My portfolio lost 4.9% in 2022, while my benchmark return was a loss of 6.2%. This small gap came from my decision to shift to bonds based on a formula using the blended Cyclically-Adjusted Price-to-Earnings (CAPE) ratio of the world’s stocks. After deciding on this CAPE-based approach, all the portfolio adjustments were decided by a spreadsheet, not my own hunches. I started the year 20% in fixed income, it grew to a high of 27% as the spreadsheet told me to sell stocks, and now it’s back to 20% after the spreadsheet said to buy back stocks. This cut my losses in 2022 by 1.3 percentage points.
My return also looks good compared to most stock/bond portfolios because I avoided the rout in long-term bonds. My fixed income consists of high-interest savings accounts (not at big banks), a couple of GICs, and short-term bonds. If long-term bonds ever look attractive enough, I may choose to own them. My thinking for now is that I prefer the safe part of my portfolio to be very safe, and I certainly didn’t want to own long-term bonds back when yields were insanely low.
Another thing that helped my results look a little better is that I measure my returns in Canadian dollars, and the U.S. dollar appreciated relative to the Canadian dollar during 2022. Even though my U.S. stocks lost money, they appeared to lose less money when measured in Canadian dollars.
One measure that doesn’t look very good this year is that my real return (after adjusting for inflation) was a loss of 11.0%. I prefer to think in terms of real returns because what matters to me is what I can buy with my money. So, while I hope to achieve somewhere close to a 3% average annual compound return, I fell behind significantly this year. However, stocks have performed well since I retired, so I’m still on the upside of sequence-of-returns risk.
The following chart shows the cumulative real returns for my portfolio and my benchmark since I started investing on my own rather than working with financial advisors. Each dollar I had in my portfolio in 1994 that remained invested over this entire period has doubled in purchasing power three times now. The power of compounding shows itself over long periods.
Through all of the recent market turmoil, my calculated safe withdrawal rate (adjusted for inflation) has remained amazingly stable. This is because I adjust the assumed future stock market returns based on the current blended CAPE of the world’s stocks. As stocks rose, my spreadsheet assumed lower future returns, and as stocks fell, the assumed future returns rose again.
I try not to look at my portfolio spreadsheet too often, but when I do, I rarely look at my net worth. I focus on the monthly dollar amount of my after-tax safe withdrawal rate. I find this amount much more meaningful than the net worth figure that feels disconnected from day-to-day living.
Michael, Would you consider sharing a (google or word) tempate of your spreadsheet even if simplifed? I've often looked for something like this but found very few options.
ReplyDeleteI've started to try to make a sanitized version of my spreadsheet, but there are so many edge cases that don't apply to me but might apply to others that I give up. The last thing I want to do is provide something that won't work for people.
DeleteMy real returns for 2022 was a loss of 11.2%. Mostly just stayed the course with investments in VGRO and similar investments.
ReplyDeleteJust starting retirement so I'm still sorting out the best approach for withdrawals (timing - which accounts). I used some of our space in our HELOC to buffer our withdrawals over the year, and will probably focus more on this over the next few years as we get more in a groove between our investments and spending!
Decumulation is definitely tricky. I wrote my own simulation software to test different plans to settle on a strategy of draining RRSPs early to make my income and my wife's income up to a particular marginal tax bracket. There are a lot of details that determine whether that's a good plan for others.
DeleteCool post as always. My return was somewhat lower this year, about -10%. The difference is because I was not smart enough to avoid long bonds altogether and was just using a full bond index like XBB, and also because I hold some small amounts of other asset classes that didn't do so well.
ReplyDeleteMay I ask, when you say high interest cash, what instrument do you use? Do you use an ETF like CMR or CASH? Or actual accounts at small banks and such?
Also, I know based on your previous posts that you follow some formulaic rules for overall asset allocation. You mentioned your fixed income portion was 20% most of the year. Does that mean the remaining 80% is all equity?
I used to use EQ Bank's savings account, but they started falling behind on the interest rate they offer, so I've shifted mostly to Saven (Ontario only, high interest, poor interface).
DeleteI enjoy your posts - always informative. You write “Each dollar I’ve invested over this entire period has doubled in purchasing power three times now. “ How do you calculate cumulative returns? If it’s the product of annual returns then would it not be more accurate to say each dollar invested in 1994 has indeed doubled in purchasing power three times, but amounts invested thereafter have returned other amounts? For example, it appears each ~$600 invested in 1999 have increased in purchasing power by 1/3 to ~$800 today
ReplyDeleteWhen I wrote that line, I intended it to mean those dollars that I invested as of 1994. Rereading it, I can see how it can be interpreted differently. I'll update the post to try to make it clearer.
DeleteGreat informative article as always Michael. How do you buy your bonds? I'm guessing it's not a bond ETF. This is an area I really need to explore.
ReplyDeleteI've bought individual bonds in the past, but now I use ETFs: VSB with Canadian dollars and VGSH with U.S. dollars.
DeleteThank you for another excellent post, Michael.
ReplyDeleteI, and I see from earlier comments too, others, would be interested to learn more about the mechanics of your drawdown strategy. Do you already have a post that you can point me to? What I’m looking for is something that covers the timing and sequence of the withdrawals e.g. every quarter (Jan, Apr, Jul, Oct), dividends are rolled into one RRSP, held in CASH.TO, and then withdrawn, along with the proceeds of any sold ETF units, in mid-January of the year in which the cash will be used for expenses. The expenses cash is mostly parked in high interest savings accounts and short-term GICs until needed. Funds over the amount reqired for expenses (to bring withdrawals up to the top of the desired tax bracket) are withdrawn via in-kind ETF transfers to non-registered accounts, which are subsequently transferred to TFSAs.
Actually, the above is pretty much our process, albeit, we converted the RRSPs to RRIFs as there’s no fee for making the withdrawals, plus we get to hang onto more cash for awhile longer due to no withholding tax on the RRIF minimum.
Hi Bob,
DeleteAs for the timing of my withdrawals, I have them blended with rebalancing. I keep a spreadsheet of my holdings reasonably up-to-date. These holdings include cash in small-bank savings accounts. I live on this cash. When my overall portfolio gets out of balance for any reason (market moves or slow draw down of cash balances), I rebalance. So, my spending adds pressure on my fixed-income holdings and causes me to rebalance from stocks to fixed-income more often than would happen for a working person.
There's nothing wrong with making withdrawals on a schedule; it was just easier for me to blend it in with everything else on my spreadsheet.
As for how I draw down my accounts, I spend all year from non-registered savings accounts. At the end of the year, I estimate my income from all sources (and my wife's), and make RRSP withdrawals to top up our incomes to a particular marginal tax bracket.
That’s most interesting and thank you for explaining your process. I hadn’t considered my withdrawals and the rolling of dividends into one account as rebalancing, but that’s exactly what I’m doing when determining what to sell and what to buy. My spreadsheet does most of the hard work now. I just enter the amount to be withdrawn and it tells me which and how many units I need to sell and/or buy.
ReplyDeleteOur investment return for 2022 was -9.8%. Several percent of that was due to the weakling UK pound. First because the world noticed that Brexit was turning out to be the economic disaster those who were paying attention said it would, and second, when their 44-day Prime Minister (Liz Truss) and her Chancellor announced massive unfunded tax cuts, which also almost wiped out thousands of DB pension plans.
“weakling UK pound” should have read “weakening UK pound”
DeleteReading your response again, and thinking about how my process might be fine tuned, prompts me to ask a few more questions, I hope you don’t mind.
1. When you top up the cash in the savings accounts, how far over the “withdraw/rebalance” trigger do you go? For example, 12 months cash, meaning after 12 months, and assuming no changes in asset prices, you will need to top-up the cash again, or much shorter periods of spending? Currently, we have 2.5 years of cash available for expenses including the current year. I’m trying to determine how low I can let this go before I have to top it up, and how far over our needs I should take it.
2. What is your target asset allocation i.e. equity/fixed income excl. cash/cash? Our overall portfolio is 70/18/12, with different allocations in accounts we are/are not drawing from; TFSAs 100/0/0, RRIFs 55/35/10, NR 80/0/20.
3. How far from your target allocation will a rebalancing event be triggered? I use +/-5% of the target allocation percentage.
Many thanks.
Hi Bob,
DeleteTo start with, my strategy seems complex, but it's easy for me to use because my spreadsheet does all the work. There is a wide range of approaches that work just fine, and I think people are best using something they can stick with easily.
I think most of your questions are answered in the following post (including links within the post to 2 papers I wrote):
https://www.michaeljamesonmoney.com/2020/05/calculating-my-retirement-glidepath.html
I treat all my accounts (and my wife's accounts) as a single large portfolio. I treat all bonds and cash as part of my fixed income. My target allocation shifts as I age as described in the link above. My stock allocation is currently just a little under 80%. However, I adjust it downward with a formula based on current stock valuations if they are high as described here:
https://www.michaeljamesonmoney.com/2021/12/what-to-do-about-crazy-stock-valuations.html
My threshold for rebalancing is described in the last paper pointed to by the first link above. I don't deliberately overshoot my fixed income level. So if my RRSP withdrawals put my portfolio out of balance, I buy some stocks. In practice, though, these RRSP withdrawals typically don't trigger rebalancing.
If my spreadsheet tells me I need to rebalance from stocks to fixed income shortly before it's time for my RRSP withdrawals, I just wait a bit and let the RRSP withdrawals do the rebalancing work.
You were right, those pages and papers answered pretty much all of my questions. Thank you for sharing your work on these topics.
DeleteOn the matter of UK DB pensions almost failing, here’s a very interesting video that you might find of interest: https://youtu.be/1JmevmE6AnI
My knowledge of macroeconomics is limited, but one thing I understand is that consumption can't exceed supply, where supply may be the sum total of all human work, natural resources, or anything else. Any attempt to allow more consumption through financial engineering must result in some gymnastics in financial markets to keep consumption in line with supply. As Charlie Munger likes to say, a population can't vote themselves rich.
Delete