Let me introduce you to my guest blogger this week.  Trevor Dale.  

I met Trevor and his family almost two years ago now, while showing some homes.  And we have always kept in 'email contact,' since the showings; at that point it just wasn't in the cards for the Dale's to move, but little did we know that a few years later, Trevor would be a featured guest blogger for me.  It's amazing what happens when you meet the right people.  

Below is what Trevor is fluent in, Investments and Wealth Management.  I will connect all his links through out this post for you too.

Thanks Trevor!

An investment time horizon is when you will need to liquidate a particular investment or portfolio. I have heard a misconception too many times that someone’s time horizon is the date that they retire. While their life definitely changes at the time of retirement, that is not usually the time when they need to liquidate all of their investments. Unless they plan to withdraw all of their investments then their portfolio will likely, hopefully, be around long past retirement.

At the firm that I run, I do things a little bit differently when it comes to retirement planning. Rather than look to a questionnaire about someone’s assets, income and risk tolerance to find out their asset allocation to stocks and bonds, I look at their cash flow requirements in retirement. This is more how a pension fund looks managing its money.

***Please note that this is not specific advice to your individual financial situation and you should consult a licensed professional prior to acting on any information in this writing. This information is provided for educational purposes only.

There are always two questions I ask every client that become the basis of all portfolio construction:

1. How much cash will you require?

2. When will you need those cash flow(s)?

In my opinion the transition phase for retirement could begin up to 10 years prior to retirement. As a person approaches retirement they should be gradually increasing the amount of fixed income securities that they have so that when it comes time to draw on the portfolio, the amount allocated to fund their cash flows should avoid requiring to be withdrawn in a down market at a loss. Once I know how much cash someone requires in retirement and when they will be retiring, then I start to build to 5 - 10 years worth of income in bonds when they retire, initiating the process prior to retirement. Each year I gradually increase the amount until we are at the desired allocation. For someone already in retirement I tend to hold around 7 years of bonds, generally speaking.

Using the scenario of someone in retirement and holding 7 years of cash flows in bonds will allow me to draw down the bonds for 7 years if the stock market declines and then liquidate more stocks when the market recovers in order to replenish the fixed income portion of the portfolio. For example a 65 year old with a $1,000,000 portfolio where someone requires $40,000 per year in cash flows will suggest $280,000 in fixed income. This is a 28% allocation to fixed income which is often considered low.

The traditional rule of thumb for investing is that your age should equal the percentage of bonds in your portfolio. According to this rule of thumb, a 65 year old should have 65% in bonds.

Let’s look at another example where a family has $1,000,000 in assets yet has no other sources of income and is drawing $120,000 per year. This would suggest that $840,000 be allocated to fixed income and is an 84% allocation and the funds at this rate would likely run out fairly quickly. I find that taking this numbers-based cash flow approach gives a much better opportunity to discuss spending, savings, retirement planning and portfolio construction. The above examples are a simplistic version of the model that I use. When I go through this with clients I factor in things like inflation, emergency reserves and other sources of income such as company and government pensions. I will also consider possible inheritances and expenses such as home renovations, children’s tuition, a parent’s expenses or perhaps a child’s wedding. What happens when someone doesn’t expect to withdraw all of their funds in their lifetime and there is a large part of their estate that will be for legacy purposes? These are all important factors to take into account.

Let’s take a moment to discuss the purpose of each type of asset.

Fixed income securities, commonly known as bonds or GIC’s, are typically less volatile than stocks and can be used to match off known expenditures and cash flows. When used in this manner it is an asset/liability matching program similar to what a pension fund uses. Their purpose is to hold value with a fairly predictable rate of return. Fixed income has risks that include interest rate changes, time, liquidity and credit quality of the issuer. These all need to be carefully selected when choosing a fixed income investment. Equities are designed to take advantage of potential growth that owning a company may offer. The purpose is to seek a potentially higher return than fixed income however with a higher degree of volatility and change in value of the investments than fixed income. Risks associated with stocks are individual stock risk, sector risk, business cycle risk, country specific risk, liquidity and currency risk. Let’s keep one important factor in mind when it comes to choosing between owning debt or equity in a company. A company is presumably borrowing money in order to put that money to work and make a higher return than they pay for on their debt. For example: if a company borrows at 2%, they should earn more than that with their operations, otherwise they will be operating at a loss.

A company’s leverage, debt payment coverage, debt covenants, economics (macro and micro) and other factors are important to keep in mind with fixed income investments. Let’s discuss different ways to get exposure to these investments. Fixed income exposure can come from guaranteed investment certificates (GIC), bonds, treasuries, exchange traded funds (ETF), mutual funds, hedge funds and private lending. Equities, also known as stocks, can be owned directly, through mutual funds, etf’s, hedge funds, options and private equity. One consideration that I’ll have you consider is that if you own a balanced fund that co-mingles both bonds and stocks, then now knowing the purpose of each type of investment, how can you only withdraw from the bonds if you are in retirement or preparing for retirement? For example, if the stocks have a bad year and you only want to withdraw from your bond portfolio, you won’t be able to do this if you own a balance fund. Owning a balanced fund means that your stocks and bonds are in one fund. While this is a simple way to buy both assets at one time, it becomes difficult when managing a portfolio and preparing for retirement.

One other example I’ll have you consider is that if someone loses their job and their stocks are in a negative year, then a separation of stocks and bonds will allow for just the bonds to be sold and withdrawn to supplement their income. If the investments were in a balanced fund then they would be selling both stocks and bonds by default. The main takeaway is to think about what time horizon means to you and make sure you understand your strategy is for implementing that asset allocation. You should be able to answer questions like,

• If I suddenly need to withdraw funds what will be sold?
  

• How am I protecting myself for a downturn in stocks while also taking advantage of the upside potential?

 

Thanks for reading and have a great day.

****

Trevor Dale is a designated Chartered Financial Analyst, portfolio manager and life insurance

broker. He runs a wealth management firm TK Dale Wealth Management. He offers financial

planning, fully managed investment accounts, insurance solutions and mortgages. Mortgages

are provided by his registration as a mortgage agent at iBridge Capital #13506. He has been in

the investment industry since 2004, and prides himself on providing unbiased and independent

advice for his clients. Trevor started his career at the age of 17 when he joined the army as a

reconnaissance soldier. After completing university Trevor worked for a bank, where had a lot of

experience working with pension funds, hedge funds, stocks, bonds, swaps and more. 

Previous to starting his own firm, Trevor worked for a hedge fund company as portfolio manager, chief compliance officer and director of client services.

Trevor can be found at: 

tkdale.com

Twitter & amp; Instagram: @tkdalewealth

Facebook: facebook.com/tkdalewealth

***Please note that this is not specific advice to your individual financial situation and you should

consult a licensed professional prior to acting on any information in this writing. This information is provided for educational purposes only.