I need to have a liquid reserve to support my family for 6 months; money market, savings account, short term real return bonds; with time I’ll keep increasing the amount through regular contributions of 10% of income.It’s smart to have an emergency fund. The exact amount for the fund depends on how likely you are to lose your job and how long it would take to get a new job. I would say that 6 months of living expenses is toward the high end but may be quite sensible for your situation. A money market fund or a savings account makes sense. I’m not sure that real-return bonds have enough choices of maturities to allow you to limit yourself to just short-term bonds. Keep in mind that this fund is intended to deal with unexpected events and should not be invested in anything volatile.
RRSPs make sense, but may not be enough.You’re right that even if you make maximum RRSP contributions, your ultimate savings may not be enough to derive the income you want in retirement. If you are able to save more than this, then you should consider a TFSA as well.
I’m considering an asset allocation of 40% bonds, 60% equity (equally divided among Canadian, US and global).This is a fairly typical allocation for someone who is still at least a couple of decades from retirement. I’ve chosen an all-stock allocation for myself, but this isn’t for everyone. The important thing is whether you are able to keep your head during the next stock market downturn and keep rebalancing as necessary. Note that when stocks drop, rebalancing means buying more of the stock asset class that has dropped the most. You need to choose asset allocation percentages you can stick with when the media is screaming that stocks are dropping to zero.
I’m considering the following equity investments: no load index funds, blue chip for now; when market recovers, add small cap; use currency neutral for global, possibly limit “global” to “BRIC”, though R does not fire up my imagination.If you wish to use index mutual funds, TD’s e-Series are a good choice, although TD employees will do their best to steer you to their expensive funds. An alternative is broad index exchange-traded funds (ETFs) from iShares or Vanguard. I’m assuming that “blue chip” means a large-cap index. I prefer to own ETFs that cover a full range of company sizes, but this is more difficult in Canada than it is in the U.S. I don’t have the ability to predict when it would be best to jump into small-cap stocks; are you sure that you do? I have no opinion on which parts of the world will give the best returns. By going after the hot parts of the world you risk always buying high and selling low.
I’m considering funds of long-term / low-risk bonds for the time being; when stock market recovers - ?I find most bond mutual funds to be very expensive. TD e-Series has a low cost bond fund. In the ETF space, iShares has some low-cost bond funds. From your comment, it sounds like you may want to change the type of bonds you own or your percentage allocation to bonds when stock markets start rising. I don’t try to do this sort of thing myself. There are many investment firms that employ brilliant people who try to outsmart each other in this way. I see no upside in playing this game; I just stick to my asset allocation through thick and thin.
I plan to avoid gold – as an investment class it is too specialized.I avoid gold mainly because it has little inherent value relative to its price. Its industrial and jewelry uses don’t come close to justifying its current price. People buy it in the hope of selling it to someone else for more money. I’m not interested in a high-stakes game of hot potato.
I think the above should allow me to sleep well and still generate reasonable returns through thick and thin – I need 5% to retire. Whatever is left after annual costs and above investments can be invested in something riskier or spent on leisure and hobbies.I’m not sure what you mean by needing 5% to retire. Does this mean you need 5% investment returns to build up enough savings to retire, or maybe that you will need 5% returns after retiring to derive enough income? In any case, most advice these days is that you should count on withdrawing less than 4% of your pre-retirement savings each year to have a reasonable chance of having your savings last for the rest of your life.
If A.N. manages to build 6 months of emergency savings, maximize his RRSP contributions, avoid expensive forms of investing, and avoid panic selling or chasing hot investments, he will likely have a wealthier retirement than most Canadians.