# Who needs stocks? A case for GICs.



## lb71 (Apr 3, 2009)

In today's Globe and Mail.



> Meet David Trahair, a chartered accountant, GIC booster and author of _Enough Bull_, a new book that takes aim at the notion that investors need the stock market to retire comfortably....Most people can get by just fine by cutting their expenses, paying off their mortgage and investing their savings in GICs. There's no need to endure the torturous swings of the market to achieve financial security.


That's my parents right there. After last year's market meltdown, I had to wonder if they were on to something.

Edit: This should have been posted in Investing. Can a moderator move it?


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## brad (May 22, 2009)

This is the basic strategy (except using bonds, not GICs) espoused by the authors of Your Money or Your Life.

I do think there's a certain amount of "inflation proofing" that we can do to help reduce the impact of inflation and live on less. And it's true that paying off the mortgage removes probably the biggest expense we have in our working years.

Still, though, it's worth going through old magazines and catalogues and looking at prices from 20 years ago, comparing them to what they are now, and projecting that forward 20-30 years or to whatever point in the future we plan to retire.

If you consider that a pair of shoes that costs $80 today might cost, say, $250 in 20 years, and even a used pair of shoes might set you back $150, you start thinking it's worth taking on some risk in order to be able to beat inflation so you don't have to walk around barefoot. Or maybe you could buy a bunch of shoes today and keep them in a closet, waiting for your retirement. That doesn't work so well for other things, though, like milk.


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## CanadianCapitalist (Mar 31, 2009)

lb71 said:


> In today's Globe and Mail.
> 
> That's my parents right there. After last year's market meltdown, I had to wonder if they were on to something.
> 
> Edit: This should have been posted in Investing. Can a moderator move it?


Mr. Trahair is just plain wrong. He is using one time period when stocks have underperformed bonds to make his case. GICs don't always beat stocks. For some time periods, their real returns have been extremely poor. There are two problems with a GIC only strategy:

1. Since expected real returns from fixed income instruments are low, an investor needs to save a lot more. It is true that with stocks realized returns could turn out to be low. But with fixed income, your expected returns are low to begin with and you have to resign yourself to live on less or work part time or retire later or a combination. What was your Plan B with stocks becomes your Plan A with bonds.

2. The risk in GICs / bonds is seldom discussed but there is a big one -- inflation. Bond yields are priced based on expected inflation. If actual inflation turned out to be far worse, watch out -- the returns could turn out be nightmarish.

Mr. Trahair makes some valid points. I think his suggestion to fully pay off the mortgage before investing has a lot of merit. I have no quarrel with his suggestion not to borrow against home equity and caution against leveraged investing. But I think, he is way off base in recommending avoiding stocks altogether.


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## MoneyGal (Apr 24, 2009)

There has been a tremendous amount of academic literature on this point in the last few years, and I don't think it has necessarily filtered down to the non-academic world. (Disclaimer: I haven't read Trahair's book.) 

There are a couple of issues. First, the issues in accumulation and decumulation (retirement) are quite different -- decumulation involves the variable not just of investment returns, but withdrawals (this is the "sequence of return risk"). 

What this means in more practical terms is that for accumulators, the standard deviation of a portfolio is less important than for decumulators. It is only with decumulation (portfolio withdrawals) that sequence of returns risk enters the planning horizon. 

In a generic discussion of "who needs bonds?" I am not clear that people are talking about accumulators, or decumulators; or whether they are not distinguishing between the two. 

The general problem is thus: a retiree who takes on "too much" risk in the form of equities runs the risk of running out of money if markets perform poorly in the first few years of retirement. But a retiree who invests "too little" in the equity markets runs the same risk but at this time because there is too little investment growth to sustain the spending rate. 

It is clear that for a portfolio with sufficiently low withdrawals (as a percentage of the total portfolio), an all-fixed-income strategy holds the least risk of running out of money -- but beware if you live longer than expected! 

Unless you can meet your income needs with a very low withdrawal rate (i.e., under 4%), the optimal portfolio allocation *will* include equities. This has to do with both sequence of returns risk and inflation protection (as outlined above).


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## MoneyGal (Apr 24, 2009)

x-post with CC, who makes many of the same points.


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## FeeOnly.ca (Jun 4, 2009)

If you cannot tolerate stock market risk on an emotional level don't invest in equities. 

If you cannot tolerate a permanent loss of capital don't invest in equities. 

Save with Government of Canada Real Return Bonds, you will beat inflation by ~ 2 % consistently without any risk. You could also add a 5 year ladder of guaranteed GICs.

For most people securing a life-long retirement income & maintaining their lifestyle is the purpose behind the investing.

You can and should do something about stock market risk and the other risks you face as an individual. You can export that risk. 

For the distribution phase, people who want the risk free and hassle free utility of GICs and the inflation protection of RRBs 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. 

In retirement using an inflation-indexed life annuity to make-up any income shortfall is a simple, safe and appropriate strategy for anyone with a normal life expectancy. It is also guaranteed for life.

I believe an evolving mix of GIC’s, RRB's and later in life an inflation-indexed life annuity would be especially appropriate for anyone averse to taking stock market risk. In fact, I’ve come to believe most people should adopt this strategy, to protect themselves ... from themselves.

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 using RRBs. You can also do well with a 5 year ladder of GICs , especially if you pick-up better rates (typically 1% or more) by working with a Registered Deposit Broker . 

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

You insure you home against very low probability events like fire because the consequences are so enormous. We need to think about retirement planning in the same way. 

It's not about trying to be Warren Buffet, Ben Graham or John Bogle, at least it shouldn't be.

This is about safely "Living a life of Wealth", your ability to do what you want, when you want and how you want.

You have very focused needs that require safe, suitable and guaranteed solutions. You don't need nerves of steel, machine-like discipline, world class investing prowess or even luck. 

During the distribution phase (retirement) individuals cannot assume the risks the way a pension fund does and be successful. 

Be very careful, IMO the conventional wisdom is wrong.

www.yourwealthadvisor.ca/.../3860207-three-crucial-tips

http://www.yourwealthadvisor.ca/apps/videos/videos/view/3860143-i-love-the-stock-market

http://www.compositefinance.com/investmentprinciples.htm

In fact if you want to invest in equities you should actually save more than you would using using RRBs. Why, because the potential distribution of returns is so wide. Only after-the-fact will you be able to determine if you could have saved less employing equities. By that time if you are "unlucky" it will be too late to help yourself.


Graham Cook

Composite Finance Inc.


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## MoneyGal (Apr 24, 2009)

Yes but: this strategy *only* works if you can earn enough with GICs to meet your income needs in retirement. The suitability of this strategy goes down -- way down -- as income needs in retirement go up. 

For a 65-year-old male retiree with $1M (leaving tax aside for a moment) and a 30-year-retirement who can live on a 3% return (assuming 3% inflation and 3% returns), the probability of running out of money is 0%. 

But if that retiree wants or needs, say, $60,000 from that portfolio, they stand a 24% chance of running out of money -- and 41% at $70K and 53% at$80K.

There are two parts to this equation. If you want to avoid stock market risk you must be satisfied with lower expected returns and lower income in retirement. (In fact, your expected returns may actually be negative if you use GICs exclusively -- see this study.) 

Annuitizing (instead of putting it in GICs or RRBs) does not increase your expected income but will lower it - it protects against longevity risk. You can get a higher return from an annuity, but only in exchange for taking on some of the credit risk of the issuer; in addition to the loss of liquidity and any bequest potential. 

There are not easy answers to this issue. A message of "GICs only!" or "don't exclude equities!" is not sufficient. I do not think the quality of this discussion (not this discussion here, specifically, just in general) is very high.


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## MoneyGal (Apr 24, 2009)

OK, I think I get a bit hotheaded about these issues and I apologize if my tone seems argumentative. 

It seems to me that in general discussions of this topic, insufficient attention is paid to the fact that if you want to have only GICs, RRBs and annuities in your retirement portfolio, you must save enough pre-retirement so that you can live on the income from an all-GIC, RRB and annuity portfolio. 

The question, to my mind, is not "are equities bad?" but "what is the least amount of risk I can take, given my income needs/wants in retirement?" and then find the optimal portfolio (while taking into account survival probabilities, and expected returns by assets class, and inflation). For some people, that may be an all-GIC/RRB/annuity portfolio. However, for many people (looking at the data about how much Canadians save for retirement), that kind of portfolio will be insufficient. 

Do I think that equities have been oversold? Yes. But a wholesale swing back to guaranteed products is not necessarily a better strategy.


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## SavingMaster (Aug 1, 2009)

CanadianCapitalist said:


> Mr. Trahair makes some valid points. I think his suggestion to fully pay off the mortgage before investing has a lot of merit.


I cannot disagree enough with this statement, particularly when Trahair argues that this investing also includes retirement investing. A person could potentially lose decades of growth employing small regular contributions in favour of putting their eggs into one basket.


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## tojo (Apr 20, 2009)

FeeOnly.ca said:


> If you cannot tolerate stock market risk on an emotional level don't invest in equities.
> 
> If you cannot tolerate a permanent loss of capital don't invest in equities.


I completely agree with these statements. Even so, I have to continually remind myself not to take on more risk than necessary. I'm always using financial calculators, not to see how much I can make should I luck out at a 15% annual return, but how I can reach my objectives and targets with the minimum risks possible.

As I get closer to my objectives, my weight in equities have been steadily decreasing...the risks are just not worth it.

Those of you with just a few years investing experience will find it hard to understand - especially in the internet age where it's simple to pull up financial reports, internet blogs, cheap advice ... whatever. The lure of equities is like a siren's song - it's in the media, news, everywhere...and everyone has illusions of being the next Buffet and retiring at 45. But if you lived through '81, '87, '91, '01, '02 and '08/09 you know what I mean. You coast along thinking you are bullet-proof and that you will win out because you are in it for the long run and wham, 50% of your hard earn money evaporates....my goodness - earning 12% the last five years don't look so great anymore. I've seen enough dreams destroyed that it's no wonder most of the older folks I work with have no more than 15% or so in stocks. They've been burned and simply won't get back in and put their future on the line...


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## CanadianCapitalist (Mar 31, 2009)

MoneyGal said:


> OK, I think I get a bit hotheaded about these issues and I apologize if my tone seems argumentative.


I'm never offended by opposing view points -- compared to what passes for discussion on most places on the Internet, we are golden here 



> Do I think that equities have been oversold? Yes. But a wholesale swing back to guaranteed products is not necessarily a better strategy.


I couldn't agree more. And I wonder: as more and more investors come to believe stocks are toxic to own, isn't that a good thing for investors in stocks today? It's the securities that are very popular that we should be wary about and own the unpopular ones (for the long-term, of course).


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## FeeOnly.ca (Jun 4, 2009)

I did qualify my remarks, but I understand that bad news is ... well bad news.

I also know this is a very unpopular viewpoint. But .. Hear me out.

The markets honestly don't know or care what any-body's income needs are, and there isn't a magic "asset allocation" for every persons income need.

In the distribution phase if you want to invest in equities you should actually save more than you would using using RRBs. Why, because the potential distribution of returns is so wide. 

Only after-the-fact will you be able to determine if you could have saved less employing equities. By that time if you are "unlucky" it will be too late to help yourself.

If you want to learn more about distribution income planning, and see the actual math that illustrates these critical issues I highly recommend you visit Jim Otar's site and read the last 150 pages of his free online book here:

http://www.retirementoptimizer.com/

I'd welcome a discussion on the finer points of why equities may well be inappropriate but until you actually study the topic in depth I'll have an unfair advantage.

Or, for a few quick examples you can just review the ppt presentation below: 

http://www.retirementoptimizer.com/Updates/AFreshLook.ppt

"How to read the analysis: The green line shows the asset value of the top decile portfolio since 1900. That means only 10% of portfolios ever achieved or exceeded the asset values indicated by this green line. Do not use this for your retirement planning; it is there just to show you what can happen if you are lucky.

The blue line shows the asset value of the median of all portfolios since 1900. That means 50% of all portfolios had a lower value and 50% had a higher value than this line. And where it crosses the zero line (meaning no money left in the account), it means that half of the portfolios have already run out of money. Do not use the median for retirement planning because the odds are not on your side. 

However, the median line may have one useful application for estate planning: When I am estimating the tax liability or the insurance needs at the time of death, then I use the median. In addition, I use the green and blue lines for best and worst case projections, respectively.

The red line shows the asset value of bottom decile portfolio value since 1900. It indicates the portfolio value where 90% of portfolios survived and 10% are depleted. This is the line you need to use for retirement planning. That is because at 90% survival rate, the odds are on your side. If this line does not touch the zero line until your age of death, then you have an good retirement plan."


Respectfully,


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## FeeOnly.ca (Jun 4, 2009)

Follow-up to posts about Life Annuities.

See what Zvi Bodie and Jeremy Seigel (Stocks for the Long Run) agree on. 

Inflation Indexed Bonds & Inflation Indexed Life Annuities:

http://www.yourwealthadvisor.ca/The Great Debate Excerpts.pdf

The full transcript is also available.


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## Bullseye (Apr 5, 2009)

CanadianCapitalist said:


> It is true that with stocks realized returns could turn out to be low. But with fixed income, your expected returns are low to begin with and you have to resign yourself to live on less or work part time or retire later or a combination. What was your Plan B with stocks becomes your Plan A with bonds.


This is really the most well put point on this matter that I have ever read. Even though this is not new information to me, you've stated it so perfectly, I'm going to save this quote for future debates on this issue.


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## CanadianCapitalist (Mar 31, 2009)

FeeOnly.ca said:


> Or, for a few quick examples you can just review the ppt presentation below:
> 
> http://www.retirementoptimizer.com/Updates/AFreshLook.ppt


It is not surprising me at all that an investor with $1 million invested entirely in stocks quickly runs out of money at a 6% withdrawal rate. I think even young investors should have some bonds. It is downright irresponsible for someone starting retirement to have no bonds at all. If a retiree is 100% invested in stocks and wants a sustainable withdrawal rate, it is the portfolio's dividend yield -- roughly 2% today. If you tap into capital, you run the risk of running out of money. 

I'd like to see how you can use a portfolio of RRBs to achieve a 6% withdrawal rate on a $1 million portfolio. Let's assume you put $1 million in RRBs today. If you don't want to tap into capital your safe withdrawal rate is the yield, which is 1.8%. If you want to tap into capital to pay for the other 4.2%, you will run out of money.

PS: I don't want this thread to degenerate into a discussion on withdrawal rates. If that's what you want to talk about, it's been discussed to death in another thread.


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## FeeOnly.ca (Jun 4, 2009)

CanadianCapatalist, the example portfolio is 40% Equity & 60% fixed income, not 100% equities.

Please read further, RRB are well considered in Jim's book.

IMO, incorrect asset allocation assumptions that don't work during distribution are very risky. 

The typical retiring boomer needs guaranteed tools like GICs, RRBs and Inflation Indexed Life Annuities precisely because they are "on their own".

http://www.yourwealthadvisor.ca/apps/videos/videos/view/3860113-you-re-on-your-own

http://www.retirementsolutionscentre.ca/en/ProductAllocation/immediate_annuity.html

Respectfully,


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## CanadianCapitalist (Mar 31, 2009)

FeeOnly.ca said:


> CanadianCapatalist, the example portfolio is 40% Equity & 60% fixed income, not 100% equities.
> 
> Please read further, RRB are well considered in Jim's book.
> 
> ...


Alright, but you still haven't addressed my point: a 6% withdrawal rate is extremely aggressive. I don't have any quarrel at all with the statement that a retiree needs guaranteed tools like GICs, RRBs and perhaps even annuities. What I do have a quarrel with is the suggestion to _avoid stocks altogether_.


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## Rickson9 (Apr 9, 2009)

That is the exact strategy my parents used as well. It works surprisingly well.


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## FeeOnly.ca (Jun 4, 2009)

_Alright, but you still haven't addressed my point: a 6% withdrawal rate is extremely aggressive. I don't have any quarrel at all with the statement that a retiree needs guaranteed tools like GICs, RRBs and perhaps even annuities. What I do have a quarrel with is the suggestion to avoid stocks altogether._

Okay then use a 4% withdrawal rate (in the same example). It is the sequence of returns that destroys the viability of the portfolio not the withdrawal rate. If you download Jim's calculator you can test your assumptions and my predictions.

Graham

PS. Life Annuities have been and still are the most fundamental retirement income vehicle available to individuals. Before the 1980's that's all there was.

Individuals experimenting with investment portfolios to provide a relaible inflation-indexed retirement lifestyle is a relatively new and still unproven strategy. 

Do you know of anyone who has 30 or 40 years of proof that it will work?


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## FeeOnly.ca (Jun 4, 2009)

_What I do have a quarrel with is the suggestion to avoid stocks altogether_


I'll qualify when I think it is appropriate to avoid stocks altogether. 

You should avoid stocks altogether if any of the following apply:

1. You cannot tolerate stock market risk on an emotional.

2. You cannot tolerate a permanent loss of capital.

3. Your capital to income-need ratio is 33:1 or less at retirement. Then make-up any life-long essential income shortfall using only guaranteed products (avoid stocks altogether).

4. You are not 100% sure you won't act irrationally based on greed or fear, ever.

Put another way: 

If your capital to income-need ratio at retirement is above 33:1, you can tolerate stock market risk on an emotional, you can tolerate a permanent loss of capital and you are not prone to emotion based decision making then .. go ahead and invest in stocks. But only up to 40% or 50%.


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## FeeOnly.ca (Jun 4, 2009)

_It is downright irresponsible for someone starting retirement to have no bonds at all._

Not necessarily. 

If you have secure public service employment with the associated inflation-indexed DB pension that will meet your life-long retirement income needs you can tolerate more risk. Go ahead and invest in stocks if it doesn't keep you up at night.


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## scomac (Aug 22, 2009)

FeeOnly.ca said:


> The typical retiring boomer needs guaranteed tools like GICs, RRBs and Inflation Indexed Life Annuities precisely because they are "on their own".
> 
> http://www.yourwealthadvisor.ca/apps/videos/videos/view/3860113-you-re-on-your-own
> 
> http://www.retirementsolutionscentre.ca/en/ProductAllocation/immediate_annuity.html


Very interesting series of video clips interviewing Zvi Bodie. Thanks


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## moneygardener (Apr 3, 2009)

Nice to see you here Scott!


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## FeeOnly.ca (Jun 4, 2009)

For those that are interested in this topic I highly recommend today's "*Good to go*?" article and the related video interview in the Financial Post:

*Jon Chevreau and Jim Otar discuss retirement planning myths* 

http://www.financialpost.com/opinion/story.html?id=d816d0eb-1f7d-470f-b97e-fb98736079e8


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## scomac (Aug 22, 2009)

moneygardener said:


> Nice to see you here Scott!


Thanks for the welcome, Keith!


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## Rickson9 (Apr 9, 2009)

I think individuals should choose investment strategies that suit their personality. Once you start doing things that are against your personality, bad things happen.

I happen to be lazy, slow moving, risk-adverse, anti-diversification, and loathe to sell assets so a specific subset of value investing works for me. For others, it would drive them nuts and cause them to do things that are destructive for their finances. 

It would be akin to my jumping into options trading or real estate development. I don't have the personality type to do well at that (or many other things).


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## CanadianCapitalist (Mar 31, 2009)

FeeOnly.ca said:


> For those that are interested in this topic I highly recommend today's "*Good to go*?" article and the related video interview in the Financial Post:
> 
> *Jon Chevreau and Jim Otar discuss retirement planning myths*
> 
> http://www.financialpost.com/opinion/story.html?id=d816d0eb-1f7d-470f-b97e-fb98736079e8


Jim Otar's book "Unveiling the Retirement Myth" is available for download from his website until August 31, 2009. The book weighs in at a hefty 525 pages and the download is 6 MB. Try downloading with Internet Explorer. Firefox kept repeatedly choking on the download.

http://retirementoptimizer.com/


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## Germack (Apr 4, 2009)

I believe most investors would be better of by investing in GIC and not in equities as a recent Dalbar study has shown: 

The S&P 500 returned ~8.35% over the last 20 years.

The average equity investor however earned only 1.87%, which was less than the rate of inflation rate (2.89%).

Therefore I guess for the average investor would be better off by only investing in GIC/bonds.

Source: http://www.qaib.com/showresource.asp...&Type=FreeLook

In addition, people who invest in equities via MF with high MERs would be far better off investing only in bonds/GICs.

Total return over 30 years:
S&P500 index: 11.00% minus 2.5% MER = 8.5%
5 year Gov bonds: 8.63

Investing in GICs/Gov bonds is easy. Using a financial advisor / mutual funds is not necessary and the total return after fees should be very similar as compared to investing in equities via MF. Besides, investing in GIC/bonds is much less risky.

People investing in a low cost diversified portfolio and buy and hold will likely do better than people investing in bonds/GIC over the long-term, however very few people invest this away. Therefore, most people would be far better off by only investing their money in GICs/Gov bonds.


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## Rickson9 (Apr 9, 2009)

Germack said:


> People investing in a low cost diversified portfolio and buy and hold will likely do better than people investing in bonds/GIC over the long-term, however very few people invest this away. Therefore, most people would be far better off by only investing their money in GICs/Gov bonds.


I agree.

Most need to "do something" or even worse, "do something complicated". Money is like a full bladder, people feel the need to piss it away.

Also people want to be right (ie "I told you that the trade deficit as a function of gdp would cause this eclipse") and discuss hypothetical, nonsensical and unpredictable macroeconomic issues instead of making money. Basically they want to waste their time (and not make money).


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## humble_pie (Jun 7, 2009)

i was biting the bullet and doing the homework and dutifullly trying to screen these exasperatingly dull vids, in which one colourless guy after another tells you to go for annuities or GICs, when my eye fell on a racy headline in the next column. Annie Leibovitz, photographer of stars, is facing financial ruin, it said.

seems this bigger-than-life creative genius had borrowed $24 million in late 2008 in a short-term loan backed by her photo archives and possibly her 2 houses. Loan is due september 8 but Leibovitz can't pay. The lender, Art Capital Group, described by the Nat Post as a "high-end pawn broker," says it will show no mercy.

http://www.nationalpost.com/story.html?id=1924365

the toast of new york city, and the only person ever to have driven queen Elizabeth into a public snit when she ordered the royal highness to change tiaras during a photo shoot, Leibovitz, 59, somehow went through $24 mil in less than 9 months. That's almost a million a week.

so who is Leibovitz' financial planner ? I bet he didn't whisper annuities to Annie, didn't croon term deposits or warble investment ladders. Must be one cool dude.


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## lb71 (Apr 3, 2009)

CanadianCapitalist said:


> Jim Otar's book "Unveiling the Retirement Myth" is available for download from his website until August 31, 2009. The book weighs in at a hefty 525 pages and the download is 6 MB. Try downloading with Internet Explorer. Firefox kept repeatedly choking on the download.


Unfortunately, he is now charging for the download.


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## CanadianCapitalist (Mar 31, 2009)

lb71 said:


> Unfortunately, he is now charging for the download.


Yes, unfortunately Mr. Otar is now charging $3.99 for downloads:

"I have gotten an overwhelming download response, so I changed the rules slightly: The green download is free until end of August 31st, or for the first 5,000 (OK maybe a little more than that) successful downloads. After that it will be for a great sum of $3.99."


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## CanadianCapitalist (Mar 31, 2009)

FeeOnly.ca said:


> _Alright, but you still haven't addressed my point: a 6% withdrawal rate is extremely aggressive. I don't have any quarrel at all with the statement that a retiree needs guaranteed tools like GICs, RRBs and perhaps even annuities. What I do have a quarrel with is the suggestion to avoid stocks altogether._
> 
> Okay then use a 4% withdrawal rate (in the same example). It is the sequence of returns that destroys the viability of the portfolio not the withdrawal rate. If you download Jim's calculator you can test your assumptions and my predictions.
> 
> ...


Sorry. Your statement is simply incorrect. The key variable is the withdrawal rate of a portfolio. And that's my point: even an investor who is fully invested in fixed income will run out of money if their withdrawals rate are too high. 

Of course, investors who purchased life annuities 30 years back are very happy. They locked in when interest rates were very high and enjoy their income stream during a period when inflation fell substantially.

Today, inflation is low and so are interest rates. A period of high inflation would devastate fixed income portfolios. That's why even retired investors should have some stocks -- to provide some inflation protection to their portfolios. Someone retiring at 65 today still has a long time horizon of 25 years or more.


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## OntFA (May 19, 2009)

CanadianCapitalist said:


> Of course, investors who purchased life annuities 30 years back are very happy. They locked in when interest rates were very high and enjoy their income stream during a period when inflation fell substantially.


But falling interest rates and inflation - while still growing the economy - would have also benefitted those who bypassed the annuity option and instead invested in a balanced portfolio.



CanadianCapitalist said:


> Today, inflation is low and so are interest rates. A period of high inflation would devastate fixed income portfolios. That's why even retired investors should have some stocks -- to provide some inflation protection to their portfolios. Someone retiring at 65 today still has a long time horizon of 25 years or more.


Fixed income doesn't have to be devastated. With yields only about 3-4% bonds cannot sustain even a modest withdrawal rate.


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## lb71 (Apr 3, 2009)

There was a Q&A with the author David Trahair on GlobeInvestor earlier today. For those who missed it and are interested, the transcript is available here:

http://www.theglobeandmail.com/globe-investor/investment-ideas/buy-gics-only-gics/article1292666/


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## DrStan (Apr 5, 2009)

This seems like another gimmick to get some airtime. I could come up with an implausible theory ("The case for owning a single stock!"; "The case for putting all your money in a high interest account!"; "The case for not saving a nickel!"), write a book about it and get airplay because it's so far-fetched and outside the box.

The ONLY people who would benefit from a GIC-only strategy are the most extremely risk averse investors. People who fret about losing a single dime of their hard-earned money and who can't even tolerate the fluctuations of a bond fund. Or multi-millionaires who can live well on a modest 3% from their investments. They have no need to risk their money.

I do agree about paying down high interest debt early and then catching up with RRSP contributions later, when tax rates are likely higher. This makes sense.

Right now, the TSX Composite is yielding about a 3% dividend, equivalent to a 5-year GIC BUT with preferred taxation rates, and some subsectors (such as the dividend index) and individual stocks are yielding more. This seems like a much more logical choice for the vast majority of investors. Even taking into account 0 growth, this stills puts investors ahead of the GIC route. 

If interest rates skyrocket, then there may be room for discussion, but it seems like nonsense today. Own shares of solid dividend payers, keep an eye on the companies, and relax.


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## brad (May 22, 2009)

DrStan said:


> If interest rates skyrocket, then there may be room for discussion, but it seems like nonsense today.


But if interest rates skyrocket, that generally means inflation will be skyrocketing too. A GIC earning 10% doesn't get you very much if inflation is running at 9.8%.


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## CanadianCapitalist (Mar 31, 2009)

lb71 said:


> There was a Q&A with the author David Trahair on GlobeInvestor earlier today. For those who missed it and are interested, the transcript is available here:
> 
> http://www.theglobeandmail.com/globe-investor/investment-ideas/buy-gics-only-gics/article1292666/


I find it interesting that *finally* David Trahair is using credible data -- comparing TSX total returns with GIC returns instead of just comparing the price level of the TSX as he did in his books. Still, he pretends GICs are superior in light of his own data:

Time Period - Performance Delta
10 years - 6.06%
20 years - 3.75%
30 years - 3.48%
40 years - 2.06%
50 years - 2.45%

And David Trahair still claims: "As you can see GIC returns seem to be competitive - in the long term not much lower than the TSX Composite Total Return Index"! A 3.75% delta over 20 years means you'll have 2x more capital with stocks than with bonds. That's the reward part of stocks. You have a high probability to earning better returns for taking on the risk.


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## scomac (Aug 22, 2009)

DrStan said:


> This seems like another gimmick to get some airtime.


Not really. You have to look at this from the perspective of the average investor's returns rather than the returns of the market which have been so effectively used to promote heavy stock investing.

For starters, the average know nothing retail investor requires advice to invest, even remotely effectively in stocks. The cost of that advice is quite high. Trahair suggests 2% MER for a mutual fund, but the average dollar invested in equity funds attracts considerably higher fees than that. Conservatively, the cost of the typical actively managed equity mutual fund will be greater than 2.5%. That comes right off the top of your return.

Secondly, the know nothing retail investor loves to chase performance. It's much easier to sell the hot commodity, than it is to get folks interested in funds that have lagged. If you follow the net sales statistics of mutual funds in Canada, the hottest selling funds are invariably those from the categories with the highest recent returns.

Thirdly, these sorts of investors tend to invest heavily in equities after a significant run-up and sell out often times during a market driven panic such as we experienced in the last year. Again, look at fund flows for evidence; money flows into long term funds during a bull run and flows out during bear markets. This is the opposite of buying low and selling high. 

Because of these various errors in timing that are committed by retail investors everywhere (including those who have advisers), the asset weighted returns of equity funds are well below the time weighted returns and that is after costs have been deducted from the gross market return. Therefore, it becomes quite evident that the average know nothing retail investor would be best served by investing exclusively in GICs. Not only is it safer, but the returns will most likely be at least as good, if not higher and quite a bit higher if the individuals costs are above average and timing errors are damaging.


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## CanadianCapitalist (Mar 31, 2009)

scomac said:


> Because of these various errors in timing that are committed by retail investors everywhere (including those who have advisers), the asset weighted returns of equity funds are well below the time weighted returns and that is after costs have been deducted from the gross market return. Therefore, it becomes quite evident that the average know nothing retail investor would be best served by investing exclusively in GICs. Not only is it safer, but the returns will most likely be at least as good, if not higher and quite a bit higher if the individuals costs are above average and timing errors are damaging.


It is true that investors pay a high price on account of expenses and emotions. But the low volatility of fixed income doesn't seem to helped investors either. According to DALBAR (http://www.qaib.com/showresource.aspx?URI=advisoreditionfreelook&Type=FreeLook), here's the delta between the index returns and investor returns for stocks and bonds:

Time Period / Stocks / Bonds
20 years 6.48% 6.66%
10 years 0.07% 6.29%
5 years 0.42% 6.49%

It appears to me that the conclusion, then, is that both stock and bond investors have trouble sticking to a simple plan. 

In any case, I wish David Trahair had made the point about emotions in his book. Instead, he uses carefully selected time periods, ignores dividends in making a case for GICs.


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## DrStan (Apr 5, 2009)

scomac said:


> Not really. You have to look at this from the perspective of the average investor's returns rather than the returns of the market which have been so effectively used to promote heavy stock investing.
> 
> For starters, the average know nothing retail investor requires advice to invest, even remotely effectively in stocks. The cost of that advice is quite high. Trahair suggests 2% MER for a mutual fund, but the average dollar invested in equity funds attracts considerably higher fees than that. Conservatively, the cost of the typical actively managed equity mutual fund will be greater than 2.5%. That comes right off the top of your return.
> 
> ...



So essentially, GICs protect people against their own stupidity and emotional decisions? I agree completely that people make bad choices, look to time the market and often receive bad advice, but the bottom line is that espousing a GIC-only approach is not the solution. 

The solution, for the average investor, is a mix of stocks and bonds, the proportions of which can be adjusted based on risk tolerance and time before the money is needed. The way to avoid stupid decisions is to dollar-cost average into low fee investments and forget about it. Anyone who is savvy enough to read that guy's book and look through the financial section of a newspaper would be savvy enough to read some other financial resources and make sound(er) decisions.


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## humble_pie (Jun 7, 2009)

celeb photog annie leibovitz has renegotiated her $24 million loan from Art Capital. Still at stake are her valuable photo archives & real estate. But they dropped the lawsuit against her.

still no word on leibovitz' financial advisor. OK so he didn't put her in GICs or laddered bonds. But she's had a swell life.


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## scomac (Aug 22, 2009)

DrStan said:


> So essentially, GICs protect people against their own stupidity and emotional decisions? I agree completely that people make bad choices, look to time the market and often receive bad advice, but the bottom line is that espousing a GIC-only approach is not the solution.


But it is for a lot of people. You can't force everyone to empower themselves, become DIY investors and use low cost index funds in an intelligent fashion to overcome these issues and ensure that what ever equity risk premium is availed investors at the time might be earned. While I would agree whole heartedly that it is a noble endeavour to attempt to educate and hope to modify behavior of investors in an effort reduce the impacts of these frictional costs, it maybe simply more effective to accept that these issues exist and direct investors to the least problematic alternative. A reliable and straight forward solution such as GIC ladders fits the bill.



> The solution, for the average investor, is a mix of stocks and bonds, the proportions of which can be adjusted based on risk tolerance and time before the money is needed.


That is standard advice based on asset class returns not investor returns. For starters, the bond component will generate returns similar to GICs, so any return premium must come from equities. If the costs of investing in equities in the traditional vehicles consumes most or all of the equity risk premium, then there is no advantage to your preferred solution.


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## DrStan (Apr 5, 2009)

scomac said:


> But it is for a lot of people. You can't force everyone to empower themselves, become DIY investors and use low cost index funds in an intelligent fashion to overcome these issues and ensure that what ever equity risk premium is availed investors at the time might be earned. While I would agree whole heartedly that it is a noble endeavour to attempt to educate and hope to modify behavior of investors in an effort reduce the impacts of these frictional costs, it maybe simply more effective to accept that these issues exist and direct investors to the least problematic alternative. A reliable and straight forward solution such as GIC ladders fits the bill..


*You're right, of course, it's impossible to educate everyone. What I'm opposed to is presenting this as the magic bullet investment solution. GICs are a reliable way to eke out almost no growth. Averaging into low cost investments should provide better returns.



scomac said:


> That is standard advice based on asset class returns not investor returns. For starters, the bond component will generate returns similar to GICs, so any return premium must come from equities. If the costs of investing in equities in the traditional vehicles consumes most or all of the equity risk premium, then there is no advantage to your preferred solution.


*With the availability of ETFs, low cost index funds, TD e-Series, heck even the ING Streetwise fund, I can't see why people would still go out and buy traditional mutual funds with bloated MERs, unless for very specific purposes and asset allocation. Bonds, especially a decent corporate bond fund, can also provide a better yield than GICs for the fixed income portion. Espousing the basic GIC solution is far too simplistic. If people are ruled by their emotions, after a few years of torrid stock returns and low GIC returns, they will want to move away from GICs and hop in at the top of the market. Then they will get burned and go back to GICs. I believe a simple asset allocation stocks/bonds with dollar cost averaging will provide good returns, and almost certainly better than GICs.


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## scomac (Aug 22, 2009)

DrStan said:


> *With the availability of ETFs, low cost index funds, TD e-Series, heck even the ING Streetwise fund, I can't see why people would still go out and buy traditional mutual funds with bloated MERs, unless for very specific purposes and asset allocation.


None of these alternatives come with advice attached. While advice can be purchased separately, the vast majority aren't even aware that these alternatives exist and this majority will want to invest with an advisor. That leads to high fee alternatives. 



> *Bonds, especially a decent corporate bond fund, can also provide a better yield than GICs for the fixed income portion.


This isn't always the case. The management fees associated with corporate bond funds can consume much of the additional yield. Individual bonds expose the investor to the perils of default risk that can't possibly be diversified away in a retail portfolio. If an investor opts to use the services of a deposit broker, he/she can often pick-up a nice yield premium by choosing GICs from alternative suppliers while still maintaining CDIC coverage.



> *If people are ruled by their emotions, after a few years of torrid stock returns and low GIC returns, they will want to move away from GICs and hop in at the top of the market.


That's always a possibility, but the same case could be made for folks investing in a mix of stocks and bonds.



> *I believe a simple asset allocation stocks/bonds with dollar cost averaging will provide good returns, and almost certainly better than GICs.


I don't necessarily disagree if this can be done in the most advantageous way. However, the DALABAR study that was linked to up-thread clearly pointed out the average investor, even those in asset allocation funds, didn't earn the returns of the market, not even close. They would have been further ahead in simple guaranteed interest baring investments. That is the historical experience. All I am proposing is that instead of looking at past history and attempting not to make the same mistakes, assume that these mistakes will be made in general and direct average folks to a safer, more reliable and less error prone strategy: GICs.


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