# Does this ETF exist? It should.



## james4beach (Nov 15, 2012)

For years now, I've been hearing demand in these forums for a certain type of fund. It's very possible to do-it-yourself, but due to psychological hangups people don't seem to want to DIY. (Mainly a result of misconceptions about dividends and yields). People want and need, I think, a standard Canadian balanced fund, but want it to have a high payout/distribution because retirees want to live off the cash.

*What it would look like*: it would hold XIC and XBB, say 50/50. And it would pay out a constant, high distribution such as 6% yield. Internally the fund would finance this cash through dividends, interest, and sale of shares (resulting in ROC or capital gains). And yes it would eat away at the capital of the fund. The beauty of it all comes from automatic, regular distribution payments that don't require the investor to sell shares of the ETF. And because it holds the standard ideal stock/bond index, you get the best total return possible that's virtually one-size-fits-all.

Here are things that are close, but not quite as good:

1. The standard monthly income funds like RBC Monthly Income. They are great 50/50 funds, yes, but because these actually try to preserve capital, the distributions are small. People want higher distributions.

2. XTR. In a way it's the right idea, except it's full of junk bonds. And it's not a 50/50 fund but more like 90% equivalent equity exposure. Basically the problem is that XTR will have a poor total return and its holding are not appropriate for retirees.

Now, the fund I envisage can (and should) be made manually, but I think it could attract a lot of investors if it just existed as an ETF with automatic distributions. Because it doesn't exist, people flock to things like XTR and CPD and take on all kinds of exotic exposures, when they could achieve the same things with plain old XIC and XBB!


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## james4beach (Nov 15, 2012)

Now imagine a couple other things about what this fund would look like.

Its performance would be identical to a 50/50 holding of XIC and XBB.

Haven't retired yet? DRIP the shares, and you get the total return of simply holding XIC and XBB.

Are you now retired? Stop the DRIP and you turn on the spigot of cashflow at 6% yield!

Want to pause that gushing water? Turn DRIP back on.


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## humble_pie (Jun 7, 2009)

james4 how could you? you've left out the most crucial financial modality of all. 

you've left out option selling. It's gamma theta that is going to deliver the monthly return. 

best of all is that the investors won't be able to understand a thing. The option mask will cover up the underlying portfolio like Anonymous. Especially since 95% of the options trading program does not even have to be reported in the audited annual financial statements.


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## lonewolf (Jun 12, 2012)

Need to be able to set up an auto trade with in your own parameters for all ETF & stocks out there let the system run by it self


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## james4beach (Nov 15, 2012)

humble_pie said:


> you've left out option selling. It's gamma theta that is going to deliver the monthly return.


Well no, my point was that the underlying investments of my hypothetical ETF should be the simplest and most basic index exposure, with nothing sprinkled on top.

Look at the BMO ETFs that include option selling. They have not succeeded in increasing the total returns; in fact those ETFs have worse total returns than the non-option versions. While the options selling (at least as done by ETF providers) does add income, it reduces capital gains, and the net result has been detrimental to total return.

So while it's possible that humble_pie achieves a better total return using options, the BMO options traders are unable to do it. And since they're unable to do it, the best total returns are achieved with basic index exposure at the end of the day... and that's what we want. Highest total return


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## humble_pie (Jun 7, 2009)

^^

but what does bmo have to do with the price of chicken?

of course you want options, jas4, you've already said the capital will be invaded in order to pay out the high return.

a horizons betaPro/dividend 15 type options strategy will increase the return at first. Mind you, over long term in a rising market their particular strategy will also work to reduce capital. But that is also what you secretly desire, no?

you want high returns with an easy peasy on/off auto button on the high road to utter oblivion, no?

it seems you might have missed the numero uno advantage, though, so i do beg you to allow me to repeat it. _ Including options means never having to explain anything to the investors_.


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## james4beach (Nov 15, 2012)

But capital is always invaded to pay out high return -- that's unavoidable. Dividend stocks do that by removing cash that would have been reinvested into operations. Options writing does that by having some stocks called away and forfeiting some capital gains. I'm making the argument for plain vanilla underlying, since that's the simplest holding.



> you want high returns with an easy peasy on/off auto button on the high road to utter oblivion, no?


It's not what I personally want, but it's what everyone on this forum has been asking for, for the past 7 years.

Someone just joined the forum and said: "I have 500K, what do I do with it?"

That's someone would could use my hypothetical ETF. They can just put their 500K into it, and suddenly they are holding the most efficient "balanced fund" possible in Canada. With DRIP on, there is no depletion of capital and they enjoy the total return of a balanced fund.

And then once they retire, or fall on hard times, they can turn off the DRIP and suddenly they would be paid out $30,000 a year in cash distributions.

Yes of course it depletes the capital -- you're drawing from capital. I would never hide this fact for anyone.


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## james4beach (Nov 15, 2012)

Heck, I'd argue that it's healthy for people to understand that *any high yield strategy depletes from capital*. The problems people seem to get into are when they don't understand this tradeoff. For example XTR makes it look like you get a 6% distribution as "income". Well no, of course you don't, it comes from the risk of junk bonds (losses reduce capital), and return of capital (reduces capital).


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## humble_pie (Jun 7, 2009)

how can anyone discuss anything with you, you are _so serious_ all the time



EDIT: so sorry, but i truly believed that your messages Nos 1 & 2 were tongue-in-cheek. I'd thought the idea in play was a kind of yellow humour.

now i'm beginning to realize - gasp - that u might be serious


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## james4beach (Nov 15, 2012)

I'm sorry humble pie. I realize I'm too serious ... I do hear that pretty often.

I was serious! My posts were NOT tongue in cheek. I don't think there's anything wrong with my idea. This is what people want ... high payouts.


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## humble_pie (Jun 7, 2009)

ok i'll go & read them again this weekend. This time i'll read em seriously.

but at first glance i really & truly did believe they were yellow humour. Especially the part about drawing down capital, i'd thought you were making fun of people's natural desire - in this era of zero-to-negative interest rates - to obtain safe guaranteed returns of 5% per annum.


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## james4beach (Nov 15, 2012)

But humble you know from our various threads like the "income investing" threads that appear at a rate of 1 per week, that people really want yields over 5%. So the need is there. Now it becomes a matter of, well how are you going to get that 5% or 6% payout forever, while achieving the best total return possible?

I see that as the core question. What method achieves the highest total return over the very long term? Now just extract cash from it, because people insist on doing so.


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## andrewf (Mar 1, 2010)

humble_pie said:


> ^^
> 
> but what does bmo have to do with the price of chicken?
> 
> ...


HP, are you aware of any funds that have better risk adjusted returns, driven by options-selling? Something like a vanilla equity fund that adds a bit of extra risk adjusted return.


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## james4beach (Nov 15, 2012)

The reason that I think options selling is a moot point (and not beneficial to total returns) is that BMO's apples-to-apples comparison shows that... well... it does not benefit total returns at all. So why should it be part of a "best total return" strategy? At least as implemented by BMO's options traders, it's useless.

ZEB is their bank fund and ZWB is their covered call bank fund.

ETF / YTD / 1yr / 2yr / 3yr / 5yr
ZEB / -0.6% / 3.3% / 5.4% / 7.5% / 8.1%
ZWB / -1.0% / 4.5% / 5.0% / 6.3% / 7.0%

_Q.E.D._

BMO has not added any total return by selling options. With the exception of the 1 year return, the options version of the fund has done worse in every other time frame. The total return is worse by nearly 1%/year !

Which brings me back to my primary point. You get the best total returns by sticking to the plain, dumb old indexes. Which of the two above would you rather hold? ZEB of course; it gives you the better total return. Want cashflow? You're better off if you wrap ZEB (or XIC as I'm arguing) in a simple structure that just removes and distributes cash from it.


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## andrewf (Mar 1, 2010)

I recognize this thread as being inspired by a conversation james and I had a few weeks ago. 

In the spirit of serious consideration, I offer the following feedback:

-if the 6% is always current payout (ie, 0.5% of NAV monthly, or 1.5% of NAV quarterly), then payments will tend to be somewhat volatile as the market moves up and and down. According to Vanguard (US market data), a 50-50% allocation had as bad as -22% return in 1 year. Of course, there can be multi-year bear markets that would result in even larger drawdowns. Encouragingly, this portfolio has a long-run return of 7.8%, so 6% is perhaps not as unsustainable as you might think.

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

This could be mitigated by paying out 6% of the trailing 3 year average NAV. This would make the payout rather invariable, but still allow it to drift lower over time without completely depleting capital.

-I believe this would introduce some tax inefficiency by prematurely triggering capital gains for people who are reinvesting the distributions. Not sure how big of an effect this really is, and should be irrelevant in registered accounts.

-Understand about simplicity, but there is significant risk added by such high home-country bias. Canadians should be much more diversified.


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## james4beach (Nov 15, 2012)

Thanks andrewf for the comments.

I agree that the X% of a trailing 3 year average seems like a nice way to smooth out the payout. Nice idea.

Yeah the DRIP may not be too efficient. I still think the vehicle would be targeted towards people who want the cashflow (otherwise they'd just buy XIC/XBB) so maybe most people would just be taking the 6% payout.

Valid criticism about high Canadian exposure.


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## james4beach (Nov 15, 2012)

Basically I think a lot of seniors want the RBC Monthly Income Fund (which is a great balanced fund), but with a higher pay-out ratio.


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## humble_pie (Jun 7, 2009)

james4 i am so sorry! it was a mistake made with good intentions, though. I hope you'll forgive.

i'd truly believed that your startup messages Nos 1 & 2 were in fun. Initially i'd thought your idea was a clever joke, the kind that gets its dry humour from the fact that it looks almost like the real thing (sometimes you do make subtle jokes in-house jokes like that.)

so i'd replied about options in what i'd hoped was something of the same spirit. i thought you'd easily know i was joking when i wrote about an advantage being never having to tell the investors what's happening with the options, because the regulators don't require it.

so there we are. so sorry.

moving on to your new fund idea itself (seriously), this has some excellent aspects. It does have some drawbacks imho, which i won't get into here because i'd like to concentrate on the chiefest aspect, which seems wonderfully pertinent to our times.

this aspect is that, in advanced old age when special housing arnd/or medical care needs arise, most standard middle-class investment portfolios will *not* be sufficient to fund those increased costs from investment income alone. There will have to be some invasion of capital.

interest rates today are zilch. Dividend yields are dropping, unreliable or both. A principal amount of even $2 million, invested in standard stocks & bonds, will not generate enough income to keep a frail senior couple living in a desirable medical treatment centre today. Four or five million dollars would help them, but $1 or $2 million are a hoot.

$2 million? $4 million? $5 million? what kind of fairy tale is that? let's get real: millions of dollars are not going to happen for most canadians alive today, so some alternative has to be worked up.

at this point, Steve41's famous expression "Die Broke at 95" becomes totally meaningful. Capital has to be regularly & efficiently invaded. Decumulation has to be accomplished according to a sensible plan.

james4 to me the beauty of your idea is that it offers an orderly & sensible decumulation plan for aging retirees. 

it's true that your fund might appeal to younger folks who demand income but have a personal fetish against selling off a few shares of the underlying ETFs now & then. But i think your fund's greatest value is as an idea that focuses attention on the need for reliable income late in life & the concomitant need - in these days of ultra-low interest rates - to gradually spend the capital that has been saved up, in a disciplined manner.

none of this is good news for heirs, by the way.

.


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## peterk (May 16, 2010)

james4beach said:


> Haven't retired yet? DRIP the shares, and you get the total return of simply holding XIC and XBB.
> 
> Are you now retired? Stop the DRIP and you turn on the spigot of cashflow at 6% yield!
> 
> Want to pause that gushing water? Turn DRIP back on.


DRIPping such a fund would be a terrible idea though. Only an idiot would do that. You'd pay dividend/income/ROC/cap gain on 6% of your portfolio every year! Instead of just dividend/income on 2-3% if you held the regular XIC/XBB split...


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## humble_pie (Jun 7, 2009)

peterk said:


> DRIPping such a fund would be a terrible idea though. Only an idiot would do that. You'd pay dividend/income/ROC/cap gain on 6% of your portfolio every year! Instead of just dividend/income on 2-3% if you held the regular XIC/XBB split...



exactly, this is one of the negatives about the J4S - the james4 special fund. It's fairly useless for young or middle aged investors unless they have a fetish for faked-up income & can't bring themselves to occasionally sell a few shares of their own holdings.

so it's of no value to you peterk, you'd be looking for capital gains i assume? eligible canadian dividends with their tax credits will do you fine as well, imho.

but for many aging retirees, a disciplined decumulation plan is essential. James4 has one approach. Apparently, there need to be several other approaches.

peterk this doesn't concern you, you are still too young, so you probably don't remember it. But a year or 2 ago moneyGal - a pension expert - wrote that financial planners with decumulation expertise are far too rare, although they are greatly needed at the present moment. I'm sure she was right.

is why i believe that any reasonable approach, such as this idea from james4, that shines light on rational decumulation plans has value. We can see many cmffers asking for decumulation plans for their aging parents. They don't call it decumulation; but decumulation is what they're talking about.


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## andrewf (Mar 1, 2010)

There are waves of 30-something posters washing over this forum, looking for high yielding investments. We see a new thread every week asking how to invest $50k/$500k/etc (as if the $ amount really mattered) to generate yield.

James is recognizing that these people are irrational in wanting yield (yield is an illusion), but proposing a non-harmful way for these people to scratch their irrational itch for yield without stooping to high-yield bond funds and the like.


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## james4beach (Nov 15, 2012)

humble_pie said:


> Initially i'd thought your idea was a clever joke, the kind that gets its dry humour from the fact that it looks almost like the real thing (sometimes you do make subtle jokes in-house jokes like that.)


Yes true, I plead guilty to that... I frequently make tongue-in-cheek posts  



> this aspect is that, in advanced old age when special housing arnd/or medical care needs arise, most standard middle-class investment portfolios will *not* be sufficient to fund those increased costs from investment income alone. There will have to be some invasion of capital.


Yes I agree entirely. I'm looking at my parents' situation, and other relatives into retirement, and they cannot do this without depleting some capital.



> Capital has to be regularly & efficiently invaded. Decumulation has to be accomplished according to a sensible plan. james4 to me the beauty of your idea is that it offers an orderly & sensible decumulation plan for aging retirees.


Well thanks  I was definitely going for orderly and sensible. It's not ideal in the big scheme of things, I'll agree, but forced upon us by low interest rates.



> But i think your fund's greatest value is as an idea that focuses attention on the need for reliable income late in life & the concomitant need


Yes you're right. I don't know why I thought that young people might use this... as you say, this doesn't have relevance to young investors. The focus really would be on people retiring and late in life.

As you point out, how many people have $3 million? So this is a very common need. Yet the tools don't seem to be out there for people to easily accomplish this. They end up buying stuff like XTR and unwittingly taking on junk bond exposure, for example.

Another more subtle example is how people bought up tons of high yielding energy companies. Because of the desperation for yield, they loaded up on single sector exposure and bought the kind of companies which required them to forfeit capital appreciation. These people would have been better off sticking to the broad index, and that pains me.


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## james4beach (Nov 15, 2012)

peterk said:


> DRIPping such a fund would be a terrible idea though. Only an idiot would do that.





humble_pie said:


> exactly, this is one of the negatives about the J4S - the james4 special fund. It's fairly useless for young or middle aged investors


I will amend my idea as originally presented. Let's throw out the DRIP part of the idea, I agree that's dumb. If someone is a young investor they should hold the XIC or ZCN directly of course, let's keep it simple.

So I agree: this is for people entering retirement or well into retirement and let's forget about the DRIP.



> but for many aging retirees, a disciplined decumulation plan is essential. James4 has one approach. Apparently, there need to be several other approaches.


Well thanks  Yes I want to stress this is _just one approach_.




> We can see many cmffers asking for decumulation plans for their aging parents. They don't call it decumulation; but decumulation is what they're talking about.


Yes and I think some people end up with de-cumulation plans without realizing that's what they're doing. There are billions of dollars in this country in "monthly income" funds, many of which are doing exactly this, to varying degrees.


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## james4beach (Nov 15, 2012)

As andrewf alluded to, this idea came from a thread in which we were discussing and brainstorming about something similar.

The 50/50 exposure funds like RBC Monthly Income (1.2% MER) and CIBC Monthly Income (1.47%) are actually quite good funds. Here was my thought process: let's use those as starting points and then,

1. Use ETFs and lower the fees. Save over 100 basis points (on 500K that's $5,000 fee savings a year!)
2. Boost the payouts and acknowledge that in today's world, *we must dig* into capital


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## cainvest (May 1, 2013)

james4beach said:


> 1. Use ETFs and lower the fees. Save over 100 basis points (on 500K that's $5,000 fee savings a year!)
> 2. Boost the payouts and acknowledge that in today's world, *we must dig* into capital


So why not just withdraw from a simple portfolio of US index, CDN index and bonds (25/25/50) ?


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## james4beach (Nov 15, 2012)

cainvest said:


> So why not just withdraw from a simple portfolio of US index, CDN index and bonds (25/25/50) ?


That is a great idea, yes. More manual work though.


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## cainvest (May 1, 2013)

james4beach said:


> That is a great idea, yes. More manual work though.


More work yes, but for a likely "once a year" calculation and withdrawal is it worth it to construct an ETF that would likely have a MER much higher than the three funds combined?

Keeping them separate one can also adjust to their own risk factors or needs, say 15/15/70 or 10/10/80 instead of a fixed 25/25/50. You can also decide withdrawal percentages and times, depending on market conditions.


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## james4beach (Nov 15, 2012)

I realize this is getting more into psychology, but there's also the issue that people don't like selling shares. Yet if the ETF did it for them, they have no complaints about distributions.

You're right though. Much better flexibility in many directions if you do it yourself.


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## cainvest (May 1, 2013)

james4beach said:


> I realize this is getting more into psychology, but there's also the issue that people don't like selling shares. Yet if the ETF did it for them, they have no complaints about distributions.


And that's what mutual funds at banks are for, people who just don't get it or can't be bothered with it. Likely just the thought of an ETF would scare them away. I know the types you're talking about and they seem happy to pay 2-3% MERs, just as they did while saving for retirement all their lives.


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## humble_pie (Jun 7, 2009)

i wasn't thinking of james4' proposal as an actual fund that some company could build, commercialize & sell. Yes it would have a MER in addition to the MERs of the 2 component ETFs.

instead i was thinking of the proposal as a broad, general formalization of what people are scrambling around doing on their own, in order to meet the income needs of frail aging relatives.

often, writing things down makes the path forward more clear. Writing things down for others to see is even better. IMHO this is what james4's idea helps to do. James presents one structure - there can be other structures - for a conservative portfolio where capital will be eroded. Hopefully not a whole lot of capital, but a certain disciplined invasion of capital will have to take place, in order to maintain an aging & possibly frail senior in dignified circumstances.

cainvest, you're one who could easily run such a portfolio yourself, you would likely never need such a fund! but decumulation of assets in order to care for aging parents in decent surroundings is already an ongoing activity with some cmffers & sometimes they ask on here - as Siwash did a year or so ago - for suggestions. The big challenge, of course, is that interest rates are so low, while medical treatment costs for seniors are rising.

if you recall the Siwash thread, it became a classic. There were a number of excellent replies including many from altaRed that were 100% perfect & appropriate for a young man caring for an elderly parent couple with average savings.

i take moneyGal's word that there are not enough financial planners with decumulation expertise. I believe it's a legitimate topic for cmf discussion & james4's concrete proposal helps to push folks in the right direction.


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## cainvest (May 1, 2013)

I agree that more discussion on decumulation would be a good idea, it's not as clear cut or a "one size fits all" as many would think. I think having a financial planner looking over one's shoulder is a must in this phase.


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## andrewf (Mar 1, 2010)

Sure, but there is a cost to having a financial planner. For many people with a $1 million nest egg, the cost is on the order of $10k - $20k per year. That's pretty expensive.


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## cainvest (May 1, 2013)

andrewf said:


> Sure, but there is a cost to having a financial planner. For many people with a $1 million nest egg, the cost is on the order of $10k - $20k per year. That's pretty expensive.


Guess that depends on what they are doing for you and the amount/type of advice you're getting. If the FP is doing everything for you they should get paid more than an FP to just "review" your current game plan that you manage. As with most things in life, doing it yourself might save you time and money but maybe not if you mess things up. My FP is completely free through my bank, they call me in (obviously trying to sell me something) and go over my portfolio with me.


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## humble_pie (Jun 7, 2009)

andrewf said:


> Sure, but there is a cost to having a financial planner. For many people with a $1 million nest egg, the cost is on the order of $10k - $20k per year. That's pretty expensive.



most cmffers can or could manage without a permanent financial advisor on retainer. It's true that, in today's circumstances, when a senior or a senior couple's portf might range from $300k - $1M, there's not enough income to pay 10-20k per annum for an advisor. Besides, there's little for an advisor to advise, on an ongoing basis. Most of the expertise has to be parlayed in the beginning, when a decumulation plan is contemplated & created.

certainly Siwash was so well set up in cmf forum that he never even had to consult a financial planner for his parents, although we did recommend it & we believed that an FP workup would roll out precise future number projections for his parents' particular case, something we couldn't do in a public forum.

as i recall, Siwash was planning something like 80% guaranteed fixed income, maximum 20% in a broad spectrum equity ETF. His parents may not have had pensions but they did have OAS. At the time, everything was nicely possible, i hope all is still going well today.

the Siwash case is fairly typical for a older retired couple with anywhere from 300k to 1M. At the lower end, the equity proportion would have to shrink. In every case, it would be a question of tweaking the numbers carefully.


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## humble_pie (Jun 7, 2009)

cainvest said:


> My FP is completely free through my bank, they call me in (obviously trying to sell me something) and go over my portfolio with me.



what more would a sprightly & spry motorcycle rider possibly need? i'm sure you are able to resist the blandishments & quite often the bank representatives do have a useful idea or 2 ...


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## My Own Advisor (Sep 24, 2012)

andrewf said:


> Sure, but there is a cost to having a financial planner. For many people with a $1 million nest egg, the cost is on the order of $10k - $20k per year. That's pretty expensive.


That's the rub. There are many people that need the behavioural support, and thus, a fee-only advisor is extremely helpful, although this comes at a cost. 

Those that can afford the advisor's fees; have that $1 M+ in the bank, don't see this as a huge cost.

Those that need the support the most, don't have funds but at the same time, can ill afford to waste any funds on the way to fund retirement.


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## cainvest (May 1, 2013)

humble_pie said:


> i'm sure you are able to resist the blandishments & quite often the bank representatives do have a useful idea or 2 ...


They're actually very good about not "pushing" sales, they mention things and move on. Really I just use them as backup in case I've made a serious error.

Surprisingly banks do a fairly good job at planning. I've sat in with a few friends while they went over their retirement portfolio with the bank's FP, all for free of course. I even had one calculate and show the savings to the person if they moved everything from the bank to their direct investing arm. Oddly enough, and despite the significant yearly savings on their portfolio, the person didn't want to manage it themselves for fear of making a mistake.


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## peterk (May 16, 2010)

james4beach said:


> I will amend my idea as originally presented. Let's throw out the DRIP part of the idea, I agree that's dumb.


Excellent. Everything else about your new ETF I like.  There is certainly a need for it. Anything to prevent our interest-starved parents and grandparents from investing in a portfolio of JNK/LIQ/COS and the like, is a good thing.


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## My Own Advisor (Sep 24, 2012)

No DRIP james. Just cash flow 

I should have mentioned this when I responded to this thread. 

I've been thinking about this as well...what type of low-cost, simple, balanced all-in-one ETF would be the ideal product?

I was thinking something like XIU + VXC + XSB. Something like 33/33/33 for that. Almost buy and hold forever.

The asset accumulators could (gasp) DRIP this of course, i.e., total return.

The retirees or near retirees could set up a cash wedge for this, stop the DRIP a couple of years before they stop working, keep 1-2 years of cash in their accounts, live from and spend from that, then let the assets pay their distributions as time goes by and sell off capital over time.


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## james4beach (Nov 15, 2012)

peterk said:


> Excellent. Everything else about your new ETF I like.  There is certainly a need for it. Anything to prevent our interest-starved parents and grandparents from *investing in a portfolio of JNK*/LIQ/COS and the like, is a good thing.


Amen to that!

Great thoughts from everyone, I really like this feedback. My Own Advisor, I agree that something like your XIU/VXC/XSB is a pretty good mix.

I also agree with the cainvest & humble that you may not be able to make one-size-fits-all, but maybe this isn't so much about a real ETF but a methodology or hypothetical structure to help make an action plan more concrete.


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