Friday, July 31, 2015

Portfolio Asset Allocation Time (Again)

Markets keep churning up and down, with China stock markets way down and the USA somewhat up.  Your returns may be small or negative but is still time again to consider your asset allocation and do some rebalancing if necessary.

Asset allocation is the division of your investments into various types like bonds and stocks in order to give you diversification and fit your needs for return and risk.  Asset allocation is a very important determinant of your investment success and risk.  If you use passive (index) investing, asset allocation drives over 90% of the variability in your investment returns.

People often ask how to determine your asset allocation?  It does depend on things like:
  1. Your goals - do you need money in the short (1-5 year) or long term (25 years)?
  2. How much risk can you tolerate?
  3. How much return do you need?
This website has a simple calculator that can be useful, or you can consult other online information or your financial adviser.  My asset allocation and deviation from target are shown below.  I need to reduce cash and increase bonds and international stocks.

It is time to look at your asset allocation again - are you on track or off target?  Likely your equity percentage is high and you may want to reduce it.  There are a few ways to do this with advantages and disadvantages

  1. Buy and sell stocks or mutual funds to rebalance.  If this is done in a tax deferred account like an IRA, 401K, or RRSP, then there are no tax implications.  If you buy and sell in a taxable account, you may trigger capital gains and increase your taxes.
  2. If you have an automatic investment deducted from your paycheck, like a 401K or RRSP contribution, you can change the investments that are purchased.  For example, if you are over your target on stocks and low on bonds, you can change the contribution to be 100% bond mutual funds.  This will over time bring your allocation back on target, but it takes time.
  3. If you are regularly withdrawing form your investments, say to fund your retirement, you can change your withdrawal strategy to bring your allocation back to balance.  For example, if your cash is high, use up your cash on day to day expenses to bring it down.
As always, beware of what you read on the Internet, like this blog.  Not everything is the truth like the US faked the moon landings.  Talk to your financial adviser before making financial decisions like this.

Example Asset Allocation Versus Target

Monday, July 27, 2015

Your Portfolio Return Over the Last Year Sucks

You may not be keeping track of your return on your portfolio over the last year.  Let me pass on some information -  it probably sucks compared to recent returns.

Lets say you had a portfolio allocation as follows (conservative allocation), with returns estimated based on equivalent Vanguard Index funds:
Fund TypeAllocation1 Yr Return
Domestic Bonds40.00%1.70%
Large Cap stock24.00%7.40%
Small Cap Stock6.00%5.21%
International Stock20.00%-6.69%
Cash10.00%1.00%
Total100.00%1.53%

So you made about 1.5%, which sucks in most peoples' minds.  Your particular return may be somewhat different depending on your exact allocation, buying and selling, etc.

But there is good news as well, let's look at the three year returns of the same portfolio.
Fund TypeAllocation1 Yr Return
Domestic Bonds40.00%1.36%
Large Cap stock24.00%18.27%
Small Cap Stock6.00%19.35%
International Stock20.00%10.86%
Cash10.00%1.00%
Total100.00%8.36%

Looks pretty good over 3 years, right?

So a few points to consider.  
  • Although most investors enjoyed high returns for the last 3 to 5 years or so, the last year was not as profitable, and this is normal.  Markets do not just keep going up and delivering double digit returns.
  • Returns are still positive.  Those of us old enough to live through extended market downturns remember double digit negative returns during some multi year periods.
  • It is important to stay in the market.  If you try to time your selling and buying, you will probably miss most of the eventual upturn and incur large transaction fees.
So yes, the return is not as good, but don't sweat it.  And, as always, do not believe everything you read on the Internet (like this blog) or in hard copy and consult a trusted financial advisor before making financial decisions.

Sources: WSJ.com mutual funds data

Friday, July 24, 2015

I am Going to Stop Buying Refurbished Electronics

As a cheapskate (thrifty person), I sometimes buy refurbished electronics.  I look for something that was factory refurbished - refurbished by the original manufacturer. The price has to be right, at least 30% off the price of new.  In the past, this worked well with products like ROKU boxes, a Panasonic camera, a Yamaha sound bar.

But No More!!

I recently bought a refurbished Gopro Hero 3+ and an Asus T100 convertible laptop.  My experience is nothing but small problems that make the products only semi-useable.  I am into my second month of corresponding with a very nice customer support person at Asus.  My problems were intermittent disconnections of the keyboard and screen (still there, but now I know how to detect it), intermittent update problems (still there, but it seems to update itself eventually), occasional periods where it will not turn on (still there).  The Gopro wifi does not seem to work and USB connection to a MAC does not work.  I am waiting for action by Gopro, ticket submitted in their wonky system that tells you to login, but then tells you that you cannot submit a trouble ticket because someone else has an account with that email address (me)!  So I thought, why is this happening?

Modern consumer electronics are complex, with considerable electronic hardware and extensive software.  Many vendors contribute to a product, and the final product is usually assembled in China by someone other than the company selling you the product.  Quality control in China is quite poor, so the selling company like HP often spends considerable effort trying to fix this.

When something goes wrong, it can either be a true failure, meaning the product does not work, or it could be intermittent, like the keyboard does not stay mated to the tablet in my case.  These problems cause returns, which are then tested.

Often, there are no faults found, meaning the test did not find anything, but due to the product complexity, it is impossible to test the entire functionality and to test it for an extended period of time.  These no fault found products probably end up being "refurbished", which means being cleaned up, retested, and repackaged, then resold.

The repaired units may have a single fault repaired, like the power supply, but there may be other faults that were not found, like the power supply connector is loose.  These repaired units end up being sold as refurbished products also.

So these refurbished products have a much higher likelihood of intermittent problems or problems with functionality that is not properly tested in the refurbishment process.  The hassle of finding the problems, dealing with customer service, and eventually convincing them to give you a replacement (which is also refurbished) is high compared to the savings.  So no more refurb for me.

Picture credit: Flickr

Friday, July 10, 2015

Career Planning for The Over 55 Crowd

Lots of articles are written about how to advance your career, and they are mostly aimed at the 20 to 45 year old who is trying to advance in terms of hierarchy, pay, responsibility, and scope.  This is all fine and good, but what happens when you are older and later in your career?  Success at 55+ is based on continued employment at a decent wage along with the usual factors - most people do not want to be unemployed and forced to take jobs they do not like. Based on my experiences and observations, which mainly cover the technology industry, here are my thoughts.

If your career is in a slow changing industry, you can often continue to advance well into your 50's and 60's, based on your experience.  Your cumulative experience is valuable as the industry has not changed much.  Examples of a slower changing "industry" would be law, education, medicine, transportation, and construction.  For example, an old experienced criminal lawyer with a good track record, many contacts in the field, and an experienced staff would be a good choice to advise or defend you.  Over 55 people in these industries can follow the same career advice as 20 to 45 year olds: maintain your skills, work hard, keep a good network, take training as things change, act professional, etc.

If your career is in a fast changing industry, you need to take a different approach.  Industries like computers, telecommunications, music, and fashion rapidly change and often the young just-out-of-school person is the most sought-after employee, "a young person's job".  How does an over 55 person handle their career successfully in these industries?  A few thoughts:

  1. Continue to advance as an executive, assuming you are in that happy place called executive-land.  This is ideal - high pay, high status, more perqs, your experience may be valued, etc.  A bonus is that you can move to other competitors in your industry as successful executives are often in demand and age is less of an issue.  However, there are very few executive positions in a company compared to the number of 55+ workers.
  2. Advance in the managerial level.  This is great for many - higher pay, more status, more perqs, your experience may be valued, etc.  However, middle management is often the target for cutbacks and it is hard to get an equivalent job at another company in your industry as they usually have plenty of their own middle managers.
  3. Continue to advance as a technical or skilled worker.  This is hard to do but some manage it  by assiduously taking training, taking on more challenging work, putting in long hours and generally delivering value as an execution specialist.  Many over 55 folks cannot handle this due to the level of effort involved to stay current.  I know of exactly one contemporary who is still writing software, designing chips, or designing systems at this age.
  4. Move to the less technical or less arduous jobs in your industry.  There is a reason you see many older folks in project management, budgeting, regulatory compliance, and quality management departments.  These areas require less technical skill, less effort, and there is some value in your experience.  For example, knowing the difficulties in debugging software, even obsolete languages, gives you some insight into planning a modern software project.  The issues here are that pay levels are often less than you received at the peak of your career and the status of these jobs is often lower and you have to accept this.
  5. Become a consultant in your industry.  Some industries use a lot of consultants, and this can be an ideal 55+ job if you can manage it.  Keep your network current and ensure you have an in-demand consulting skill, for example, being an expert in maintaining legacy software on old hardware might be a good consulting gig in some industries.
  6. Exit your industry and start a new career in a different area, something that interests you.  Perhaps you want to become a seasonal tour guide instead of a chip designer.  As long as you have saved enough and your new pay will support your lifestyle, more power to you!

So what is the message here?  If you are in a rapidly changing industry and are over 55, the usual career advice may not be relevant.  You need to think clearly about yourself, your skills, your energy level and your industry and plan differently for a successful career in your late 50's and 60's.  Otherwise, your career may be determined by fate, not by you.  I wish you success.

Wednesday, July 1, 2015

How Much Can I Spend in Retirement?

This is a common question asked by people approaching retirement - How much can I spend?  The real question is how can you spend and not run out of money before you and your spouse die?

Unfortunately, there is no definite answer since we are dealing with the future, with unknowns such as inflation, interest rates, financial crises, and stock market returns.  On top of that, a big unknown is how long you and your spouse will live.  So how do we deal with the question of whether a cash flow filled with unknowns will last an unknown period of time?

Start with your life expectancy, which you can estimate via some calculators on the web, see the links below.
You will find out that you will likely live until age 82 or so.  But this is the average life expectancy, you have a 50% probability of living longer and you should really use a higher age in your estimates or you will run out of money.  Let's assume you will live until 92 and so will your spouse, and we will call you Mr. and Mrs. Smith

If we have estimates of life expectancy, how do we estimate how much you can spend each year?

First, we start with your guaranteed pension money, which will be from the government (SS or CPP) and maybe from your former employer(s).  This is money you can count on, and is often indexed to inflation.  Let's assume Mr and Mrs. Smith will get $16000 per year from government pensions and Mr. Smith will get a small pension of $9000 a year from his previous employer, Vandalay Industries.

Second, we look at retirement savings, and estimate how much you can spend per year.  Let's assume our 65 year old couple, Mr and Mrs Smith have saved $1,000,000.  There are different theories on how to estimate this:
  1. The 4% rule: spend 4% of your nest egg a year = $40,000 in our example.
  2. Use the Vanguard Monte Carlo simulation tool covered earlier in this blog: $38,000 a year for 27 years with 97% chance of not running out of money.
  3. Use an annuity calculator.  This assumes you will put your money into an annuity to generate life long income for you and your spouse.
    1. If you want an annuity with a fixed income, that gives 50% to the surviving spouse when one dies, you get $60,600 per year
    2. If you want the payments to rise with inflation (3%) and 50% going to surviving spouse, you get $39,180.
So most of the estimates of how much to spend of savings are quite close, $38,000 to $40,000, or 4%.

Third, we total up the pension and investment spending to get an estimate of how much to spend:

  $16,000 Govt Pensions
+ $9,000 Vandalay Industries Pension
+ $38,000 Retirement Savings spending (conservative estimate)
------------------------------------------------
$63,000 Can be spent per year in retirement

This will increase each year by increases in the pension amounts and the rate of inflation for the Retirement savings component.

As always, do not believe everything you read on the Internet, including this blog. This blog provides information but should not be used as a definitive source of financial guidance.  Get advice from a competent financial advisor before making important financial decisions.