The PENSION STRATEGY THE ULTIMATE GUIDE TO PERSONAL INVESTING This page intentionally left blank The PENSION STRATEGY THE ULTIMATE GUIDE TO PERSONAL INVESTING ANDREW SPRINGETT, CFP INSOMNIAC PRESS Copyright © 2004 by Andrew Springett All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, without the prior written permission of the publisher or, in. case of photocopying or other repro- graphic copying, a license from Access Copyright, 1 Yonge Street, Suite 1900, Toronto, Ontario, Canada, M5E 1E5. The information contained herein is considered accurate at the time of printing. CIBC and CIBC World Markets Inc. reserve the right to change any of it without prior notice. It is for general information purposes only. Clients are advised to seek advice regarding their particular circumstances from their personal tax advisor. The comments and opinions expressed herein are the result of work done by Andrew Springett. They may differ from the opinions of CIBC World Markets Research Department and should not be considered representative of CIBC World Markets Inc/s beliefs, opinions or recommendations. Interior design by Marijke Friesen Library and Archives Canada Cataloguing in Publication Springett, Andrew, 1973- The pension strategy : the ultimate guide to personal investing / Andrew Springett. Previously published under title: The pension strategy for Canadians. Includes index. ISBN 1-894663-89-6 1. Retirement income—Canada—Planning. 2. Investments. I. Springett, Andrew, 1973- . Pension strategy for Canadians. II. Title. HG179.S5325 2005 332.024'014'0971 C2004-906910-1 Printed and bound in Canada Insomniac Press 192 Spadina Avenue, Suite 403 Toronto, Ontario, Canada, M5T 2C2 www.insomniacpress.com In memory of Gordon Springett. This page intentionally left blank TABLE OF CONTENTS CHAPTER ONE My Quest for a Solution 1 CHAPTER Two What Is a Pension Plan? 19 CHAPTER THREE Modern Portfolio Theory 27 • The Efficient Frontier • A Note About Possibilities CHAPTER FOUR Risk 39 « Currency Risk • Interest Rate Risk • Inflation Risk • Manager (Specific) Risk • Market (Systematic) Risk • Measuring and Eliminating Risk • How Do the Great Pension Plans Measure Risk? CHAPTER FIVE Diversification 59 CHAPTER Six Aset Alocation 71 • Cash and Asset Allocation • Asset Allocation and Fixed-Income The Owner and the Leaner Government Bonds Certificates of Deposit Corporate Bonds Preferred Shares Foreign Bonds • Asset Allocation and Equities Inflation-Proofing Equities Why Do Equities Work? The Real Value of Companies • Asset Allocation and Real Estate • Absolute Return Investments and Asset Allocation CHAPTER SEVEN What Does the Ideal Pension Plan Look Like? 121 • Adjusting Asset Allocation to Your Risk Tolerance (Comfort Level) CHAPTER EIGHT Portfolio Rebalancing: The Art of Dynamic Asset Alocation 145 CHAPTER NINE Bringing Professional Help to Your Retirement Plan 155 • Working with an Investment Advisor CHAPTER TEN Geting Started 169 Appendix: A Note on Standard Deviation 179 Glosary 182 Index 18 Acknowledgements Thanks to my wife, Jessica, for her love and support during this project—it wouldn't have happened without you. A large number of people have contributed to my financial educa- tion over the years—thanks for taking the time. I'd like to thank Lome for taking a chance and giving a young guy his first job on Bay Street. My friends certainly deserve my thanks for all the years they've put up with listening to my ramblings and my parents Gordon and Judith deserve the greatest thanks for doing a great job. Special thanks to Michelle Bullard for sharing her writing expertise, and Mike O'Connor for bringing the project to fruition.