstances, funds in the LIRA are locked in until either your retirement age, or some other specified age as specified by the province the LIRA is registered in. For my purposes, I am basing my calculations assuming the LIRA is locked in to age 65.
  • Under normal circumstances, money added to a LIRA can come only from another LIRA, or registered pension. You cannot add money to a LIRA at a time of your choosing as you would with an RRSP.
  • Depending on the circumstances, you may be able to transfer your LIRA to your pension plan with another employer in the future.

Put another way: when you open the LIRA, any and all money is inaccessible until the prescribed age of withdrawal, or if available to you, you transfer the funds to another registered pension plan. If the market goes south and your LIRA loses 90% in value, you cannot add money to bring it "back up". Similarly, if it grows in value over time, you cannot withdrawal that money until some time in the future.

For my own personal situation, after leaving my previous employer I elected to incorporate myself and become an independent consultant. This mean that Option 2 was not possible, as I would no longer be employed by a company with a pension plan to transfer the funds into. The other options would be Option 1, leave my money with OPTrust, and Option 3, transfer it to a LIRA.

The formula for OPTrust when calculating the defined benefit pension is:

    \begin{align*}\text{annual pension at retirement} & =2.00\% \\ & \times\text{best consecutive 5 years salary} \\ & \times\text{years of credit in the plan} \end{align*}

Based on my years of service, and average salary, the pension I could have expected to receive at age 65 would be approximately $600/month, or $7,200/year. But, that is $7,200/year in 28 years!! The Bank of Canada has an inflation target of 2.00% annually. If we discount back the pension offered by my previous employer at the inflation target of 2.00%, that would equate to $426.67/month in today’s dollars. I’ll be honest: I think I can do much better than that.

That said, because the pension offered by OPTrust would be worth relatively little in the future, and because I did not have an employer to transfer my pension to, I went with Option 3. The second part of this series will outline the quantitative analysis I performed to come to this conclusion.

Leveraging the Work of Others

I am often asked where I get my information, where I start, and what my process is.

The first thing for any investor, regardless of how s/he invests, is to have an Investment Policy Statement, or an IPS. I’ll touch more on IPS’ in a later post, but in a nutshell it describes your investing goals, strategy, how to meausure success, and risk tolerance. Overall, it measures the how and why you invest. I mention this, because one’s investing process is driven by their IPS, and the process in turn drives how and where you start.

As a dividend investor, I try to work smarter, not harder. There are a plethora of information sources out there. The universe of dividend paying companies is huge, and grows even larger when you expand this to income trusts (e.g. REITs), mutual funds, and ETFs. Because the universe is so large, it is challenging to find companies to invest in that meet my specific criteria:

  • Companies with strong dividend growth
  • Companies which are cheap (by cheap, I mean in terms of valuation, not the actual cost per share)
  • Companies which offer a decent yield
  • Companies which will help to diversify my exposure to different industries (i.e. not being overly concentrated in one type of company, such as “all banks”)

With that criteria in mind, there are a number of tools that one can use to help whittle down the universe of available stocks to invest in. And once this universe is whittled down, you can start focusing on which companies to take a deeper look at, before pulling the trigger and investing your hard earned dollars. That said, here are some of the tools I use to help in identifying companies to analyze, and hopefully purchase.

  • Blogs. I try to read a lot of blogs, but as most readers know, there are many, many blogs out there. It helps to be able to have a shortened list of blogs to peruse on a regular basis. My primary source of blogs is The Div-net, as it is composed of blogs focused on dividend investing. This makes sense, as there are several great bloggers who have already done a fair bit of research on companies to invest in (or not to invest in!). Beyond that, these blogs are a great source of inspiration for my own investment activities, and often help to push me to invest that one extra dollar into my investments.
  • Podcasts. I listen to three (four) bogs on a regular basis. These blogs are not all about investing, but they do act as a great source of inspiration for managing money. Moreover, they make the listener really think, which helps when you are doing deep analyses on companies to invest in.
    • Market Foolery / Motley Fool Money. These blogs are published Monday-Thursday, and Friday, respectively, and are the podcasts of The show features a rotating list of speakers who work at, and is great for a daily recap of financial events, and an hour long recap on Friday. The host and speakers are great presenters, and I’m often left laughing under my breath on the streetcar home when I’m listening to them.
    • Planet Money. While not an investment podcast, Planet Money is a great source of things about, well, money. They cover a breadth of topics, everything from the full process to selling oil (right from pumping it out of the ground, to selling it to a gas station), the odd case of a shopping mall with two different minimum wages, and the investor of the Self-Checkout Counter (who knew that the inventor was a local Torontonian???).
    • Freakonomics. I’ve saved the best for last. I love the Freakonomic books, and the podcast is great for a weekly dose of diverse topics on economics. They cover everything to do with incentives, right from why belts are the worst invention ever, to the history of the Nobel prize.
  • News. Newspapers, and newspaper websites, are a great source of information. Regrettably, many newspapers how have “pay-walls” around them, so some of the more premium content is unavailable without a subscription. Frequent sites to visit? The Business and/or Investing sections of The Globe and Mail, Yahoo Finance (Canada), and Bloomberg.
  • Daily Email News Digests. I subscribe to two daily news digests, which typically deliver an email before 7:00 AM EST so I may read it on my way to work.
    • CFA Financial Newsbrief is put out by the Chartered Fianncial Analyst Institute, and is a great roundup of financial and economic events that have occured in the last twenty four hours (or over teh weekend in the case of the Monday edition). Within the email, there are short paragraphs describing the event, and links to longer articles on 3rd party websites such as Bloomberg, or Wall Street Journal.
    • Bloomberg Briefs. I actually subscribe to two Bloomberg digests, but they are both different versions of Bloomberg Briefs. If you go to the site, there a variety of daily digests which you can sign up for, for various financial products (ETFs, Bonds), different industries, and general financial and economic news.
  • DRIP Investing Centre. The DRIP investing Centre is the heavyweight of all information. On this site, you’ll find the Money Market Dividend Champion lists for both Canada and the US, available in Excel and PDF format. These lists are invaluable to the dividend investor, as they have information going back several decades for each company that pays a dividend in the Canadian and US markets. For my own criteria listed above, I was able to whittle the universe of 700+ stocks down to 15 stocks in less than 5 minutes, just playing with some filters in the spreadsheets. This has saved me countless hours of filtering and searching other websites for the same information. Importantly, it also lists an extrapolated Graham number, which is one of the key metrics I use for measuring the value of a company (e.g. to determine if it is cheap enough to buy). This in itself is a great time saving tool, since it avoids me researching a company, only to find that it is too expensive to invest in!

No investor is an island, and it helps to leverage the work of others! After all, the majority of us are retail investors who are trying to carve out the biggest piece of the pie that they can — and thanks to resource such as those listed above, we can eek out an even larger piece over time.

Onward and upwards!

Portfolio Update – September 2016

An investment portfolio is like a garden: you have to constantly maintain it to watch it grow. Otherwise it becomes overrun with weeds, and ultimately turns into an utter mess. Such is the state of my own portfolio…I stopped monitoring/caring for it on a regular basis in 2015, and this is the first month I have sat down to really review it, and see where it sits. Reviewing the historical performance against some benchmarks, things are dreadful. But, with some tender loving care, I’m going to right the ship and get back on the road to successful returns.

Before I begin, a note on benchmarking. I consider the Canadian Couch Potato, specifically the “Assertive” portfolio, as my benchmark. The reason being, if I had zero time to look at my portfolio, this is the portfolio I would assemble, rebalancing twice annually. In building some comparison returns, I have built a parallel portfolio as follows, based on the Assertive portfolio:

  • Initial portfolio value is $100,000, with a seed period of May 2014.
  • Because the model portfolio uses VXC, which only came into existence in mid-2014, the first few months of the portfolio used 75% VCN and 25% VAB, and starting in July 2014, 50% VCN, 25% VAB, and 25% VXC. Realistically this no bearing on current analysis or future analysis, as July 2014 is more than twelve months back, and thus out of range for TTM calculations.
  • The portfolio is rebalanced every January and July.
  • Dividends are retained until the next rebalancing period.
  • Each period of rebalancing incurs $59.70 in commissions: at $9.95/trade, this is for three sells, and three buys. This is representative of what I would pay at my own discount brokerage. I know that I may not do three outright sells and/or three outright buys (i.e. I may only add to a position), but this simplifies compiling the benchmark.

Moreover, because I am a dividend investor, I track a separate portfolio which projects what I would receive in dividends if my entire portfolio was invested in the Assertive portfolio. E.g. if my portfolio value were $500,000 in a given month, what the dividend income would be from the Couch Potato’s Assertive portfolio if I had the $500,000 invested in the appropriate proportions of VAB, VXC, and VCN, based on dividends for each of those ETFs for that month.

With a discussion on benchmarks out of the way, lets see the portfolio performance for September 2016, and the TTM (trailing twelve months) up to and including September 2016:

In total, I have five portfolios:

  • Margin. My regular trading account. This is a non-registered account where I do the majority of my trading once my RRSP and TFSA are maxed out. I also have some US companies in here for US dividends, which I use to pay for any US purchases.
  • RRSP. My RRSP account, which is the bulk of my portfolio. Locking in the majority of my dividend income in this portfolio is a smart move, since it prevents me from spending it or using dividends from those companies for day to day spending.
  • TFSA. My tax free savings account portfolio, which I typically contribute to once my RRSP is maxed out.
  • Certificated. This portfolio is relatively small, and is where I keep all of my certificated holdings. This portfolio is where I do all of my DRIP investing. All positions in this portfolio are registered directly in my name, and all companies hold fractional shares due to the nature of DRIP investing. Moreover, they are held directly at Computershare or CST Trust Company. Finally, I have regular monthly contributions to these positions via direct debit from my banking account; this is a great feature of DRIPs because I can purchase shares on a regular basis commission free, and take advantage of dollar cost averaging.
  • LIRA. I have a locked in retirement account for when I cashed out my pension at one of my previous employers.

Each portfolio has a varying mix of sectors, and I also track the total fund return which is the total return of all portfolios. This is my main measure of success. Reviewing the above, my total fund on a monthly basis has been near or above the benchmark portfolio, with a dip in the most recent periods. You’ll also notice a big drop in the certificated portfolio in December 2015, mainly driven to a drop in Telus during that period. On a trailing twelve months perspective, total fund has been relatively good, picking up post-March 2016 after I started selling things off to pay for our new house: I had sold a number of laggards during that period, which boosted overall returns on a go-forward basis. The above also includes liquidating a large percentage of my portfolio to buy a new house earlier this year, as well as paying off my student loans in late 2015.

With regards to dividend income, these two charts tell the story:

You’ll notice that the income from the benchmark portfolio is somewhat lumpy; this is because the equity ETFs (VXC, VCN) only pay a dividend quarterly, whereas the fixed income ETF—VAB—pays monthly. Because of this, every quarter my total fund passive income is relatively lower than the benchmark. However, you’ll notice that the trailing twelve month total passive income is consistently relatively higher – this shows that overall, even though on some quarters I am lagging behind my benchmark, on an annualized basis (i.e. TTM) I am still ahead. Ergo, to date my own dividend choices have been better than those of the benchmark. The drop in relative excess dividend income starting in December 2015 was due to the selloffs mentioned above for paying down student loans, and a new house purchase.

Reviewing the historical results, things aren’t as great as I would like them to be, but they aren’t horrible either. A big challenge was that I sat on a large pile of cash and didn’t even do something as simple as investing that cash in a broad market index fund to generate some returns; it sat there as cash, generating literally 0.00% return for 6+ months! But now that I am refocusing, I’m looking to right those previous errors.

Here’s hoping October shapes up to be a little better.

Onward and upwards!