Last month I wrestled with my pension decision and opted to take the lump sum (commuted value) rather than a deferred pension at age 65. That decision meant forgoing a ~$15,000 per year pension in retirement. Instead, I would receive a $290,000 lump sum – $134,000 in a locked-in retirement account and the remaining $156,000 paid in cash.

I received the lump sum cash payment on Friday. It’s strange to see more than an entire year’s salary ($110,500 after taxes) deposited into your chequing account. Fortunately, I’m a disciplined budgeter and have already mapped out a spending plan for the rest of the year.

First, I sent $30,000 over to my Wealthsimple Trade account to fully max out my available TFSA room (finally!). Next, I sent another $3,700 over to Wealthsimple Trade to max out this year’s available RRSP contribution room. I’ll use the funds to add to my holdings of VEQT in both my RRSP and TFSA.

The funds for my LIRA have not arrived at TD Direct Investing yet, but when they do I’ll also purchase VEQT in that account and hold it there until retirement.

The other major change for our finances this year is that we’ll no longer have to withdraw from our small business account to meet our spending needs. We had planned to pay ourselves dividends, but instead any income earned this year will remain inside the business account where it is taxed at a lower rate.

Speaking of business income, it’s been surprisingly steady this year despite the disruption caused by COVID-19. While web traffic and advertising have slowed by 30 percent or more, I’ve been busier than ever with freelance writing and my fee only financial planning service. It’s good to have multiple income streams.

Finally, we’re resigned to the fact that we’re likely not going away this summer and so we want to make the most of the time we spend at home. We’ve purchased some new patio furniture and spent the weekend cleaning up our backyard. We’d also like to buy a hot tub and so we’re exploring our options there. 

Don’t think we’re splurging just because there’s a large lump sum in our chequing account. Instead, I think of it as using our travel refunds to invest in our stay-at-home experience this year and beyond.

This Week’s Recap:

I managed just one post here this week when I looked at changing investment strategies after a market crash.

This post remained incredibly popular – the top ETFs and model portfolios for Canadian investors.

Over on Young & Thrifty I wrote about how to invest in oil through stocks and ETFs.

I also looked at borrowing to invest when the market is down.

Promo of the Week:

I’ve been catching up with some the recent changes at Willful Wills – the online platform where you can create a will for as little as $99. I initially reviewed Willful Wills two years ago.

They still have the same the pricing plans – $99 Essentials (just a will); $149 Premium (will an 2 Power of Attorney documents); $249 Couples (will + POAs for two people).

Willful is now available in seven provinces (Ontario, BC, Alberta, Sask, MB, NS, NB).

They’ve added the ability to account for pets (assign a pet guardian + leave money for their care), and added a charitable giving feature (ability to leave a $ amount to a charity, and ability to leave a % of your residual estate to charity).

Willful has created more than 20,000 documents since launching in 2017. They’ve also given out over 1,300 plans to frontline healthcare workers during COVID (healthcare workers can apply here), and are currently offering a free printing/shipping offer.

While the law still doesn’t allow for digital signing, witnessing, or online storage of wills or POAs, Ontario’s new emergency order does allow for virtual witnessing – and Willful has launched a partnership with Notary Pro to help Willful customers get their wills virtually witnessed (and we’re watching legislation in other provinces hoping they follow suit).

Whether you’re creating your first will, or need an update, be sure check out what Willful has to offer.

Weekend Reading:

Michael Batnick answers the question, why aren’t stocks down more? I’ve been hearing that a lot lately.

Even a common sense investor like Ben Carlson has a stock picking side. Here are some crisis investing lessons learned from his fun portfolio.

Here’s Millionaire Teacher Andrew Hallam on financial experts trying to time the market:

“If you sold some of your investments because you think stocks will fall, you are thinking like a hedge fund manager. If you have suspended your regular investment contributions while you wait for the markets to stabilize, then you are thinking like a hedge fund manager. If you have money to invest but you want to wait for stocks to fall even further, you are thinking like a hedge fund manager.”

How are your investments protected? This MoneySense article explains the role of the CDIC and CIPF, and breaks down the different kinds of protection each offers.

Here are two conflicting views regarding when to take CPP. (I recommend deferring CPP to age 70):

1. Jonathan Chevreau reconsidered when to take CPP benefits amid COVID-19 risk and elected to take it at 66.
2. Rob Carrick argues that the pandemic makes it even more sensible to delay the start of CPP retirement benefits.

The Alberta Investment Management Corp (AIMCo) made a $3 billion blunder with a volatility trading strategy (options and derivatives):

“It’s not very hard to lose $3 billion selling volatility,” said one quantitative hedge fund manager who frequently trades with the likes of AIMCo. “You’re doing stuff that has a minus-infinity potential outcome.”

Check out this podcast interview with Millionaire Teacher Andrew Hallam on whether you should try to time the stock market.

In his latest Common Sense Investing video, PWL Capital’s Ben Felix explains why the stock market is not the economy, and the economy is not the stock market:

Worried about your RRSPs tanking? Michael James on Money says, so is the Canada Revenue Agency.

An incredibly brave post from Kind Wealth founder David O’Leary, who shares how he filed for bankruptcy at age 25.

Finally, this powerful piece in the New York Times is worth a read: My restaurant was my life for 20 years. Does the world need it anymore?

Have a great week, everyone!

Investors should take great care to choose an investment strategy they can stick with for the long term – in both good times and bad.

The problem is we make our decisions about risk tolerance and asset allocation in a vacuum. Our retirement portfolio isn’t at stake when we fill out a questionnaire. Then markets open the next day and our original target mix gets immediately thrown out of whack.

Overconfidence and Risk Tolerance

It’s easy to feel overconfident about our risk tolerance and investing ability when markets are soaring. And, without proper rebalancing, there’s a good chance your portfolio was overweighted to stocks after markets climbed 20+ percent in 2019.

Then March 2020 happens and stocks fall 35 percent in just one month. Suddenly, investors were scrambling to “de-risk” their portfolios. But the damage had already been done. 

I’ve answered many reader questions about changing investment strategies after a market crash. One asked if I still recommend my one-ticket investing solution, Vanguard’s VEQT, given the recent market turmoil. My answer: a resounding yes!

To be clear, I didn’t invest in an all-equity portfolio like VEQT thinking global stocks only go up in price. In the 30-year period dating back to 1990, U.S. stocks were up 21 years and down in nine of those years. That’s a 30 percent chance in any given year that stocks would fall in value. 

Volatility

Investors also talk about volatility, and perhaps waiting on the sidelines until things return to normal. But I’d argue when exactly are things “normal” in the stock market? Volatility is the name of the game. In nine of the 30 years between 1990-2020, stocks were up more than 20 percent. In three of those years, stocks were down 16 percent or more. What’s normal?

I get it. Nobody wants to lose money in their investment portfolio. And losing 35 percent of your portfolio in such a short time is shocking to see. But stepping back to see the big picture reveals that Canadian stocks are down 17 percent on the year, while U.S. stocks are down just 13 percent. That’s hardly outside the normal distribution of short-term stock returns.

What I think I’m really hearing from investors is they were taking too much risk in their portfolio leading up to the recent market crash, and now they realize a more balanced portfolio is needed. That’s perfectly fine. It’s just that market crashes are a painful way to learn about your true risk tolerance.

Adding bonds is the best way to reduce the volatility in your portfolio. Vanguard’s VBAL, which represents the classic 60/40 balanced portfolio, fell less than 20 percent at the market low in March, and is now down just 7 percent on the year. That ride is easier on the stomach than VEQT, which fell 27 percent at the low and is still down 11.5 percent in 2020.

Changing Investment Strategies

One trend we saw after the 2008 market crash was for investors to break up with their mutual fund advisor and flock to self-directed investing. After all, active managers couldn’t fulfill their promise to deliver all the upside while protecting the downside. All investments got clobbered.

I can see this trend continuing when investors open their March investment statements and realize their actively managed mutual funds failed to guide them unharmed through the market crash caused by a global pandemic.

This is one time I will advocate for changing investment strategies amid a market crash. If paying high mutual fund fees didn’t deter you from switching to a low cost investing option, perhaps a portfolio decline in the 20+ percent range will be the catalyst.

Final thoughts

Investors shouldn’t be changing investment strategies based on market conditions. We know the expected range of outcomes in both the short and long term.

First, we need to ensure that we’re invested in a risk appropriate asset mix that will allow us to sleep at night. If you can’t stand the thought of portfolio falling 30 percent or more in the short term, then you need to dial back the risk and add more bonds.

Next, in the face of stock market corrections, crashes, or crazy volatility, we need to be able to weather the storm and stick to our plan. That could mean ignoring the news, reducing the number of times you check on your portfolio, and continuing with your regular contribution schedule. 

Finally, avoid market timing and trying to guess which direction markets are headed. Your active manager can’t do it, and neither can you. Switch to a passive investing approach, with an appropriate mix of stocks and bonds, that will capture the market returns minus a very small fee. 

If I panicked and sold VEQT at its low in March I would have missed out on the ensuing gains made over the following month. And if I step back and look at the big picture, I know my investments were up 20+ percent last year, and they’re only down 11.5 percent so far this year. 

Investing is a long-term game and we shouldn’t make investment decisions based on short-term results.

The recent stock market crash and plunging interest rates may have some investors scrambling for safe havens. Stocks fell by as much as 35 percent (before recovering about half of those losses), while the interest rate on GICs and savings accounts in particular have dropped in lock-step with the Bank of Canada’s emergency rate cuts.

Everyone’s situation is unique. First, we all need to be mindful of our personal finances to ensure we have enough cash flow to get through this crisis. 

Investors still in the accumulation stage with several years or even decades to go before retirement can confidently stick to a risk-appropriate investing plan. 

Those nearing retirement should consider building a safety buffer of cash and GICs to cover their spending needs in the first years of retirement. 

Retirees have different goals, such as balancing current income needs with the need to continue growing their portfolio to cover future spending.

One caution for investors of any age is to avoid chasing yield. We’re in extraordinary times, when banks and energy companies have dividend yields in the 7-10 percent range.

As attractive as those yields look to income-hungry investors, it’s not hard to imagine any of these companies, even our treasured banks, suspending, cutting, or even eliminating dividends at some point in the future. There’s a long list of nearly 50 companies that have already done so since March of this year.

On the fixed income side, we know that cautious savers want their money to at least keep up with inflation. One reader asked whether market-linked GICs were worth a look:

“With the GIC rates dropping again, and not being interested in investing in the stock market at our age, what is your opinion on market-linked GICs?  Your principal is safe and there’s good upside potential if markets perform well.”

To be blunt, I’m not a fan of market-linked GICs. In fact, you’re most likely better off with plain vanilla GIC.

Remember you cannot have reward without taking risk. The promise of “some market upside” with these products is often mis-sold to investors who think they can have their cake and eat it too.

Banks have pushed market-linked GICs for years as interest rates plunged to historic lows. With this clever marketing gimmick, investors are guaranteed to get back their principal if markets go down, but also get to participate in some of the stock market growth if things go well.

The actual interest rate is linked to stock market returns through a complex formula that requires an advanced degree in mathematics to figure out.

Here’s an example from a few years ago that still holds true today:

This Week’s Recap:

Here are my posts from the past two weeks.

Should you postpone retirement amid the coronavirus crisis?

Last weekend I opened up the money bag to answer reader questions about moving to Questrade, investing in energy stocks, and more.

On Wednesday I listed the top ETFs and model portfolios for Canadian investors.

Over on Young & Thrifty I looked at whether now is a good time to invest in stocks.

The market crash last month may give investors an opportunity to crystallize capital losses in their taxable investing accounts. I’m working on a new piece with Wealthsimple to show how the robo advisor handles tax loss harvesting for its clients. Stay tuned for that in the coming week or two.

Promo of the Week:

I’ve received a lot of feedback from readers who are interested in switching to a discount broker like Questrade or Wealthsimple Trade.

You might want to do so if you’re already a self-directed investor with one of the big bank brokerages and are tired of paying fees for every trade (that’s why I switched from TD Direct to Wealthsimple Trade earlier this year).

Another reason to switch is to simply take control of your finances. Many investors are still heavily invested in expensive actively managed mutual funds with a bank sales person or investment advisor, paying 2 percent or more each year on their investments.

By switching to a discount broker and investing in low cost ETFs, investors can slash their fees to the bone. 

Nervous to take the plunge? Try investing in an asset allocation ETF like Vanguard’s VBAL or VGRO, or iShares’ XBAL or XGRO. These one-ticket solutions take the guesswork out of investing because they are automatically monitored and rebalanced behind the scenes so you can focus your time and energy on other activities besides your investment portfolio. Truly a set-it-and-forget-it option.

Wealthsimple Trade is Canada’s first and only zero-commission trading platform where investors can trade stocks and ETFs for free in an RRSP, TFSA, or non-registered account. Sign up for Wealthsimple Trade today.

For most robust investing needs, including for LIRAs, Margin, and Corporate accounts, Questrade is still the king of low-cost investing in Canada. You can purchase ETFs for free and trade stocks for as little as $4.95. Take your savings further with a registered account at Questrade.

Weekend Reading:

Bank of Canada governor Stephen Poloz shares his thoughts on the current pandemic and laying a foundation for the road to recovery.

Rob Carrick is helping his readers through the pandemic with a weekly personal finance update. His latest explains why you should clean out your big bank savings account that’s paying next to nothing in interest.

My Own Advisor blogger Mark Seed explains how he’s preparing his finances for a global recession.

A stark reminder that home equity lines of credit are actually callable loans that can be taken away by your bank in times of trouble.

Carleton associate professor Jennifer Robson offers a great explanation to those of us asking why can’t the government just send everyone a stimulus cheque.

Preet Banerjee has done a great job keeping Canadians informed of federal government stimulus measures, including the most recent changes to the CERB:

Another Carleton professor, Frances Woolley, explains the behavioural economics of the Marie Kondo method. Marie Kondo is the guru behind the best-selling Life-Changing Magic of Tidying Up and Spark Joy.

Morgan Housel asks two big questions – one economic, one more social – that seem crucial to pay attention to as we think about recovery.

Here’s a brilliant thread on Twitter – a Q&A with Costco founder Jim Senegal:

for my marketing class this morning the founder of Costco(!!!) Jim Senegal is speaking & doing a Q&A. does anyone have any questions?

ps Jim is one of the sweetest and most humble people I’ve ever met.

— Paige Doherty (@paigefinnn) April 16, 2020

The latest Canadian Portfolio Manager podcast with PWL Capital’s Justin Bender sheds light on his “Light” model ETF portfolios that include the asset allocation ETFs offered by Vanguard and iShares.

Seniors who don’t need all of their RRIF money this year should consider this workaround.

Here’s Millionaire Teacher Andrew Hallam speaking to retired Canadian investors about what to do with the investments during the COVID-19 market crash:

Michael James on Money uses a personal example to explain how rebalancing does its job.

Finally, is it your dream to work from home full-time? Our friends at Credit Card Genius share 20 ways to work from home.

Have a great weekend, everyone!