Investing for Retirees Part 1: The Foundation

1. Investing for RetireesPart 1: The Foundation Low fee, tax efficient, diversified, income producing portfolio Session 11.1, Fall, 2019

2. Disclaimer • The Ottawa Branch of the National Association of Federal Retirees and the facilitator of this seminar do not in any way offer financial orinvesting advice. • This seminar and the information in this PowerPoint presentation are provided for education purposes only. • Investing involves risk. Any personal investing decisions should be made only after individual due diligence and/or with the assistance of a registered financial adviser or broker. • Ottawa Branch takes no responsibility for any investment decisions that participants may make. • By attending this seminar and signing the disclaimer provided, you are signifying that you understand and agree to these conditions. Please note that the Ottawa Branch provides information on issues, products and services of general interest to its membership. It does not endorse a particular position on a product or service, as being suitable for individual members, but brings them to the members' attention so that they can make up their own minds

3. 1. Focus on what you can control

4. In conclusion: F T D • Control what you can: • Minimize Fees • Optimize Taxes • Diversify to reduce risk through asset class and geography

5. A great strategist once said: • There are known knowns. • There are known unknowns. • But there are also unknown unknowns - the things we don’t know we don’t know. • Loosely translated from Donald Rumsfeld, U.S. Secretary of Defence, 2001-2005

6. Unknown unknowns – an example Denver 2004-2007. • Many beautiful, vacant houses for sale. • At the same time, radio ads offering: 1% Adjustable Rate Mortgages NINJA (No income, no job or assets) mortgages • Stock market peaked October, 2007 • Housing market bottomed October, 2011

7. The point is, we don’t know what we don’t know • The world economy is more complex than 99% of us comprehend. • The next great market downturn will be caused, according to the “experts”, by the end of the Debt Supercycle. • Canada has the highest total debt load (Personal, Govt, Business) as a percent of GDP in the developed world, OECD Nov 23, 2017 • All financial bubbles have been caused by easy credit and excessive debt

8. The looming debt crisis

9. Frequently used acronyms and terms • ETF – Exchange Traded Fund. A mutual fund sold like a stock with (usually) lower fees than mutual funds • MER – Management Expense Ratio. The fees in % that you pay to a mutual fund or ETF to cover the cost of managing the fund and paying the person who sold you the mutual fund • Index – a selected list of stocks or other investments chosen to reflect the average value of a type of stocks, bonds or other assets • S&P 500 – The Standard and Poors index of the 500 largest US stocks • Dow Jones Index – Usually the DOW Industrials – 30 stocks selected to represent the US industrial economy • TSX 300 – The 300 largest Canadian stock issuing companies listed on the Toronto Stock Exchange • Inverted Yield Curve – When short term interest rates are higher than long term, often signalling that a recession is coming.

10. 2. Develop your allocation strategy

11. 4 rules for long term investing success • 1. Develop and stick to a low cost, diversified asset allocation strategy • 2. Focus on time in the market rather than timing the market • 3. Keep it simple – complexity is not a benefit • 4. Rebalance annually

12. Develop the allocation strategy that is right for you • Income vs growth • Most investment plans and vehicles are designed for accumulation, not decumulation • Dividends for income • Capital gains for legacy • Diversification for safety

13. Components of an Allocation Strategy • Equities (Stocks) • Canada • US • International • Emerging • Real Estate • Real property • REITs • Fixed Income • GICs • Bonds • Preferred Shares • Cash • Pension

14. Picking individual stocks is like playing hockey against the Senators • More mutual funds than stocks • Can you or your advisor beat pros with super computers ? • But – there is one good reason • Canadian dividend tax credit • Good buys take courage • Remember - A great company is not necessarily a great stock

15. The value (?) of Investing Advice • From the Globe and Mail, Report on Business, August 16, 2019: • “The argument for gold is getting brighter by the day”, Tim Shufelt, G&M • “The argument against gold stocks …. Don’t do it”, BMO Capital Markets

16. The more decisions we make, the worser we do • Amateur investors woefully underperform the market. • Trying to beat the market is a fools game. 90% of the pros can’t do it. • Design an asset allocation strategy that is right for you, and stick with it. • “An investment portfolio is like a bar of soap. The more we handle it, the smaller it gets”.

17. Quiz True or False • The best investment managers can predict within six months the next market crash • We know when the Debt Supercycle will end and what impact it will have • Donald Trump‘s next actions regarding China are clearly known • The Canadian stock market is one of the best performing in the world over the past ten years • The Canadian economy has outperformed the US economy over the past five years.

18. 3. Fees erode performance

19. Projected investment returns • Some of the country's top financial minds think you should expect to make 6.3-per-cent a year in Canadian stocks over the long term and 3.9 per cent in bonds. • Rob Carrick, Globe and Mail, June 5, 2017

20. Costs seriously erode your gains • Market returns predicted to average 6-7% • 2% MER for managed mutual funds + 2% inflation leaves you 2-3% • Taxes take another 20-54% in non registered accounts

21. How 2% fees erode your returns over time

22. Why it is so hard to beat the market • More mutual funds and ETFs than stocks – 9500 funds in the U.S. vs 4000 listed companies. • Fees – Canadian Mutual Fund fees some of the highest in the world • Active average 2.17% vs 1.2% in U.S. • SPIVA • Trading costs • Many funds have 100% turnover per year • Taxes • High turnover = high taxes

23. Most Canadian managed mutual funds underperform their Index • S&P Index vs Active (SPIVA) research: • % of funds beating the index over 5 and 10 years 5 years 10 years Canadian equity 10 9 Canadian dividend 28 0 US equity 4 3 International equity 8 5 As of Dec 31 2018 www.ca.spindices.com

24. Cdn Equity MFs vs Index ETFs • Big Bank Cdn Equity MF • MER 2.18 • 10 yr Total return %/yr 8.4% • Top 10 54% • RY • TD • BNS • CNQ • ENB • I Shares Cdn Equity ETF (XIC) • MER .05 • Ten yr Total return %/yr 9.3% • Top 10 37% • RY • TD • ENB • CNR • BNS

25. Active (Managed) versus Passive (Index) Investments • Active Management: • Paying someone to select stocks or other investments • Goal is to beat the Index • Can be in a Mutual Fund, Exchange Traded Fund (ETF) or Personal Account • Passive Management: • Buying all of the stocks or investments in an Index • US = S&P 500, Russel 2000 • Canada = TSX 300 • Rest of the developed world = EAFE • Emerging Markets • Bonds • Preferreds

26. Index (passive) funds have lower fees and taxes • Typical Canadian equity Index MF fee is 1% or less • Index ETF fees are lowest: .05% • Passive (Index) funds now equal 15% of U.S and 5% of Canada markets • G&M January 27, 2018

27. John Bogle, the father of Index Investing • “In investing, you get what you don’t pay for. • Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. • And they won’t be foolish enough to think that they can consistently outsmart the market.”

28. Mutual Funds versus Exchange Traded Funds (ETFs) • Mutual Funds can be Active or Passive • Sold through brokers or financial advisors • Usually have annual trailing commissions up to 1% • Fees can be high: • .5% - 2.5%+ • ETFs can be Active or Passive • Sold like stocks through brokers • No trailing commissions • Often half the fees of an equivalent Mutual Fund: • .05% - 1%

29. Exchange Traded Funds (ETFs)have lowest fees and taxes • ETFs are mutual funds sold like stocks • Active ETF MERs range from .50 – 1.0 % • Passive (Index Tracking) ETF MERs range from .05 - .50 % • Passive funds do little trading, so produce little capital gains tax • See: Rob Carrick’s ETF Buyers Guide, Globe and Mail

30. 4. Tax optimization can enhance returns

31. Approximate Ontario marginal tax rates after age 65 by type of income (including clawbacks)

33. Canada’s big banks are plotting to dominate the ETF world • 2010, 91 per cent of investment funds went into mutual funds, • 2018, over 50% per cent of fund sales are going toward ETFs • Canadian Banks and major Mutual Fund companies are all creating ETFs, many active with higher fees • RBC & I Shares ETF joint venture • ETFs available through Bank Branches as Mutual Funds

34. Your bank “Advisor” may not be your friend • Bank Advisors are basically salespersons with no investment qualifications • An “Advisor” is NOT a “Financial Adviser” • The majority of bank managed mutual funds underperform the market because of fees • All Canadian banks offer Discount Brokerage services online

35. Tax benefits of dividends and capital gains • Dividend tax rate = 70% or less of interest or income rate, depending on tax bracket • Effective after tax Dividend yield = 1.2-1.3 or more times interest income • Capital Gains = 50% of interest or income rate, depending on tax bracket • Effective after tax Capital Gain yield = 1.4-1.5 times interest income

36. 5. Time in the market and diversification

37. Time horizon is key • Age is not the key factor – time horizon is • If you need funds within 1-3 years, stay out of stocks and medium-long term bonds • No return without risk • “Ask yourself one question. • Do I feel lucky?” • Dirty Harry, 1971 This Photo by Unknown Author is licensed under CC BY-SA

38. S&P 500 Average Historical Returns90% of ten year periods had positive returns – but not all • Including Dividend Reinvestment: • Time period: 50 Years 30 Years 20 Years 10 Years • Average Return 9.389 % 9.425 % 9.301 % 9.158 % • BUT: US is only major stockmarket with these returns • S&P 500 revenues are 42% international

39. 9% Average stock market return (red line) hides a lot of variabilitySource: AWealthofCommonSense.com

40. S&P 500 (SPY ETF) 26 yearsNote 2000-2002 and 2008 crashes vs long term $100k invested in 1992 worth $940k today

41. The Need to Diversify5 Year Total Returns incl reinvested dividends

42. 10 - 2 Year US Treasury Spread 2000, 2006-7 negative spread predicted recession & market crashCanada negative since July, 2019

43. Negative bond interest rates portend economic contraction • $14 trillion in negative yield government bonds • Japan and Germany government bonds pay -.4% • Germany just issued 30 year bond at 0% • Entire US govt bond yield curve is below the Federal Funds rate • David Rosenberg says that historians will view this coming period of economic history as exceptional

44. Investment types and short term risk today

45. Real (inflation adjusted) bond returnsaverage 4%Source: AWealthofCommonSense.com

46. Rebalancing contributes to a successful strategy and removes emotional decisionsRebalance when: • Annually • When new funds become available • When funds are removed • Markets tend to over and under shoot – don’t want to limit upside