This week’s video is not a regular stock pick. Through my latest webinars and reading through comments I received, I realised that retirees are pretty much left by themselves. There are plenty of content about building your nest egg, but there are very few tips on what to do once you retire. In this video, I go through 4 Mistakes Retirees Must Avoid to be able to live from their investments their entire retiree life.
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00:00 Mike Heroux: Hey, fellow investors. This is Mike Heroux from Dividend Stocks Rocks. I hope you’re doing well today. I’m doing something a little bit different this week. I wanna discuss four mistakes all retirees must avoid in regard to their investment portfolio. We often discuss how to build your nest egg, what are the most interesting dividend growth stocks and so on, but we rarely put that much attention once you have stopped working and now you have this huge nest egg that you have to manage, you have to manage your portfolio but you don’t necessarily know what to do with it, and then how to withdraw your money from that portfolio. And it basically creates lots of anxiety because you don’t wanna lose that money, you worked so hard to save money throughout all those years, that the last thing you wanna see is to lose 20%, 30%, 40% of your portfolio over the span of three or four months, right?
01:04 MH: So, the first mistake that you must avoid if you are retired is to avoid to play safe. Actually, it’s okay to play safe but don’t put all your money into government bonds or GICs, for example, if you’re 60 or 65 or even 70. The thing is, I understand you don’t wanna lose any money and you wanna make sure that this money keeps growing over time. But the thing is, you’re still young, unless you’re 90, then maybe you can start to think about going a little bit safer, but chances are that your life expectancy will be between 85 to 90 and several of us will probably live until 95. So if you retire at 60 or 65, or even 70 you’ll probably have like 20-25 years in the stock market, so if you wanna play safe too much, if you wanna put like 70% or 80% of your investment into bonds or safer investment, you might lose lots of opportunity on the stock market, you might suffer from investing in stuff that are not too liquid and you may also be affected by inflation.
02:24 MH: The second mistake that you must avoid is to ignore inflation. I know for the past decade inflation rate has been probably like less than 2%. So you’re thinking, “Well, my budget doesn’t move that much if the inflation rate is below 2, right?” But the thing is, that’s the consumer price index calculation, those are based on stats on the basket of goods that the government tracks in your country. So, what happen is, if they consider that you should allow, I don’t know, like 20% of your budget into your car or into your household, and in fact, you’re living in an apartment and you rather enjoy more travelling and more restaurant and more food, well, you’re not following the same inflation rate that is being calculated by your government.
03:14 MH: So in other words, if you spent a lot of the money on food, for example, and gasoline over the past 10 years, the inflation rate has been a lot more than 2%. So you must not ignore that part. Even more important, the inflation even at 2% or 3% will eat up a good part of your capital or your budget 25 years down the road. So if you’re going to leave for 20-25 years, chances are that if you need $50,000 today, at the end, towards the end of your living, you’ll need between $75,000-$80,000. So if your portfolio is not able to keep up with inflation, then you’re going to have a big problem for the last 10 years that you’re gonna live, you may even outlive your portfolio.
04:02 MH: Third mistake to avoid is to chase yield. ‘Cause another reflex I found with retirees is investors are looking to not touch other capital because if they have like $800,000 invested, they don’t wanna see that amount being touched and they just wanna live off the income so they wanna live off interest and they wanna live off dividend. So, their solution is to pick companies paying 6%, 7%, 8% yield, even 10% yield and under that they would completely ignore companies paying 3% or 4% yield.
04:36 MH: The problem is, a lot of investors think that dividend payments are safe, but they’re not. It’s just based on the goodwill of the company to share a part of their wealth, part of their cash flow with their shareholders. So if a dividend yield is very high, it’s mostly because the stock price is down, meaning that investors are not very tempted by this stock, there’s not just strong demand because they don’t think that there’s enough growth vector, they don’t think that there’s enough potential, or they think that’s something is sketchy with the company and this is why there is a high-yield. If not, what is the reason for a company to pay 8% yield on their stock when the interest rates are so low, right?
05:22 MH: So, consider this, and if you wanna avoid dividend cuts, make sure that the companies that are holding your portfolio keeps increasing their dividend year after year. If they don’t, if they keep it stable, first, your dividend payment will get eaten alive by inflation, so it’s like a dividend cut in disguise, which I’ve mentioned in my previous videos. And the second thing is, no dividend growth is one step closer to a dividend cut. So, if the company is not able to increase their payment at one point in time, if they hit another bump in the road, they might as well just cut their dividend to save the business, right? So they will always put the business first and then your dividend, your revenue second.
06:08 MH: And finally, the last mistake that you must avoid is to invest too much of your money into the same sector. I know that Canadian love Canadian banks and REITs and telecoms, and they are tempted to invest like 30%, 40% of their portfolio in a single sector. But keep in mind that there are no sectors that are completely shielded from the recession or from a market bubble. So, think of what happened during the market bubble, the techno bubble in 2000, 2001 and then think of what happened in the financial crisis in 2008, 2009 and then think about what happened when the oil barrel dropped between 2014 and 2016. Those companies, they have seen their share drop, some of them have cut their dividend. So, this is a very, very bad timing for a retiree if you have 40% of your investment invested in the same sector, then you’re gonna get hit seriously bad.
07:12 MH: So, you wanna make sure that you don’t put more than 20% of your portfolio into a single sector and even if you reach 20%-25% make sure that companies inside that sector individually are not affected by the same metrics. For example, if you’re looking at REITs, make sure that you have industrial or warehouse REITs on top of having retail or offices or home apartment REITs. Those will likely be affected by the same thing, but they will not exactly react the same way. So, your warehouse and industrial might do very well while retails might not and so on.
07:53 MH: I hope that you have enjoyed this video. It’s a little bit longer than usual. If you want more information, I’ve hosted a webinar a few months ago about those four mistakes. I’m giving a lot more information. You can subscribe to watch the replay at the bottom of this page, look at the comment. I’ll put the link into it, and don’t forget to head over my blog thedividendguyblog.com. And make sure that you register to my newsletter to see more videos like this one. So, happy investing and make sure you don’t fall into those traps. Cheers.
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