"This is not what I meant when I said I wanted to go to the gym to check out hotties."

“This is not what I meant when I said I wanted to go to the gym to check out hotties.” — The guy in the back

Now that my parents are getting to the point where they have more grey hairs than brown, they’ve started making some portfolio adjustments. My Dad’s day job is managing his real estate, and so he’s begun the slow process of selling off some of his property. My Mom has cut back to only working 2-3 days per week, and yet still doesn’t cook me dinner and ship it to Korea. Don’t worry, I’ll get her back at Christmas.

But the biggest change, at least for the sake of this blog post, is how they’re repositioning their portfolio. Now that the market is flirting with yet another record high, they’re taking some profits off the table and buying bonds, REITs, and preferred shares instead. Retirement is less about risk and more about income, so they’re making that switch. Plus, ol’ Nelly has to protect his inheritance.


And so I started going about making that change for them, and discovered a few things.

First, it’s hard to pick individual preferred shares. Many of the Canadian usual suspects are yielding less than 5%, and face rate resets over the next couple years that will push the yield down even further, into the high 3 to low 4% range. That’s not very exciting, especially since I could easily put together a pretty high quality portfolio of boring stocks that yields somewhere around 5-6%. There’s room for those kinds of equities in a retiree’s portfolio, but I’m of the belief that the majority should be in bonds. Say a 60-40 split, with about 20% of the portfolio in equities with growth potential.

So I decided on a pretty simple little income portfolio for them. It goes like this:

  • 25% Horizon Active High Yield Bond ETF (TSX:HYI)(MER: 0.61%)*
  • 25% iShares Bond Index Fund ETF (TSX:XBB)(MER: 0.33%)
  • 25% Claymore Preferred Share Index (TSX:CPD)(MER: 0.49%)
  • 25% iShares REIT Index Fund (TSX:XRE)(MER: 0.60%)

*HYI is actively managed, with the majority of its holdings in the U.S.

The fees are a little high on the first and last picks, but you get the picture. This portfolio will yield right around 5% annually, which is about as good as you’re going to do in this market. I might add a couple of other asset classes (like U.S. municipal bonds), but for the most part that’s gonna be the basis of their fixed income portfolio.

You might be thinking such things as “Nelson, why are you doing things this way? Are you finally coming over to the indexing dark side?” Don’t worry, little one. I’m still as active of a stock market guy as you can get. I’m not about to dump everything and buy the market, especially at an all-time high.

But when it comes to fixed income, I’m more beaten than a rented mule. I could probably build them a half decent portfolio, but I just can’t be bothered.

Now that’s not to say they won’t buy individual stocks. They still own Rogers Sugar, which I think is one of the most underrated businesses in Canada. They also own a smattering of preferred shares and REITs I find to have good value. But going forward, the only individual names I’ll be buying will happen when I reinvest the dividends. The bulk of the rest will be in ETFs.

Let’s assume I have $100,000 in a fixed income portfolio. I can buy 20 preferred shares/bonds/REITs and probably get a 5% yield pretty easily. But is it really worth my time to monitor that kind of portfolio for only $500 per year in fees? I’m not sure it is, especially in the world of quasi-fixed income. I’d rather just set it and forget it.

There’s not only the opportunity cost of my time, there’s also the opportunity cost for the capital. If I were to slowly take a few months to deploy the $100,000, I’d be missing out on a couple thousand bucks in interest. Unless interest rates spike soon, it makes much more sense to put that money to work, collect dividends, and then sell small parts of a position to take a position in an individual stock.

I probably have the time to manage a fixed income portfolio. I’m not sure I have the expertise. Is having my folks pay 0.5% on their assets worth it to me so I don’t have to learn? I think so. By the time you factor in my time, the answer is pretty clear. I think the ETFs are the better option. For that part of your portfolio, I’d suggest you do the same.

Tell everyone, yo!