Risk in holding Cash and not Investing | General financial discussion | Discussion forum

Really?

The people in this article have bags and bags of money and other financial resources that they can draw on. Yet the expert wants them to take their relatively small amount of cash (in proportion to their total assets) and move that into the stock market??? And that's his only strategy (except for TFSA)??? They have clearly stated that they are not interested in stock market risk as they near retirement.

He does recommend they open and fill TFSAs, which is a good idea for sure. Cash investments there should cover inflation, and they will grow every year with new contributions. It's not clear to me if he has considered future contributions.

He also suggests moving to ETFs etc. From this, it appears that they still have stock market investment that they have not been happy with. Moving to ETFs may or may not help, depending on how the market goes, but yes, it will reduce fees.

This is a frequent problem with financial advisors. They dutifully ask you what your risk tolerance is, and then proceed to either ignore it or paint dark scenarios to scare you into changing it. Why mess with what has obviously worked very well? - their own common sense.

Certainly inflation is a risk to cash portion of any portfolio, but the goals of this couple can be met with their other resources. One of their goals is to not take stock market risk.

If they are concerned, even with their considerable assets, they could look into inflation-adjusted annuities when they sell their other assets. They could also buy real return bonds to protect against inflation if it gets out of hand. They could work a little longer, take a parttime job, start a small business etc in retirement. They could also actually live off their assets, not just the income from them. And, to the extent that income security is an issue, they could delay receipt of both OAS and CPP to age 70, as that income is inflation-protected.

Or they might decide to live within their means (income), which are more than adequate. That seems to be a novel concept these days.

It seems to me that their real problem, and the probable reason they have sought advice (if they are real people) is precisely because they have not been happy with stock market returns. Quoting stats from 1946 to 2012, or, worse, from 1871, is misleading and irrelevant. There were 66 years between 1946 and 2012. This couple is not going to still b here in 66 years to reap the benefit, should history repeat itself, and in the meanwhile they will not have the peace of mind which they state that they seek. And yet, this type of advisor does this smoke and mirrors routine with statistics regularly.

Funny how these folks who are so keen on "diversity" don't look beyond the ends of their noses for solutions which have more diverse options. As I recall, this particular advisor, Tyler, has been used before by FP in their analyses of individual portfolios, and his solutions are always basically the same, no matter how much money you have. I suppose it's great free advertising for him - if you believe him.

Never mind the car loan, which might be no or low interest, such that it makes sense to have it. It only represents about a quarter of their car "equity" (a term I must use loosely). But they have 4 (four) vehicles! As far as I know, 2 people can only drive 2 at a time. However, this would account for the hefty insurance bill probably, especially if they've had any tickets or infractions that got them in trouble or perhaps if one is an RV.

So, if they want to, they could dump a few vehicles and free up more cash. They still have snowmobiles and a boat to play with. But they want to keep them all, for some reason, and actually they don't need to sell them, as they are actually rich and can afford to keep up the payments and the insurance!

I think they could have accumulated most of this wealth themselves, although they likely inherited the farm as they are not farmers. Their take-home income from employment is over $11,000/ month. That's a lot of money when you consider that they probably have no children in the home at this point, if they ever did, are not likely getting dividend tax credits or capital gains benefits, and will be in a highish marginal tax bracket.

I think it's odd that they don't have TFSAs yet too, but I know other people who haven't gotten around to it yet also. It sounds to me like they've been busy and not been minding the nest as well as they'd like to or should.

The sluggish stock market has probably spooked them a bit, which is probably the wake-up call they need. I have heard other stock market investors, people whom I consider naïve in this area (mainly widows, actually, although I'm sure some widows are very savvy) saying similar things, that their investments haven't done as well as they expected the last year or two. I have to bite my tongue. What did they expect? a continuous upward roll? apparently so.
If this couple are going to stay in the stock market, as this fellow Tyler wants them to do, they need to educate themselves so that they understand what they are into and whether they are comfortable with the risk of sluggish and indeed falling markets. It doesn't matter if it's ETFs, mutual funds, or pick-and-choose. They all go up and they all go down.

Right, and Nortel was considered a blue chip stock that would at least hold it's value...

Brian said

… Actually, my advisor never considered the technology stocks to be "blue chips" - their P/Es (Price/Earnings) ratio were ultra high and out of line using normal financial statement ratio analysis. Apple stock in our era is certainly not "blue chip" to me.
Nortel is an example which demonstrates why smart investors should always go with a d-i-v-e-r-s-i-f-i-e-d portfolio to mitigate such occurrences.

I agree. I sold the Nortel shares I received when BCE butterflied its Nortel shares to us BCE shareholders. The P/E of the Nortel shares at that time were just out of this world. But, someone was willing take them off my hands for the price at the time.

Even if one kept the Nortel shares and took the resulting losses, one would still have done well from the other stocks. According to TaxTips.ca: Historical Investment Returns on Stocks, Bonds, T-Bills, the total return of the S&P/TSX Composite Index for the 20 calendar years from 1996 to 2015 was 7.6% per annum. That includes the losses from 2008 and the permanent losses from holding onto Nortel in the years 2000, when Nortel made up 30% of the index, to 2008.

Analysts rarely issue a Sell opinion. Hold generally means consider selling. The best portfolios are diversified by holding most of the market index aka Couch Potato and can be done in as little as 3 ETFs, or one balanced mutual fund such as Mawer104. KISS principle.

Norman1, I agree, a lot of people made very good money on Nortel, over a period of years, but the media loves negativity so focused on those who held (and not with a short position) during times on the long decline. I didn't see any media articles or profiles of how people who made big dough on the ride up had their lives and the prosperity vastly enriched. When people buy stocks, there's someone else selling, and one of them is certain to be the "winner" on that particular transaction. Not bad odds, 50%.

The point of Real Return Bonds is capital preservation against inflation, not so much to provide income above inflation per se. (I presume the latter will reflect interest rates more generally, but am not sure how that part works. It seems to me that nobody is going to get a big return after inflation right now as all government bond returns are very low. and these bonds are only issued by governments. You are obviously going to pay some hidden premium for the insurance value.)
All big pension funds and many balanced funds own RRBs as part of their diversification.
The lament of the article in question was that the advisor felt that this family was not protected against inflation, so that is what I was addressing.

Yes, I have read about inflation-adjusted annuities. I read about them in a book. I will try to find the reference if I still have the notes. I suppose it's possible that they are only available in the US, and that the book was American, but I don't know that. I do know that the annuity market can be extremely complex with many variables. I suppose it's also possible that I took the provision for fixed rate adjustment to be inflation protection or that that's how it was presented. In any event, 4 to 6% inflation is probably as much as anyone would expect to encounter in the current climate, especially as the gov't target is much less. One can also (according to what I read) buy fixed-term annuities which are not intended to deplete the capital and are renewable after the term ends, at which point you can pick new criteria. In other words, you might choose a set of terms for 10 years, and then take the balance and reinvest it in another annuity with terms that suit changing circumstances.

I should perhaps add that I haven't looked into buying any yet, and think I'm still too young and am not entirely convinced I need them. I was just looking at how they work and what they might provide as something to have in mind for future.
It may turn out that, like other kinds of insurance, you can have almost anything if you're willing to pay for it. Any rider on an annuity will cost you extra.

EDITED TO ADD:
I have done a search of my computer files and can't find a reference to the info that I read earlier. Perhaps it's in my paper files (shudder! groan!). I really would like to find it.
I did find a citation for this article from a usually mostly-reliable source which does talk about inflation-indexed annuities and gives the impression they are fully indexed to inflation and that one would have nothing further to worry about. http://www.moneysense.ca/retir.....etter-life

Here are articles which I was able to find referenced in my notes explaining Real Return Bonds in more depth if anyone wants to know more about them:
http://canadiancouchpotato.com.....urn-bonds/
and
http://www.bylo.org/rrbs.html

Loonie said

The point of Real Return Bonds is capital preservation against inflation, not so much to provide income above inflation per se. (I presume the latter will reflect interest rates more generally, but am not sure how that part works. It seems to me that nobody is going to get a big return after inflation right now as all government bond returns are very low. and these bonds are only issued by governments. You are obviously going to pay some hidden premium for the insurance value.)
All big pension funds and many balanced funds own RRBs as part of their diversification.
The lament of the article in question was that the advisor felt that this family was not protected against inflation, so that is what I was addressing.
….

The pension funds and balanced funds may have bought their RRB's when interest rates were higher.

That 28-year, December 2044 real return bond has a coupon of 1½% per annum. When that bond was issued, one could have bought it at par and got a yield to maturity of CPI + 1½% instead of CPI + 0.44% at current prices.

There's another Government of Canada, December 2031, real return bond that has a 4% coupon. That would have given its first owner a return of CPI + 4% per annum!

Norman1, you won that particular transaction, in my view, because BMO continued to do very well after you bought it, the seller could have made lots more if they'd not entered into that transaction (assuming they didn't need the money at that moment). Now it's also true they may have won the transaction when they previously purchased it. And I actually knew a few folks who sold off Nortel on the way up, parts at a time, and did very well. But I do agree, it's not hard to make money in stocks. Personally to me the challenge lies mainly in our own psychology; for example, maintaining confidence in your own ability to figure stuff out instead of looking at what the media and everybody else is advising or doing.