Managing Portfolios For The Long-Term

If  you want to lock in a risk-free return for the next year, you can buy a Government of Canada T-bill with a 2% yield.

In a taxable (non-registered) account, that return is income and will be taxed at your marginal rate. 

You also need to buy it with the least possible cost to you.

With inflation running at or about 2% (depending on how you consume and where you live, it may arguably be higher), you're money is not going to grow fast enough to keep up with your cost of living if you buy that t-bill (after fees and taxes).

If you want your money (after fees, taxes and inflation) to grow you are going to have to take risk.

The big question is, how much risk do you need to take?

The simple answer is: enough to grow your money faster than inflation, fees and taxes and to continue to afford yourself a cost of living that is in line with what you have come to expect.

Step 1: you need a long-term plan. You can do it yourself (DIY) or you can work with a professional. Bianca (High Rock's Certified Financial Planning professional) tells me that a stand alone financial plan will cost about $200 per hour. Depending on the complexity, this could take 3-6 hours to put together and be presented. Semi-annual updates may be another few hours per year (modifying and presenting).

For many DIYers the spreadsheets can get pretty complex when you have to factor in cost of living calculations (indexing) and taxes. Bianca has all the tools (and updated calculators) of her trade on hand to ensure ongoing accuracy.

Step 2: you need an asset allocation strategy: that combination of a balanced and globally diverse set of investments that make the best sense for you, maximizing returns and minimizing the risk needed to achieve those long-term growth goals. We call those risk-adjusted returns.

Step 3: you need execution: what is the best possible way to get this plan put to work at the least intrusive cost.

So many people have historically turned to banks to get there advice. The banks, on the other hand, know and expect you to turn to them. They are waiting for you and ready to make you pay significantly with all sorts of hidden fees and costs.

One of the best I've seen is where they give you a nice prime rate based mortgage (prime is at 3.95% now) and at the same time are thrilled to have you buy their GIC's or term deposits at 2%, garnering a very tidy 1.95% from you. We see it all the time.

Please read Larry Bates' Beat The Bank for some great insight. And if you are going down the DIY route, this is an invaluable tool.

I'll let Larry tell you all about mutual funds!

If you are a busy professional (no time) or not so comfortable with the intricacies of understanding the risk / return equation (there are many of us who go to school and write qualifying examinations to understand the complexities in it) try looking outside of the financial institution box: there are plenty of us that have all the protections that a bank can offer plus unlike a bank, we provide a legal fiduciary duty to our clients.

Check out Seek Advisor if you want to get a taste of the alternatives. There may just be a good fit in there that works for you and your family.

Make sure you understand the fees, both  upfront and hidden. The regulators are falling short of making this mandatory, so you have to ask the tough questions. At High Rock we will tell you upfront that our management fee is 1%. Our custodian, Raymond James Correspondent Services charges 0.15% for their back office services and the custody of your accounts) and the built-in or embedded (hidden) ETF fees (because we do use some ETF's for our models and portfolios) will probably work out to an additional 0.05% (give or take 0.03%) of your entire portfolio. So all in it is about a 1.2% fee. This includes the $200 per hour Wealth Forecast (financial plan) that Bianca so diligently prepares and monitors and reviews.

That should put us on par or even ahead of any robo service (because they will also have embedded fees and costs), and you get good, old fashioned, full client service (humans to communicate with).

For those who need to be assisted with "sticking to the plan" for the long-term, this may be invaluable, because after all, we are mere mortals and some of us who get "a little too close to the windshield",  as my High Rock partner Paul so aptly put it in our October Update video, sometimes need a reminder.

The point is, you need to get to retirement (or the place where your income is reduced enough so that you are in need of your investments to provide for you) and then you need to be able to live comfortably for the next 30 or 40 years (depending on your retirement), growing your money and staying ahead of the increases in the cost of living.

Some years, like this year and 2015, 2008, 2001, etc. may pop up in our faces to challenge our long-term planning. However, many more years like 2002-06, 2009-14, 2016-17, etc. will continue to provide great growth opportunities and far out-weigh the short-term negative years into the future. This will more than balance out growth and provide better than average returns over multiple year periods. It has been so in the past and it will be again. The clients who have been with us the longest get it. Tougher for the new ones to get comfortable with.

Need help with this?

Let me know.

scott@highrockcapital.ca