Construct a Low-Fee, Diversified Retirement Portfolio

1. Investing for RetireesPart 2 Construct a low fee, tax efficient, diversified, income producing portfolio January, 2019

2. Disclaimer • The Ottawa Branch of the National Association of Federal Retirees and the facilitator of this seminar do not in any way offer financial orinvesting advice. • This seminar and the information in this PowerPoint presentation are provided for education purposes only. • Investing involves risk. Any personal investing decisions should be made only after individual due diligence and/or with the assistance of a registered financial adviser or broker. • Ottawa Branch takes no responsibility for any investment decisions that participants may make. • By attending this seminar and signing the disclaimer provided, you are signifying that you understand and agree to these conditions. Please note that the Ottawa Branch provides information on issues, products and services of general interest to its membership. It does not endorse a particular position on a product or service, as being suitable for individual members, but brings them to the members' attention so that they can make up their own minds

3. 4. Asset class options

4. Asset class options (1) • Equities • Individual stocks • Mutual funds • Exchange Traded Funds (ETFs) • Real Estate • Real Estate Investment Trusts (REITs) • Physical Real Estate

5. Asset Class Options (2) • Fixed IncomePension • GICs • Bonds • Bond Funds • Preferred Shares • Cash • Money Market Funds • High Interest Savings

6. How stock prices are determined (in theory) • Current price = Present Value of future earnings • Present Value determined by “discounting” future earnings by “discount rate” • Discount rate = “Risk free rate (10 yr Govt bond)” + Risk factor • When Interest rates decline, discount rate declines, and stock valuations increase • When Interest rates rise, discount rate rises and stock valuations decline

7. Picking individual stocks is like playing hockey against the Senators • More mutual funds than stocks • Can you or your advisor beat pros with super computers ? • But – there is one good reason • Canadian dividend tax credit with US$ income • Good buys take courage • Remember - A great company is not necessarily a great stock

8. TSX 300 vs S&P 500The need to diversify(Ex dividends)

9. Examples of Equity (Stock) ETFs • Canadian Broad Market XIC, ZLB .05, .39% MER 2.7% Yield • Canadian Dividend Growers CDZ, XDV .55% 3.8/4.1% • Canadian Big Sixty XIU, HXT .05% 3.0/0 • US S&P 500 in US$ SPY, VOO .04% • US Total Market in C$ unhedged VUN .16% • US S&P 500 in C$ unhedged VFV .08% • International Developed EAFE VI .23% • Emerging Markets VEE .24% • World ex Canada VXC .27% • Note: These are NOT recommendations

10. Dividend Growth Strategies

11. Dividend stock alternatives • ETFs • Dividend growers – some great Canadian companies paying high dividends • John Heinzl’s Yield Hog portfolio • Gordon Pape’s Income Investor • Interest rate sensitive

12. Dividend Stock ETF (XDV) performance 5 yearsXDV ETF 4.1% TRP 5% RY 3.9%

13. Real Estate Investment Trust (REIT) ETFs Direct owners of real estate: offices, retirement, apartments, shopping centers Own real estate without fixing broken toilets Interest rate sensitive

14. Examples of REIT ETFs • Managed RIT .75% MER 5.1% Yield • Canadian REIT Index XRE .61% 4.8% • Note: These are NOT recommendations

15. Don’t need income ? Be a DRIP • Dividend ReInvestment Programs (DRIPs) are available on most Canadian listed dividend paying stocks, ETFs & Mutual Funds • No charge to implement or buy shares/units • Easily set up through any broker: Full service, Robo or Online • Great for long term investing • Great for dollar cost averaging

16. Impact of interest rates on investments56% of Ottawa house price increase explained by declining interest rates

17. Impact of interest rates on investmentsS&P 500 increase dwarfs house price increase

18. Quiz True or False • Individuals picking individual stocks have a good chance of beating the pros • Dividend grower stocks can be owned through specialized ETFs • REITs are a no hassle way of owning real estate • Residential real estate will be a good investment over the next ten years

19. 5. Fixed Income Options

20. Fixed income options • Preferred Shares • Bonds and bond funds • Be aware of “duration”, short term safest • Bond prices are inverse to interest rates • GICs • In non registered accounts, possible negative real returns • 2.4% - 30% Tax – 2% inflation = -.32% • Good place to park short term money in Registered Accounts • High Interest Savings & Money Market Funds • About 1.0% less than 1 year GICs

21. Preferred shares – complex, but attractive dividends ZPR vs CPD vs HPR (Managed) excluding dividends • Illiquid and complicated-difficult to buy and sell • Interest rate sensitive • Case for Preferred ETFs

22. Examples of Preferred Share ETFs • Managed HPR .55% MER 3.9% Yield • Cdn Preferred Share Index CPD .51% 4.8% • 5 year Laddered Rate Resets ZPR .50% 3.9% • Note: These are NOT recommendations

23. The case for Short Term Bonds (1)34 years of declining interest rates and a flat yield curve

24. The case for Short Term Bonds (2)

25. 2 Year/10 Year US Treasury SpreadAre you getting paid enough for taking more risk ?

26. Examples of Bond ETFs • 5 year laddered corporate RBO .28% MER 2.7% Yield • Managed Corporate bond HAB .50% 3.2% • Canadian Short term bond index XSB .09% 2.4% • Note: These are NOT recommendations

27. Bond ETFs: HAB (managed) RBO (laddered)XSB (index)

28. Your pension • The capital value of your pension is equal to your annual pension income before tax X the number of years you expect to receive it • Federal pensioners have a different risk profile than those who do not have an indexed, guaranteed, defined benefit pension. • How much risk do you feel comfortable with ?

29. Quiz True or False • 1. Preferred shares pay tax advantaged dividends compared to bonds or GICs • 2. Interest rates have been declining since 1983 but have recently started to increase • 3. Over half of the Ottawa house price appreciation can be attributed to the decline in interest rates since 1983 • 4. The ten year bond yield is not much higher than the 2 year bond yield

30. 6. Constructing your portfolio for tax and cost efficiency

31. Focus on income growth rather than capital growth • Most retirees want income and principal protection • Portfolio Models available from Wealth Management companies focus on building assets rather than income. • In taxable accounts, tax optimization plays a key role in asset selection and location. • These portfolios are optimized for $46,000 - $75,000 taxable income, & some taxable investments.

32. What to hold first in your RSP or RIF • Interest income • Taxed the same upon withdrawal in registered or non registered • Income can accumulate untaxed until withdrawal • US Dividends • No US with holding tax in a RSP or RIF • Taxed at highest marginal rate outside registered plans

33. What to hold in your TFSA • Canadian dividend payers • Get your dividend income totally tax free • Get US$ dividends from co-listed Canadian companies tax free (banks, pipelines, infrastructure companies) by holding the US listed version • REITs • Complicated payout structure and tax consequences eliminated • Infrastructure companies • Complicated payout structure and tax consequences eliminated

34. What to hold in your non registered accounts • Capital gains including US and International Equities • Focus on companies or ETFs that pay little if any dividends, eg Berkshire Hathaway • Canadian Dividend payers once your TFSA is maxed out • If other options, do not hold dividend payers in your RIF • Return of Capital payers (some REITs, Infrastructure companies)

35. Tax Efficiency Ideas • Donate appreciated stocks or ETFs • Donations of stocks with capital gains to registered charities incur no capital gains tax • Donor receives donation credit equal to full value of the shares • Determine which investment has highest after tax income in your taxable accounts • After tax proceeds (depends on income level) from: • Capital Gains = 73-90% • Dividends = 59-107%

36. Example of Capital Gains for Tax Efficient IncomeBRK.A (0% Div) versus VOO (1.7% Div)

37. Where to get investment advice • Most big fee based advisers require a minimum of $500,000 investible assets. • Independents will handle $150,000 accounts • Fees are about 1% +- per year, depending on account size • Near fiduciary responsibility

38. Alternative investment management solutions • BMO Smartfolio & other major banks’ services • Robo Advisers • Canadian Couch Potato blog • Vanguard Asset Allocation ETFs • Online Discount Brokerages • Friendly (?) bank branch

39. BMO SmartfolioFive portfolios, 20% discount for NAFR Ottawa • Capital Preservation • Income • Balanced • Long Term Growth • Equity Growth • Fees: • Mgmt .70% (or less) - 20% • ETF MERs .20 - .35% • Total .76 - .91 % (or less)

40. Vanguard & I Shares Asset Allocation ETFsGlobal stock and bond diversification with one ETF • Vanguard: • VGRO 80% stocks, 20% bonds • VBAL 60% stocks, 40% bonds • VCNS 40% bonds, 60% stocks • MER .22% • I Shares: • XGRO 80% stocks, 20% bonds • XBAL 60% stocks, 40% bonds • MER .18%

41. Vanguard Asset Allocation ETFs

42. The need to sleep at night • Be comfortable with your risk level – don’t overestimate tolerance for loss • Could you really live with a decline of 30% or more of your capital? It happens – 1987, 2000-2002, 2007-2008 • If you need the money within 5 years, do not invest in stocks and medium & long term fixed income • If what you want is income, design a portfolio that generates the income you need and don’t worry as much about valuation

43. Model Portfolio 1 – Moderate RiskWeighted average distribution 2.835%

44. Model Portfolio 2 – US SnowbirdWeighted average distribution 2.965%

45. Model Portfolio 3 – Conservative RiskWeighted average distribution 2.675%

46. How to implement this strategy • 1. Develop your personal table of investments and ETFs • 2. Open an Online Brokerage account through your bank. • 3. Transfer funds or investments “In Kind” into your account • 4. If needed, sell your “In Kind” investments to generate cash • 5. Use limit orders to gradually begin buying your ETFs. Buy no more than half of each investment at one time. Take your time. • 6. Once your portfolio is constructed, rebalance once a year. • 7. Relax and ignore the stock markets.

47. Quiz True or False • 1. Tax optimization is a key consideration of where you hold different types of assets. • 2. Interest income should be first held in RSP/RIF accounts • 3. Dividend and REIT income should first be held in TFSA accounts • 4. Capital gains should be held in non registered (taxable) accounts • 5. Fee based advisors can provide unconflicted advice and minimize other investing fees