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Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.

Topic: Wealth Management

Avoid misleading model retirement investment portfolios to make sure you buy the best stocks for you

Be very skeptical of the model retirement investment portfolios put out by some brokers. The many hypothetical and theoretical strategies they use rarely translate into real-world returns

Some of the most misleading ads from brokers you’ll see concern so-called “model portfolios.” These are presented as examples of the returns you could realize if you were to invest in a portfolio made up of that brokerage’s recommendations. All too many brokers use these model portfolios to build their businesses.

When looking at model retirement investment portfolios, you need to recognize what investments are worth adding to your portfolio, but at the same time, watching out for misleading model portfolios from brokers.

Invest in your Financial Future for FREE

Learn everything you need to know in '9 Secrets of Successful Wealth Management' for FREE from The Successful Investor.

Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.

Remember TFSA and RRSP accounts in your model retirement investment portfolios

Your TFSA can generally hold the same investments as an RRSP. This includes cash, mutual funds, publicly traded stocks, GICs and bonds.

Contributions into a TFSA are not tax deductible, as they are with an RRSP. However, withdrawals from a TFSA are not taxed. This makes the TFSA a good vehicle for more short-term savings goals.

If funds are limited, you may need to choose between RRSP and TFSA contributions. RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income—such as when you’re in school, beginning your career or between jobs—TFSAs may be the better choice.

Investing in a TFSA in low income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, then begin making taxable RRSP withdrawals.

Be aware that many model retirement investment portfolios focus on simulated or hypothetical performances

Hypothetical model-portfolios have a great advantage over real-world portfolios. For one thing, it’s safe to manage them much more aggressively than when you are playing with real money. This hyper-aggressive management gives the hypothetical account great returns when it succeeds. It runs up much steeper losses when it fails, of course. Still, the losses are only hypothetical, and easily disposed of.

When the losses reach embarrassing levels, the broker can simply forget the old hypothetical account—“take it out back and shoot it,” as brokers say. They can then start a new hypothetical account that may do better.

Brokers may start up several hypothetical portfolio accounts, and eliminate all but the top performers over a period of years until they are left with just one hypothetical account that makes them look brilliant. Mutual-fund companies do the same. Fund company employees refer to the start-ups as “incubator funds.” These funds have little money in them, so it’s inexpensive to treat them in such a way that they build a great record. It’s even easier for a broker to build a top performance record for a hypothetical account where there’s no money involved.

Unlike a real-money account, a hypothetical account can legally profit from front-running. When a broker’s research department plans to issue a strong buy recommendation and a thick research report in a rising market, it will generally add the stock to the model portfolio and issue the report simultaneously. That means the model portfolio will “buy” the stock instantly, but the firm’s brokers will need time to scan the report and call their clients. (They generally start by calling their institutional clients, by the way, and only then go on to individual accounts.)

Some model portfolios have an even more blatant advantage over the real world: buys and sells in the portfolio are calculated as if they took place at the closing price of the previous day. This alone gives you the magic wand you need to claim extraordinary results without any investment analysis.

Keep expectations from model retirement investment portfolios low so you’ll be prepared for unforeseeable problems

As for the return you expect from your retirement investing, it’s best to aim low.

Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. However, aim lower in your retirement planning—6.5% a year, say—to allow for unforeseeable problems and setbacks.

Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can turn out just as well.

One thing we encourage all investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.

Use our three-part Successful Investor approach to build realistic model retirement investment portfolios

Remember to follow our three-part Successful Investor philosophy with your overall portfolio:

  1. Invest mainly in well-established, dividend-paying companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

What is the most outlandish experience you have seen involving hypothetical results from a broker’s model portfolio?

How do you maintain your retirement investment portfolio without falling for false results from brokers?


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