Is "stocks for the long run" a safe strategy for retirement savings?

[FeeOnly.ca]

Below is my post on Jon's blog reference RRBs & Zvi Bodie:

I like RRB's as a vehicle for the safe accumulation of retirement assets.

I’ve known Zvi Bodie for years and we have common views about risk. When he asked me to review the manuscript of Worry Free Investing and provide a review for the jacket I was honored to do so. At the time and even today there are 1000's of books on stock investing for every 1 book on bond investing. A whole book on inflation-indexed bonds (TIPS or RRBs), my favorite, was irresistible.

Personally I like RRB's as a vehicle for the safe accumulation of retirement assets. I've owned ladders of stripped RRB's, most accumulated ~3.5% real +/- 0.25%. It's been a great strategy for balancing out our equities during accumulation.

All the RRB's however are ultimately destined to be sold to purchase life annuities. The annuities will deliver trouble-free income efficiently & reliably over the entire span of our retirement. I'll see what rates look like when the time comes. The annuities might be Level, Indexed to CPI or Fixed/Escalating annuity, or a combination of all three.

My experience with RRB's tells me that attempting to use our current series of RRB's to deliver a retirement income stream over 30 plus years would be a pain in the butt.

People who might want the risk free, inflation protection utility of RRBs in retirement without the hassle would do well to consider an inflation-indexed life annuity instead. It works like your MP’s inflation-indexed pension plan and will provide a higher cash flow (retirement income) than you could draw from ladder of RRBs.

As a wealth advisor I think RRB's are a great vehicle for anyone who is adverse to taking stock market risk with thier savings. RRB's are also a great no risk vehicle for safely accumulating capital in your RRSP or DC plan in preparation for purchasing an inflation-indexed life annuity (your very own risk-free inflation-indexed life pension).

IMO, the main points are:

1. You don't have to take stock market risk with your savings. You can beat inflation by 2% with out any stock risk at all.

2. Using stocks to finance your retirement is much riskier than you have been lead to believe.

3. Don't ask a barber if you need a hair-cut and don't ask someone who sells equities for a living how much (if any) stock you should be holding.

Graham Cook

[Jon Chevreau]

Graham, when you say getting income from RRBs may be a pain in retirement, I presume you're talking about getting their income in sync with RRIF minimum withdrawal strategies? Your fellow BC-based advisor, Fred Kirby, views the new TFSAs as the natural home for RRBs since they're not subject to minimum annual withdrawals. For aging boomers who won't have much TFSA room, he suggests growing them with equities aggressively while still earning, then switching them out to RRBs when real yields reach 4%.

http://www.wealthyboomer.ca

[FeeOnly.ca]

Jon said: "Graham, when you say getting income from RRBs may be a pain in retirement, I presume you're talking about getting their income in sync with RRIF minimum withdrawal strategies?"

There is a much easier and IMO better alternative to employing RRBs in your RRIF or TFSA for generating a safe retirement income. An inflation-indexed life annuity will provide similar protection, a higher income and much better utility. Investment management is included and all the issues with RRIF withdrawals go away.

Any strategy I recommend has to be practical, appropriate and fully understood by the client. Most retirees I meet have other things they are doing with their time and they don’t want to worry about the market

Even if you have the desire to DIY with RRBs, a great idea/strategy can easily get botched in the execution. Unless you are familiar with bond trading, the complexities specific to RRBs and most importantly sustainable income planning, I wouldn’t recommend that approach

As an advisor, if a strategy isn’t doable by my mother and/or my grandmother then it doesn’t pass my “low-stress & simplicity” sniff test.

That said, a straight forward RRB “accumulation” strategy in an RRSP or TFSA is much less complex. Especially with stripped RRBs.

My motto:

[Jon Chevreau]

There's another new book coming out, titled Enough Bull, that tells investors to swear off stocks and equity mutual funds "forever." It's by chartered accountant David Trahair, who previously wrote Smoke & Mirrors. Details in my blog today:

http://network.nationalpost.com/np/b...r/default.aspx

[CanadianCapitalist]

Originally Posted by Jon Chevreau

There's another new book coming out, titled Enough Bull, that tells investors to swear off stocks and equity mutual funds "forever."

I'm assuming that the argument made in the book is that just because stock returns were bad over the past 10, it would continue to be bad. Not so. Valuations are improving all the time and for the patient, stocks are likely to deliver handsome returns over the long-term. Long periods of poor equity returns are not unprecedented.

[Jon Chevreau]

Trahair touched on this in Smoke & Mirrors. Chapter 4 is entitled "Myth 3: Don't worry about your investments: you'll be fine in the long run." He's skeptical about stocks then too and remember this was well before the 2008 crash. He compares the TSX return over 20 years to bank prime lending rates, finding the TSX returned 6.6% from 1987 to 2007 (Sept to Sept)and 7.2 over the last 10 years. Meanwhile since 1997 he says the average chartered bank prime lending rate has been 5.5%. Then he gets into mutual fund fees, market timing etc. Then he looks at alternatives that are no doubt the thrust of the new book: GICs, term deposits, bonds "etc."

Question for forum members here: Did they read Smoke & Mirrors? What did they think of the arguments? Because I suspect the new one is just a repackaging of the old, rejigged to include the 2008 stock crash.

[CanadianCapitalist]

Originally Posted by Jon Chevreau

Trahair touched on this in Smoke & Mirrors. Chapter 4 is entitled "Myth 3: Don't worry about your investments: you'll be fine in the long run." He's skeptical about stocks then too and remember this was well before the 2008 crash. He compares the TSX return over 20 years to bank prime lending rates, finding the TSX returned 6.6% from 1987 to 2007 (Sept to Sept)and 7.2 over the last 10 years.

Question for forum members here: Did they read Smoke & Mirrors? What did they think of the arguments? Because I suspect the new one is just a repackaging of the old, rejigged to include the 2008 stock crash.

I read "Smoke and Mirrors" and blogged about it in three parts:

Smoke and Mirrors Myths: Part 1
Smoke and Mirrors Myths: Part 2
Smoke and Mirrors Myths: Part 3

Despite the market swoon of 2008, I still think DT's Myth # 3 is the weakest one in the book. I re-ran the Stingy Investor calculator for 10 and 20 years ending 2008 for the same asset allocation referred to in the post (20% bonds, 30% Canadian, 50% US).

10 years - 1.34%
20 years - 8.69%

Granted the 10-year returns are not encouraging but over 20 years, the portfolio returns were not that far off from the 8.91% (Arithmetic average) from bonds.

Even if we concede the point that 20 year returns from stocks were bad, I don't see how that is bad news. We are investing for the future and what matters is future returns. Future returns depend to a large extent on starting valuations. Depressed recent returns only mean that starting valuations are good. It tilts the odds in stocks' favour even more.

Of course, there is no guarantee with stocks. But, experts counselling investors put 100% of their portfolio in fixed income are glossing over the fact that investors are swapping a very low risk of low return from stocks for a high risk of their savings falling short due to low returns from fixed income.

[MoneyGal]

Originally Posted by CanadianCapitalist

But, experts counselling investors put 100% of their portfolio in fixed income are glossing over the fact that investors are swapping a very low risk of low return from stocks for a high risk of their savings falling short due to low returns from fixed income.

Hmmm. I'm not sure that you can compare those two risks. The risk of not having enough is related both to investment performance (however you are investing) and to investor behaviour (whether you are saving a sufficient amount). The risk that the equity premium will not materialize is not behavioural.

[MoneyGal]

Also: in some ways I hesitate to even wade into this discussion, but the reality is that many, many peoples' entire investing horizons are 20 years -- or less.

It may be true *for you* (or for me, I am 41) that future returns are the most important, but there is an entire generation of boomers who invested expecting an equity premium which (more and more of these micro-studies are proving) has failed to materialize.

It isn't helpful to say to someone who is *retiring now* that the long-run RoR from stocks will beat bonds. That hasn't been the case over the last 10-20 years (depending on your asset allocation), and we don't know how much time will be required to get the premium.

The prudent course of action is to base future return expectations and thus saving behaviour on the risk-free return, not on an equity premium which may not actually deliver returns over the risk-free rate in any given 20 or 30-year period.

[CanadianCapitalist]

Originally Posted by MoneyGal

Hmmm. I'm not sure that you can compare those two risks. The risk of not having enough is related both to investment performance (however you are investing) and to investor behaviour (whether you are saving a sufficient amount). The risk that the equity premium will not materialize is not behavioural.

But investment performance and saving behaviour are related. If investments don't provide generous returns, I have to make up the shortfall through savings. With fixed income, I have to save lots -- the expected returns are much lower. With stocks, there is a small risk that I have to save lots because my realized returns are lower than expected. But chances are I won't have to because most of the time stocks do provide generous returns.

Of course, if I can easily reach my financial goals with bonds alone, it's game over. I wouldn't have to be in stocks. But it is not true for most people.