PARTICIPANTS
Éric Hallé
Guest Host, Eastern Canada Regional Vice President
David De Pastena
Vice President of Portfolio Solutions
Eric Hallé: You're listening to On the Money with Dynamic Funds, a podcast series that gives you access to some of the most seasoned portfolio managers in active management, as well as thought leaders in the field of finance. During our meetings, we ask our guests pertinent questions, to get their perspective on the current economic climate, and their advice on how to deal with it. Welcome to our On the Money podcast.
My name is Eric Hallé, Regional Vice-President, Eastern Canada for Dynamic Funds, and I host the French version of the series. Today, we're going to explore the challenges investors can face as they approach retirement. Retirement can be an exciting new chapter in life, but it also comes with its own set of unique financial challenges. With the help of our guests, we'll delve into topics such as managing risk, maximizing retirement income, and navigating market fluctuations.
To help us navigate this critical phase of your financial journey, we are joined by Mr. David De Pastena. David has over 20 years' experience advising clients and managing institutional assets. Over the past nine years, his focus has been on working one-on-one with over 500 financial advisors, helping them systematize their investment processes. He also has in-depth knowledge of portfolio composition and specialized investments.
Mr. De Pastena holds the following designations: CFA, CMT, CAIA, CIM, and FCSI. Hello David.
David De Pastena: Hello Eric.
Eric: David, no secrets here. The last few years have been trying for everyone, but especially for those approaching retirement. Could you tell us more about the consequences of market volatility for retirees?
David: Eric, that's a very good question. We often talk about retirees in our industry. It's quite an important topic. You mentioned early retirees. If we take a step back and look at it, we've already chatted several times on the subject of the year 2022. It was a pretty tough year for everyone, but I want to focus on early retirees. What was the impact for them in a balanced example portfolio?
If we look at a balanced portfolio in 2022, in the averages, we can say, it lost -10, -15%. If we look at -15% more or less affected in constant. If we look at an early retiree who is five years from retirement, we see a loss like the average in a balanced portfolio, it may well be that their retirement is extended to three, four, or even five years in certain situations.
When we look at a portfolio of early retirees, I think there's a way of managing the risks accordingly to make sure that people don't have to extend their retirement. For example, you don't want to tell someone that they've been in the business for 35 years, that you had planned to retire at 65, but now you have to plan to retire at almost 70.
Eric: David mentioned extending retirement by five years. I think that's going to pick up a lot of people. Could you talk about the different strategies that could be implemented five years before retirement?
David: Five years is a round number, obviously. We must never forget that the window risk time where there are significant risks, is five years before retirement and five years at the beginning of our disbursement phase. You asked me, are there any strategies we could put in place to reduce risk, and possibly not be forced to extend our retirement. One thing you have to realize is that retirement isn't something you plan five years before you retire, it's something you plan long before that.
Because if we put in a growth portfolio for example five years before retirement, plus the growth portfolio there, suffering a loss like last year will obviously prolong our retirement. You have to build the type of volatility. I know there are people out there who say, "Yes, I want to increase my portfolio returns to get to retirement." To do that, you always have to consider that it's like going to the casino for a little while; you take the risk that maybe it's going to be a bad year. Don't forget that markets in general are becoming increasingly volatile, and more volatile more often.
What I'm proposing is that, in certain areas where it's relevant, we put more weight on gas to speed up the pace of our operations. I'm not even proposing the opposite, but something different. Maybe I'm suggesting investing in an income-generating portfolio already, because an income-generating portfolio, like a paycheck, isn't just for retirees. Pre-retirees can do that too. Then there are certain factors that reduce risk. You plug in the income-generating portfolio. A portfolio that generates 5% or 6%, depending on your situation, or even less. Then we reinvest the dividends from the distributions in that portfolio. This strategy can reduce volatility, which is an advantage for pre-retirees.
Eric: David, as I understand it, for many years when I was working with a financial advisor, I was in an accumulation mode, I had a certain portfolio in place, I was making contributions on a regular basis. Now, maybe I should rethink how my portfolio is structured. What would be the differences between portfolios and income that are perhaps intended for people who are pre-retired versus retirees?
David: They don't necessarily have to be different. The difference, let's take a simple example, you invest in a portfolio that generates 5% income. We'll take round numbers, we have 1 million, and we have a portfolio that generates dividends, capital gains, and several types of fixed income as well. It generates 50,000 out of 1 million. Then, we can take a portfolio, the same portfolio with the same distribution that generates the same income for a retiree and pre-retiree, the only difference is that a retiree will take this paycheque, then will put it in their card account, then will spend it. That's $50,000 a year.
What can an early retiree do? He can reinvest that $50,000, then buy other units, either their stock, or their mutual fund, or their ETF, to buy more units, because don't forget, when we buy units, we're buying more of the future hand, more future income, because all products, all stocks, funds, ETFs, no matter how you invest, it pays according to the number of units. When we reinvest our paycheque, we don't need to, because we're pre-retired, but we buy more units.
This means that when we arrive five years later, our potential income has increased. We have more income from our capital. So we're setting things up well before retirement, even five years before retirement. These portfolios are less volatile. We don't need to do much when we retire, we just need to change distribution, to reinvest, to pay as a paycheck. If there are advantages, there are pros and cons in life I think there's a strategy worth looking at, to say, "Maybe, I'll buy a paycheck today that has less volatility, but we'll reinvest those distributions there or those dividends there and we'll increase our future income because we're buying units."
Éric: Let me clarify that, David. If I understand correctly, if I already had a portfolio that had an income focus before retirement, when I retire, I don't necessarily have to make big changes to my portfolio. I'll be able to keep the investments I've known for a long time. Speaking of that portfolio, I'd be curious to know your opinion in terms of, what's the possible impact of inflation on an income portfolio.
David: That's a very good question. Especially these days, we're seeing a higher inflation rate than we've had in the past obviously after the Covid for a number of reasons. The real reason you always have to think about, inflation, is a number that's given by the government, that's mentioned in the economy. You always have to think about how you can spend your money.
If we look at the example, and I've already talked about this with you, Éric, we're looking at an inflation rate of around 4.5, but if we look at it after 10 years, if we continue with this inflation, I have no idea if it's going to continue, but if it continues for 10 years, as we had in the 70s when the inflation rate was quite high, our quality of life will drop by no less than 40%. This means we have to reduce our quality of life if our income is fixed.
There are several ways of managing this that we could discuss. Everyone has an opinion on this. I'll tell you one thing, if we look at companies that have a nice franchise, they have a pretty big demand for their products, let's say companies that the world loves. People like it, buying their products. I can name several examples.
These are the kind of companies that don't really have trouble raising their prices in the marketplace. People will still buy because it's a good product, a good service. So there's everything this company represents regarding where we are regarding their value. If we look at them, I call them the kings of categories. There are many industries. If we invest in this kind of company, the category kings who pay a dividend, for example, pay a dividend.
Every year, they increase their dividend because their revenues are growing, and then their profit margin stays about the same. These are good examples of a type of investment that could move with inflation, because these companies, obviously, their cost goes up, but they have so much demand for one of their products that they can pass that cost on to consumers. If these types of companies pay a dividend and then pass that increase on to the shareholders, for example, they'll increase the dividend and then keep up with inflation as much as possible. All this to say that if we were to invest in the kings of the categories that return capital to investors, they pass on all the profits or not all, but the profits to investors, they are able, perhaps in some way with this investment, to beat inflation, because our income increases, because we receive dividends.
Éric: Thanks for the information, David. If I understand correctly when we talk about category killers, we can show up at the grocery store, we can show up in certain stores, or are we used to shopping and watching prices rise? I don't think it's a surprise to anyone, but I think it's pretty [unintelligible 00:11:15] if we're able to align ourselves or our investments with some of these companies, they're able to pass on inflation or cost increases to their customers, we can take advantage of that. We can counter some of that inflation. As usual, your comments are always appreciated. Thank you very much for your time today David.
David: Thank you Eric for the invitation.
Éric: As evidenced by our motto "Invest in good advice", we encourage investors to team up with a qualified advisor. Thank you for joining us. Have a great day and see you next time.
Speaker: You've just listened to another "On the Money" podcast from Dynamic Funds. To find out more about Dynamic and its full range of funds, contact your financial advisor or visit our website at Dynamic.ca.
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