Monthly Archives: August 2015

Stop Doing #4: Stop Picking Active Money Managers

Steve Lowrie

By Steve Lowrie, Lowrie Financial 

Special to the Financial Independence Hub

Last month, we explored Jim Collins’ “Good to Great” suggestion that we would be well served by having a STOP-Doing List to pair with our To-Do Lists.

For starters, we advised investors to STOP reacting to market noise and start heeding the long-term evidence. Another worthy addition to your financial STOP-Doing List is to stop picking active money managers (or hiring someone else to try to do this for you).

As a reminder, my definition of an active money manager is someone who is engaging in some form of forecasting, whether it be picking stocks, timing markets or a combination of both.

Predicting the Unknowable
In our personal and financial lives alike, we worry about so many things that we cannot control. One of the greatest of these things is the future. When speaking with investors about the dangers of trying to accurately forecast the market’s or a stock’s pricing moves, many can accept that it’s difficult to succeed on their own. But the next leap is harder to make. Most investors want to believe that, while they may not personally have the time, energy or expertise to beat the market, they can still turn to well-heeled professional managers to do the forecasting for them.

Financial Services Attracts the Best and Brightest

In most pursuits in life, more practice and more experience makes perfect. So if someone is really good at some occupation or trade, it’s a safe assumption to assume he or she will continue to be good at it in the future.

However, active money management is different. Continue Reading…

Weekly Wrap: The Market’s near-death experience, magazine reverse indicators, the options of frugality

screen shot 2015-08-27 at 9.14.03 amThe 1,000+ point drop in the Dow Jones Industrial Average Monday morning will long be remembered by investors but, unless you sold everything at market prices in a panic that morning, those that just sat it out (or meditated, as we suggested that morning) were fine by week’s end. You can find a nice recap of the market’s near-death experience in this WSJ article, complete with charts:   U.S. stock swings don’t shake investors.

Still, the scary start to the week was enough for one magazine to create the cover shown to the left. In what some bulls interpreted as a “reverse indicator,” the current cover story of  Bloomberg Businessweek features not just one but several bears on its cover.

In a commentary on that phenomenon, Business Insider’s Myles Udland noted that the market often does the opposite of what magazine cover indicators may be suggesting, which would make a bear cover bullish. Remember, Business Week famously proclaimed The Death of Equities in a cover in 1979, triggering a multi-year bull run.

China & other submerging markets

Mid-week rallies aside, one reason for the continued bearishness is China and other Emerging(“Submerging?”) Markets. One of Bloomberg BusinessWeek’s accompanying stories was entitled Will the Next Recession be Made in China? It noted that after Monday morning’s 1,000 point-plus drop, all markets seemed to be correlated: that “the world suddenly seemed like a very small place.” Continue Reading…

Ottawa starts consultations on voluntary CPP

Jean-Pierre Laporte

By Jean-Pierre Laporte

Special to the Financial Independence Hub

The Federal Government has started consultations on its newest retirement savings concept: allowing individuals to make voluntary contributions to the Canada Pension Plan.

While details are sketchy, it would appear that basic agreed-upon concepts mean contributions would be voluntary and that employers would not be forced to make or match contributions.

While the Federal Government made it clear that it would not let the Canada Revenue Agency be used by the Ontario Retirement Pension Plan proposed by Premier (Kathleen) Wynne, presumably a voluntary CPP would allow use of the existing machinery to collect these new savings.

The core design issue rests with the form of benefit that this voluntary plan would offer: defined benefit or defined contribution?

If the goal here is to create a supplement to the current CPP benefit, presumably contributions would have to be locked in, and without member investment directions.

The mechanism to convert the fixed defined contributions coming into the supplemental CPP account into defined benefits would have to rely on partial deferred annuities, or self-annuitization.

This would distinguish the Supplemental CPP from an RRSP or TFSA.

No fiduciary responsibilities for employers

Continue Reading…

Investor Toolkit: The right way to calculate your retirement income

Patrick McKeough,

By Patrick McKeough,

Special to the Financial Independence Hub

Tip of the week: “When you work out a plan for your retirement, make sure that you aren’t basing your future income on over-optimistic calculations that will end up leaving you short.”

Every year as RRSP season heats up, many investors are confident they are taking concrete steps toward a secure retirement. But are those steps based on realistic calculations?

Let’s say you’re 50 and you want to retire at 65. You have $200,000 in your RRSP, and you expect to add $15,000 in each of the next 15 years. To determine if this is enough to retire on, you need to make assumptions about investment returns and income needs.

• What you can expect

Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. For purposes of this retirement plan, we’ll assume a 6% yearly return, and disregard inflation. Continue Reading…

Are guaranteed investments worth the premium?

Editor’s note: the piece below was written a few weeks before the market chaos of last Friday and this Monday, which only makes it  that much more relevant now. Even more prescient was a B&E guest post on August 13th entitled What you can do about the upcoming stock market crash.

Marie Engen, Boomer & Echo

By Marie Engen, Boomer & Echo

Special to the Financial Independence Hub

The stock markets have shown some volatility this summer and this has concerned some investors who have been riding the latest “full steam ahead” bull market and think a market correction is imminent.

These concerns have increased interest in investment products that have a principal guarantee. But are they worth it? These guarantees come with a steep cost.

Market-linked GICs

Market-linked GICs, also called equity-linked GICs, are hybrid products that proclaim to capitalize on the growth potential of the stock market without risking your original investment. The return is derived from gains in the equity markets over the term of the GIC – usually 3 or 5 years.

The portion of the return derived from the equity markets depends on various components:

  • The benchmark used to calculate the return e.g. S&P/TSX Bank Index or Capped Utility Index, Nikkei 225 Index
  • Pre-set maximum return e.g. 6% for a 3-year term
  • Dividends are not included in the calculations

Interest income is paid on maturity. If the equity portion produces no return, you receive no interest at all. Pay particular attention to how the equity portion of the return is calculated.

Like conventional GICs they are guaranteed by the Canada Deposit Insurance Corporation to the maximum allowable limits and are available for purchase in registered and non-registered vehicles.

Segregated Funds

 segregated fund is essentially an insurance product based on an underlying mutual fund that is offered by insurance companies. Under the insurance contract – usually for 10 years – part, or all, of the original principal amount may be guaranteed. In some cases there is the ability to reset the guarantee at a higher amount in future years. Continue Reading…