Wednesday, 25 June 2014

I just constructed a $192,000 ETF income producting ETF portfolio for Grandma Olga

                                                  Operation Grandma Olga


Grandma Olga is a new retiree that just hit 60. Her expense run around $2000 a month. She recently had $204,000 in the bank. Her municipal pension comes in at $700 a month and at age 65 her government pension will kick in for a total pension and benefits of about $1300 a month.
My original introduction post of Grandma Olga
This post is about me constucting an all ETF income producing portfolio for my mother In-law which I call Grandma Olga. After sending her to two financial advisers and giving her many options on what she could do with her retirement nest egg she wanted me to construct her an income generating portfolio. Its been a learning process as I have put in countless hours number crunching, researching and learning the ins and outs of creating a globally balanced, income producing, bond/equity balanced portfolio. This has been a tremendous burden on me in terms of time and stress. I am not compensated for this other than some bartered baby sitting work. In this process it has given me more perspective upon my own portfolio and goals.

I am no finance professional and I don't claim to be. Do I think I can beat the market? NO! Can I do better than a financial adviser charging 1% of assets and as well directing towards funds with 1-2% Fees? Maybe! What I can do is make an individual income specific portfolio that should keep up with the market.

So finally after endless meeting with Grandma Olga we have come to a decision. She wanted to originally gamble her chances by going with a 100% equity portfolio. But after carefully consideration and advice by me we are going into a more conservative but still aggressive approach to suit her needs.

She worries she will die broke and penniless upon her death and we are working hard to prevent such a thing.




The Plan:
  A sustainable portfolio she can draw upon via dividends and interest with hopefully never cashing out her initial investment. With this said we are going an all ETF route that provides us ease of manageability (especially for me) and a vast amount of products in different categories ( ie. bonds , preferred shares and common broad equities) . We are aiming for a primarily monthly payout paying portfolio that will yield over the average of 4% with slight capital appreciation per year.  Re-balancing will probably take place twice a year.

At 4% many consider this the max you can pull out of your retirement savings without touching your main principal. We are trying to replicate that as well as some gains in capital appreciation by adding on some higher risk holdings.




The Allocation: 

Fixed Income: 46%
  • Bonds 34% : Investment grade corporate 1-5 year laddered Fund
  • Preferred Shares 12% : Canada and American high quality holdings Fund

Equity Income 54%
  • Reits 12% : Canadian Income Real Estate Investment Trusts Fund
  • Canada 12.5% : High dividend paying stock fund
  • American 12.5% : High dividend paying stock fund
  • Covered Calls 7.5% : Covered calls of select North American stock fund
  • World 12% : High yielding mainly Europe/Asia Fund
    Total portfolio value $192,000

    Total cash in savings and checking account $12,000

Thoughts on allocation:

In this allocation we have relative safety in the fixed income portion being close to 50% and chance for some capital appreciation in the equity portion. Preferred shares are considered fixed income due to there limited share price fluctuations and higher set dividend rates. Many also consider Reits a hybrid between fixed income and equity with their high steady dividend payouts so in essence one could say this portfolio is high as 58% fixed income. To get the higher yield we wanted we stuck with investment grade Canadian corporations where there main holdings are rock solid Canadian Financials like TD Bank and Royal Bank. To hedge against rising interest rates we stuck to short term 1-5 year laddered bonds to weather any potential but incoming interest rate storm.

For the Equity income portion we went after a globally diversified portfolio that provided mainly of dividend appreciating and high dividend funds. To further extend our income we went with a few covered call funds. Most would say leveraged funds are quite risky but the covered call limits your downside as well as upside but you generate higher income from writing the options plus the dividends obtained.

We have opted to put $12,000 aside for cash on hand to pay for whatever difference their will between pensions,dividends on monthly expenses. At $2000 a month expenses and projected pension and dividends/interest coming in of around $1350 total there will be a $650 a month shortfall in which she will use her cash account for. If she uses the full $650 per month subsidy from her $12,000 cash the amount will last her 18 months. I am hoping she further cuts her expenses by $200 which she can easily do a month so that cash will last her 26 months. At the point when she depletes her cash we can hopefully cash in on some of the capital appreciation of her portfolio. She also has an ongoing insurance claim which will more than likely provide her with a windfall in the coming years. I will analyze this cash amount every year and adjust her portfolio to have at least a years expenses cash on hand fund.


Now the list of the individual funds!

Bonds
  • CBO - iShares 1-5 year laddered corporate bond.            .28% Mer     4.18% Yield
  • ZCS - BMO Short Corp Bond Index                                .34% Mer     3.16% Yield

Preferred Shares
  • XPF - iShares Preferred Stock North America                  .47% Mer      5.21% Yield
REITs
  • XRE - iShares S/P TSX Cap Reit                                       .60% Mer      4.96% Yield

Canada Equity
  • XEI - iShares Equity Income                                               .61% Mer      4.21% Yield
  • ZWU - BMO Covered Call Utilities                                   .71% Mer      5.60% Yield
  • ZWB - BMO Covered Call Financials                                .74% Mer      4.80% Yield


America and World Equites
  • ZWH - BMO US High Div Covered Calls                           .65% Mer     6.07% Yield
  • XHD - iShares US High Div Index                                      .33% Mer     2.62% Yield
  • CYH - iShares Global Monthly Dividend Index                  .34% Mer     3.59% Yield
  • VEF - Vanguard Developed excluding NA                          .34% Mer     3.50% Yield


This selected portfolio is currently yielding 4.11% 
or about $7,891 a year or $657 a month average

With a 4.11% yield we are in range of her goals of 4% with a little bit of wiggle room. Even if interest rates hit hard and the market has a downturn we still will have a decent yield over 3% which is more than current offered cash deposit GICS where there 5 year rates are between 2-3%.


Selection Notes

Mers - In Canada our Management Expense Ratios (Mers) are higher than the US. Vanguard has recently come to Canada and with their lower rates it has made the market more competitive. Since then BMO and iShares have stepped up their game to offer lower Mers on select funds. Hopefully this competition will trickle down to my income fund selections. in the future.

Monthly payers - All but one of these funds pay out every month where the Vanguard offering pays quarterly. This will provide a steady income stream to Grandma Olga.

Canadian Hedged- Most of the chosen funds are Canadian hedged so currency fluctuations will not affect the holdings.

Canadian Picks - We went with all Canadian based ETF,s for ease of use for Grandma Olga. All the funds have Canadian dollar payouts so it will be easy to transfer dividends into her checking acount without the worry of currency exchange. If this were my own portfolio I would definitely be more geared toward US listed ETFs in the American and world markets as selection and lower Mers are vastly improved.

Fund selections - I am primarily with Blackrock iShares because of their vast selection as they own 80% of the Canadian ETF market. Vanguard a new addition in Canada is rapidly gaining market share but does not offer many monthly payers and their overall initial selection is very limited. Once they add more funds I may swap some of my current selections out with theirs. In many cases BMO funds could be interchangeable as they were neck in neck with iShares in many categories as well.

First Asset ETFs deserve honorable mention as they have many interesting niche high income products. The problem with them is that their funds have a embarrassing total assets which will no doubt affect the liquidity which is concerning. They are worth a look once they get more money in their funds. I had a struggle picking good paying International high income funds and it is a category that needs definite improvement. I went back and forth with a couple Vanguard offerings but they had lower yields and also payed quarterly.




Going Forward-
 I plan to make a monthly post updating Olgas portfolio performance with interest and dividends received, her monthly expenses , Net worth and any other important updates. Hopefully others can gain some perspective on Grandmas Olgas situation and take away something into their own portfolio or their loved ones.

I am also encouraging Grandma Olga to learn more about investing so in the future one day she can manage her own portfolio.



Other Notes. I have joined the Yakezie challenge at http://yakezie.com/

Good Day and Grind On Everybody!


12 comments:

  1. Thats a very good mix of ETFs, Asset-Grinder. I am surprised that Grandma Olga wanted to go all equities - I wonder if its just a sign of the times considering the all-time highs in the market. I am glad you managed to convince her to go with a better allocation - the mix of 46% bonds and 54% equities looks well balanced. Good call on keeping about 2 years of expenses in cash as well. Im sure it wasnt easy building a portfolio for someone other than yourself. I get questions from some people asking for investing tips and I always try to warn them that I am no expert and they should do their own research.

    I like the ETF picks as well...I didnt know BMO had a US covered call ETF now and will have to take a look at that one. I was considering one of the covered call ETFs for my wife's portfolio. Did you have a look at the 'core' series of ETFs from iShares? What are your thoughts? I looked at them once briefly and wasnt sure what the 'core' really meant and seemed more like a marketing ploy.

    Looking forward to reading the monthly updates on this portfolio.

    regards
    R2R

    ReplyDelete
    Replies
    1. The BMO US covered call etf is new this year. As far as ishares core series I like them at those low Mers. But they are basically index funds so Vanguard probably a better choice with even lower or matched rates really. When different but similar funds are between .10% diff in Mer they are often interchangeable and personal preference.

      Thanks for doppin by R2R!

      Delete
  2. I think you've found a good balance of diversification and income for grandma Olga. You may not be a financial professional but I bet you could outperform most portfolio managers out there :) At her age capital preservation is more important than growth.

    I recently heard on the news that large institutional investors have lagged in performance compared to retail investors. Hedge funds, pension funds, and university endowment funds have only returned about 10% in 2013, while the average small investors in the U.S. who are mostly exposed to the stock market index, have done much better because the S&P500 returned 30%. But over the long run a more balanced approach like what the CPP IB is doing will create more wealth because managing a portfolio is about weighing the risks against the possible gains. Many retail investors are not properly diversified.

    Congrats on joining the challenge. Have fun in the forums, and good luck :)

    ReplyDelete
    Replies
    1. Thanks buddy.

      Ultimately the best route to go would have been lower cost index or select funds for capital appreciation but then we woul have to incur more capital gains out of the withdrawls and also it would require more management from me. At that point I could just in theory ditch all the funds and go into individual equities but then again my management would increase.

      Tough to find the right balance managing peoples wants and needs.

      See you on the yakezie boards!

      Delete
  3. Why were you so stressed? Because someone's actual financial well-being was on the line (other than your own)? I personally enjoy running numbers, crunching numbers, running ratios, what-ifs, contingencies, etc. - so I hope you weren't stressed about that side of it!

    Familial brownie points are a nice thing to have, however if you were so stressed out about it I hope no one else in the family comes knocking on AG's door!

    Thanks for including all the specific math. That really gets us Wallet Engineers going!
    WE#1

    ReplyDelete
  4. I was stressed out because it was a lot of work. Past couple weeks I read up a lot about etf,s , Meetings with Olga trying to draw out her wants and needs.

    The problem is I take the task very seriously and I often tripe check all my numbers and picks. I as well love to crunch numbers, ratios, what ifs and most of all calculating yields and money projections. I do enjoy the work and I consider it quite the learning experience.

    Also recently I have been asked to help my friend get out of deep debt. It has also taken up quite a bit of time. He is a great guy but drowning in 3 maxed credit cards, 2 bank accounts in overdraft and a maxed out credit line plus his mortgage. Maybe I will make a post about him soon if there is interest.

    Thanks for droppin by WE.
    Keep on crunching on and good day to you sir!

    ReplyDelete
  5. Grandma Olga is lucky to have you do all of this for her. You are a great SIL! It sound quite reasonable especially given the size of her nest egg is on the smaller side. I'll be interested to know if she is able to lower her expenses like you are hoping.

    Thanks for showing your buddy my post the other day. I would love to see a write up on him. You are a great friend to help him as well. I would like to similarly counsel people on this type of thing, once I retire. Unfortunately between work and blogging and family commitments, I'm pretty full up but it is a goal and dream of mine. Speaking of family commitments, I have to sign off now to go to babysit my grandson. TTYL AG! Happy Canada Day!

    ReplyDelete
    Replies
    1. Thanks for droppin by Debs. I used your blog and a couple others to base my plan of attack on my friends debt.Your site was very helpful and thank you for that! I went through my friends current debts and interest rates. We went through his expenses. We then set forward a plan to drastically cut down his expenses and set priority to certain debts like his overdraft bank account first followed by his credit cards. He was in denial of his debt so long that avoidance was his main way of dealing with it. I told him he had to fully commit or I wouldn't help him which thankfully he did.

      It was amazing on how much of a needless consumer he was. Monthly fees to so many services he didn't even use and top tier fees to everything he actually used. I am pushing him to start his own blog so he can self motivate and get some support but not sure if he up to that quite yet.

      Good Day and Grind On!

      Delete
  6. Why use ETF in this scenario? ETF are typically for frequent trading. Just curious.

    ReplyDelete
    Replies
    1. Can you explain to me what is a better option and why?

      Delete
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