Monthly Archives: December 2016

Simplifying Investing for Financial Independence

By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

As 2016 comes to a close, we thought we would look back financially to where we started this adventure, from January of 1991. The chart below shows the ascent of the S&P 500 Index over our 26 years of retirement.

On our retirement date of January 14, 1991, the S&P 500 index closed at 312.49. It has recently closed at 2262, making roughly an 8% annual gain plus a couple per cent counting dividends. Hard to imagine, right? With all of the market ups and downs, global turmoil, governments coming and going, businesses expanding and failing, and still producing roughly a 10% annual return.

But is this really a one-off period and not the norm? Continue Reading…

The two crucial success factors that often elude investors

There are two crucial success factors that often elude investors:  the ability to save consistently and the discipline to stick with a saving and investment plan over time.

Successful investing is a long-term proposition.  In the short run, financial markets are very unpredictable, gyrating to a complex and increasingly-interconnected information flow that changes by the second.  Sentiment and trendiness rule the short run, as markets oscillate around a more predictable long-term relationship between risk and reward.  As the great investor Benjamin Graham once said:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Furthermore, we believe most investors are confused about what it is that is difficult and what it is that is straightforward about investing.  Let’s start by looking at some essential yet straightforward steps for creating a sensible portfolio that should put you put you in a good position to achieve long-term investment success:

1.) Decide whether you’re going to do it yourself or use an advisor.  While it may seem obvious: you want to ensure that if you do choose to work with an advisor that he or she will act in your best interest.  In Canada, the vast majority of advisors are not required by law to work in your best interest – that doesn’t mean they won’t, but be aware – Robb Engen addressed this issue in a recent piece on Jonathan Chevreau’s Findependence Hub – Commission-based advice & suitability: a dangerous combination

2.) Decide how much risk to take.  Risk is most effectively assumed by exposing your portfolio to broad asset classes with different risk characteristics.  For example, stocks are riskier than bonds but that risk is usually rewarded with higher returns over the long run.   Your portfolio should be allocated to different asset classes so that it’s appropriate for your risk profile.  And we don’t just mean you take a questionnaire and allocate according to your score: your allocation really has to reflect your specific financial situation, taking into account both near and longer term goals.

3.) Pick what type of securities or funds in which to invest.  A sensible portfolio should be diversified effectively across geographies, industries and other dimensions of risk.

4.) Pick investment products that keep costs low. Compound interest is a modern miracle: costs work in the same way but against you, and the other side of that miracle is a curse.  For example, mutual fund fees in Canada are among the highest in the world, which can take a huge dent out of your nest egg over the long run.

5.) Trade only when necessary. Trading should be kept to a minimum and is really only necessary when a portfolio strays too far from its target allocation, you have new savings to invest / you need to withdraw funds, or your situation has changed by a magnitude that requires a new allocation.

So go create a low-cost diversified portfolio that suits your risk profile and trade when necessary to rebalance back to target:  it’s actually very straight forward.  There are wonderful products on the market for both do-it-yourselfers and those who want to work with advisors.  The merits of such an approach are evidenced in volumes of peer-reviewed academic literature, in the publicly available records of investment fund performance and anecdotally from scores of investors.

It all starts with saving

Unfortunately it’s easier said than done.

While the investing side as described above may, on the surface, seem fairly formulaic and mechanical, it doesn’t properly address two extremely important elements that are essential to long-term investing success.

The first may seem obvious but is not easy: saving. Without money to invest in the first place it’s hard to benefit from a long-term investment plan!  But saving is really hard.  It forces you to ask yourself some tough questions:

  • What do I need versus what do I want?
  • Can I live within my means?
  • Can I ignore what other people think is important and focus only on what is important for me and my family?
  • Am I comfortable with delaying gratification in order to save?
  • How much do I need to save to accomplish what I desire in life?  What do I desire in life?
  • What is worth sacrificing today so I can benefit later in life?

The second is not so obvious and is really difficult: discipline. Successful investing means that at times you’ll be fighting some very difficult impulses and emotions.  Again, you need to answer some difficult questions:

  • Am I prepared to buy an investment that has decreased in value dramatically?
  • Am I prepared to sell an investment that is skyrocketing, that everyone is talking about at cocktail parties and “getting rich” from?
  • Can I ignore the pundits and market commentators?
  • Can I stick with the plan even though my emotions tell me to do the exact opposite?

Now you might be saying sure, I won’t let my emotions get the better of me.  Believe us when we say it’s much more difficult in the heat of the moment to stick with the discipline that’s required.  Most investors, both amateur and professional, fall victim to psychological pitfalls and stray from their discipline precisely at the moment they need it most, usually around market peaks and troughs.

By all means, engage in an investment process to deliver long-term success. Do your research and take your time to set it up correctly but don’t forget about the really hard part: saving enough to allow you to benefit from investing and maintaining the discipline to reap the rewards over the long run.  If you feel you can’t avoid the psychological pitfalls alone, get some help!

Graham Bodel is the founder and director of a new fee-only financial planning and portfolio management firm based in Vancouver, BC., Chalten Fee-Only Advisors Ltd. This blog is republished with permission: the original ran on December 14th, here.



Shifting Trends: from Low Volatility to quality Dividend Growth








By Christopher Gannatti, WisdomTree Associate Director of Research

Special to the Financial Independence Hub

Over the period of about the last three years, the annualized returns of the S&P 500 Index have been nearly 12%. That is a strong number, and it shouldn’t be surprising that U.S. stocks are more expensive now than they were then.

Let’s discuss what has been driving these returns and analyze various factor strategies to shed light on their potential to continue this trend in returns going forward.

Multiple Expansion, Earnings Growth or Dividend Yield: what’s most Important?

By itself, an index’s trailing total return may not say much about its future return potential. Fortunately, we can model different drivers behind performance by deconstructing the three separate components of total return:

• Average Dividend Yield

Continue Reading…

The sad decline of Defined Benefit pension plans

Ryan Goldsman, author of Financial Myths

By Ryan Goldsman

Special to the Financial Independence Hub 

When times change but our pension options don’t, we are quick to point the finger. “You made a promise, now I’m going to hold you to it. Even though it will be paralyzing for you to keep this promise, that’s ok –  you will keep this promise.”

“Oh and by the way, the next generation is entitled to the same promise.”

It makes no sense, but last summer we’ve seen a few major employers — Canada Post and GM (General Motors) to name a few — go into the wee hours to get a deal done, both arguing over pension benefits. It’s been a major sticking point for a number of employers and their employees over the years and will only continue to increase in frequency.

The reality is the DB (Defined Benefit) Pension Plan — which was a very good idea a generation ago — is no longer readily offered to employees today. Effectively, gone are the days of the gold watch and the even more valuable promise of income for life: “You don’t have to worry, we’re your employer, we will worry for you.”

In the past, an employee gave the very large majority if not 100% of their working years to one employer; in return he or she was offered the benefit of income until death and it was the employer who would pay up if needed. It was a wonderful deal for employees who lived to an average age of under 70. Employers were also able to hire the best employees and make them this promise. It made sense. With contributions made over 30 working years and a payout not usually exceeding 10 or even 15 years in the worst case, employers had a fair amount of money in the employee pension plan, allowing everyone to sleep well at night.

Many pensions today underfunded

Continue Reading…

Tapping “Flow” to boost Creativity

flowcreativityLast year,  the Hub reviewed a classic (i.e. not recent) book called Flow, written by a University of Chicago professor, Mihaly Czikszentmihalyi. This time, we’re going to take a look at the same author’s followup book, Creativity, which bears the subtitle Flow and the Psychology of Discovery and Invention.

It’s a fascinating read for anyone who has fancied themselves an “artiste” or musician, but were never able to extract a living from their creativity. But of course, one bonus of achieving financial independence is that it’s never too late to cultivate one’s creativity. One of the author’s concluding points is that we should strive in various ways to boost our creativity, whether or not it leads to the world’s recognition of our talents. The concluding words are these:

“… what really matters, in the last account, is not whether your name has been attached to a recognized discovery, but whether you have lived a full and creative life.”

Much depends on what “domain” one chooses: there is a chapter on the domain of words: for writers, poets, novelists and those who are “vendors of words,” to use an expression often used by the British journalist and author Malcolm Muggeridge Continue Reading…