Hedging in the Retirement Risk Zone

Retirement_Risk_Zone

WealthyEdge.ca

My latest MoneySense blog reveals some of my personal strategies for dealing with the bear market: How I’m preparing for Retirement in a bear market.

There may be a few ideas for anyone who, like myself, is in the “Retirement Risk Zone.” That’s the five years prior to and five years following your projected retirement date. If it’s 65, the traditional age, then the Risk Zone is between age 60 and 70. Based on the Hub’s demographic user patterns, a lot of people are in that category (although we actually have lots of millennial and Gen X traffic too on both sides of the border).

Towards the end of the blog, I talk about portfolio hedging. I have to credit my fee-for-service financial advisor for most of these concepts. He didn’t want to be named for the MoneySense blog but he is listed in the Hub’s “Guidance” section elsewhere in this site.

It took me awhile to accept that hedging — that is, using options or selling short certain ETFs representing the major indices — is as much a risk reduction strategy as it is a “risky” strategy.

Hedging means trading off some upside for downside protection

The best way I can describe it is that you’re willing to give up some upside in return for protecting the downside. In this respect, it’s not unlike asset allocation or a classic balanced fund. Naturally, a portfolio half in bonds and cash should be less volatile than one 100% in stocks. You’d expect the aggressive portfolio to have the highest returns in a continuing bull market in equities and if you were in a balanced fund would accept the lower returns that let you sleep soundly at night.

To my mind, hedging is similar. In the MoneySense blog I describe a hypothetical situation (close to my own) in which asset allocation across both registered and non-registered portfolios is roughly 50/50. Ideally, registered plans are mostly in fixed income (and my case some US dividend-paying stocks), and non-registered plans are mostly in stocks, especially Canadian stocks.

But when you’re in “The Zone,” you hardly welcome watching half your portfolio sink. Yes, we’re already down 20% and are firmly in correction or bear mode in most global markets. It could be that now is the proverbial buying opportunity, and that’s probably true for younger investors who have plenty of time on their side.

The Long Run eventually runs out

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The Eagles’ late Glenn Frey (YouTube.com)

Not so we aging baby boomers. The deaths the past week of David Bowie at 69 and of the Eagles’ Glenn Frey at 67 should be sufficient reminder (“memento mori“) that we are all mortal. The concept of stocks for the long run is certainly a good foundation for young people and the middle-aged to build growth portfolios but as Keynes also reminded us, “In the long run we’re dead.”

Here at the Hub our slogan is to achieve financial independence “while you’re still young enough to enjoy it.” It’s hard to really enjoy Findependence when you’re worried about the stock market crashing 50% or more, as it did in 2008.

But as my adviser told me at the time — as he sailed through the financial crisis intact via his hedging strategies — you don’t need to stand helplessly like a deer blinded by headlights as markets go south.  If you care as much now about capital preservation than growth, then it follows that you’re willing to trade off some future upside for a lower downside. Asset allocation may get you there and one of the regular contributors to the Hub is a firm believer in retirees relying on cash flow from high-quality individual stocks.

Partial hedge is still net long equities

Currently “we” are only a sixth to a third hedged so we’re still happy if markets recover. As the MoneySense blog warns, if you do start to hedge, it will be inevitable that you may get whipsawed. So if you choose to initiate a hedge by shorting ETFs covering the TSX or the S&P500 or EAFE ETFs, realize that if markets start to rise, you will be losing money on the the sell side of the hedge. (But if you’re net long you’re still “happy”).

Conversely, if they sink further, you will be glad you purchased the “insurance,” as those positions rise even as the indexes sink further.

No guarantees either way but when in investing was there ever a guarantee? And as the other blog notes, you don’t want to try this without the guidance of a good financial planner or investment adviser who is thoroughly proficient at risk management, options and hedging.

Happy 2016, and a few financial New Year’s Resolutions

new year goals or resolutions - colorful sticky notes on a blackboard

To all readers of FindependenceDay.com, we wish a very happy — and Findependent! –2016.

A reminder that as of January 1st, 2016, you can contribute a further $5,500 to your Tax-free Savings Account or TFSA. That’s the first thing they remind you of at RBC Direct Investing, one of the main two financial institutions our family uses.

I have to admit that personally I’ve made no formal list of New Year’s Resolutions, although I have declared that I’d like to take my stress levels down a tad, perhaps by using the word “No” a little more often. We’ll see.

In the meantime, for a good formal list of financial New Year’s Resolutions, the Financial Post’s Angela Hickman recently published a good starting point. Click on Five financial resolutions for 2016, and how to (really) make them happen.

Below, I’ve taken the liberty of summarizing the 5 points. Again, click the red link above for the full piece.

1.) I resolve to figure out my finances

2. I resolve to stick to a budget

3. ) I resolve to get out of debt

4.) I resolve to save more

5.) I resolve to stop wasting money

These are all valid suggestions and especially useful for younger folks for whom financial independence is still a faraway goal.

7 eternal truths can also become New Year’s Resolutions

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Majority of Canadians support leaving TFSA limit at $10,000, poll shows


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workingcanadians d23ad08526748111987b5e9b9fd1c19b_400x400Toronto, December 3, 2015 – A recent public opinion poll shows majority support among Canadians for leaving the TFSA (Tax Free Savings Account) limit at $10,000, not reducing it to $5,500 as the Liberal government is considering. This support is consistent across income levels, age, region and whether the respondent worked in the public or private sector.

Catherine Swift, spokesperson for Working Canadians said, “53% of Canadians are in favour of leaving the TFSA limit at $10,000, while only 19% favoured reducing the limit.” A total of 27% of respondents said either “it depends” or “I don’t know.” These results are consistent with other polls conducted on this issue.

Both public and private sector employees demonstrated similar support for a higher TFSA limit at 56% and 62% respectively. “Since very few private sector Canadians enjoy the generous, inflation indexed pensions that are commonplace in the public sector, private sector support for maintaining the higher limit is not surprising,” said Swift.

“Given that government employees are already very well provided for in retirement, the high level of support among this group for leaving the TFSA limit “as is” suggests public sector employees value the higher TFSA limit more than might have been expected.”

Support among all income groups

Keeping the TFSA limit the same enjoys considerable support among all income groups; support reaches majority level among respondents with incomes over $50,000. Respondents with income less than $25,000 exhibited the least support for leaving the TFSA limit “as is”, yet 37% of this group still wanted the limit to remain at $10,000. Support for retaining the $10,000 limit was also consistently strong across age groups, ranging from 51% among those 18-34 to 55% for those over 65.

The poll also showed support for the current TFSA limit among voters for different political parties. Of those who voted Liberal in the recent election, fully 52% want the limit to be left alone, as compared to 61% who voted Conservative, 51% of NDP voters, 63% of Green voters and 56% of Bloc Quebecois voters.

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Catherine Swift

TFSAs have only been in place since 2009, and according to Canada Revenue Agency (CRA) data, over 11 million Canadians have a TFSA, which is roughly half of the working population. “This is an amazing level of participation in a very short time,” Swift noted. She added “These poll results are another indicator of how much Canadians love their TFSAs, and want the current limit to remain.”

“Some people have claimed that the higher TFSA limit is only for the “rich” and costs the government too much in foregone tax revenue. The results of this poll and other data indicate that the higher limit TFSA is by no means something only the “rich” aspire to.

As well, the federal government spends tens of billions of taxpayer dollars every year on very generous public sector pensions. Surely the couple of billion in tax dollars foregone annually in running the current TFSA program is the least the government can do to permit the 80% of Canadians who do not work for government to save for a decent retirement for themselves and their families,” stated Swift.

Formal petition coming to House of Commons

Since launching the campaign to promote leaving the TFSA limit at $10,000, Working Canadians has been overwhelmed by positive feedback. As a result, Working Canadians established a formal petition to the House of Commons, which will be introduced by Member of Parliament Peter Kent in the near future. The petition can be found at www.workingcanadians.ca/saveourtfsa

 

This online poll was conducted between November 26 and 29, 2015 by Research House, amongst a nationally representative sample size of 1,012 Canadians who were 18 years of age or older.

Catherine Swift is Spokesperson for Working Canadians, a not-for-profit organization dedicated to opposing the negative impact excessive union influence has on the Canadian economy and society.

To arrange an interview with Catherine Swift, contact Gisele Lumsden at 647 466-5509 or by email: info@workingcanadians.ca

 

Will the Liberal landslide delay your Findependence Day?

The “Hair” Apparent? National Post.com

The Financial Post provides my take on last night’s Liberal landslide, as it pertains to Financial Independence in this blog that just was published online: So long $10,000 TFSA, and other personal finance fallout from the federal election.

The gist is that we’ll likely lose the $10,000 annual contribution TFSA limits that were only hiked earlier this year but as aging boomers move into semi-retirement or full retirement, it’s likely they’ll fall into the middle tax bracket where the Liberals’ 1.5 percentage point cut should provide several hundreds of dollars of annual tax savings. There are also significant implications for an expanded Canada Pension Plan, Old Age Security and I expect that Ontario will now no longer see a need for the Ontario Retirement Pension Plan or ORPP.

Plenty of other links via my Twitter feed (@JonChevreau), which can also be viewed under the new “Social” tab over at the Hub.

UPDATE Oct 21. See the updated version of this blog at sister site Financial Independence Hub, with links to various Financial Post stories by me, by Jamie Golombek on tax bracket changes, Garry Marr on lost TFSA limits, and Fred Vettese on an expanded CPP and probable elimination of the ORPP.

Millennial is mortgage free at 31. Next goal: Findependence Day by 35

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Sean Cooper in front of his paid-for home.

My latest MoneySense blog features 30-year old millennial and financial writer Sean Cooper, who is having a mortgage-burning party tonight to celebrate his paying off his mortgage in just three years. See Mortgage free by 31.

In an early guest blog here at the Hub, Cooper credited my financial novel, Findependence Day, with inspiring him to seek early financial independence himself. See also a second millennial’s story at Two millennials well on the way to achieving early Financial Independence.

The book argues in particular that “the foundation of financial independence is a paid-for house.”

Cooper apparently took this message to heart because. He doesn’t even turn 31 for a few more months and has set his next goal to achieve a net worth of $1 million within four years. Well done, Sean, may you serve as an inspiration to your generation!

Click on the above link at MoneySense to find the full Q&A I conducted with Sean or see below.

Email Q&A with “Findependent” Sean Cooper

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