All posts by Financial Independence Hub

Financial planning should be a Parallel, not Serial, process

By Darren Coleman

Special to the Financial Independence Hub

In a serial circuit when one light bulb goes out, all the lights go out. Each light is wired to the next and all of them have to work for each one to work. In a parallel circuit all the lights are wired together but independently from each other, so when one light goes out, the other lights still stay on.

This concept is important and comes into play in my book ‘RECALCULATING – Find Financial Success and Never Feel Lost Again’. The book applies the analogy of driving to investing and financial planning. (See earlier Hub blog on the book).

I have spent almost a quarter of a century counseling clients about their money and assets, and often see people who believe their financial planning should look like a serial circuit. They think they must achieve one goal before moving on to the next. They have constructed an order or sequence that must be strictly followed for them to feel comfortable about achieving their plan.

This is the view Marvin and Jesse had when I met them. A successful, professional couple, they had young children and a list of goals. No. 1 on the list was that they wanted to be mortgage-free by age 45. They also wanted their kids to go to a private school, and vacations every year with the family. In addition, they wanted a comfortable retirement by their late fifties. They had great jobs, were disciplined savers, and figured they should be able to achieve all these goals. But they didn’t know how to put all the pieces together and make it happen.

I reviewed the situation to gain an understanding of their current state, and discovered that almost all their uncommitted cash flow went to pay down the mortgage. There were only token amounts being saved for their children’s education, family vacations, and retirement plans.

A couple that used serial financial planning

When I asked about this, they said paying down the mortgage as quickly as possible was the central assumption – the core pillar – of their financial planning. In short, this couple looked at all their desired destinations as if they were part of a serial circuit. Once they had paid off the mortgage, they would move on to the other plans.

I told them they could do this, but achieving that milestone of being mortgage-free by age 45 meant they could not put their children in private school, take annual holidays with the family, or make tax-advantaged contributions to their retirement plans. So, while they could be mortgage-free at an early age, they would not accomplish their other goals. And, of course, they couldn’t get the time back.

None of us can.

Shift to financial planning in parallel

I showed them that changing the picture from a serial circuit to a parallel circuit might be the answer. Continue Reading…

Debunking myths about Smart Beta and ETFs

By Jeff Weniger, CFA , WisdomTree Investments

Special to the Financial Independence Hub

This is part one of a four-part blog series addressing the attacks on smart beta and ETFs. Today we address the supposed academic consensus that the only recourse for investors frustrated with active management is to turn to market capitalization-weighted index funds.

“That’s the way it’s ‘always’ been done”

In much of our research we lay out our case that much of the impetus for trillions of dollars to continue tracking market capitalization-weighted indexes appears to be little more than “that’s the way it’s ‘always’ been done.”

In this blog series, we’ll address the most common lines of attack against smart beta and ETFs.

For clarity, our discussion of smart beta will refer to this excerpt from the Financial Times:

Smart beta strategies attempt to deliver a better risk and return trade-off than conventional market cap weighted indices by using alternative weighting schemes based on measures such as volatility or dividends.1

The truth is that the “active management versus passive market cap-weighted indexing” argument is a classic false dilemma. Continue Reading…

How Group Annuities can help employers protect Defined Benefit pensions

Source: Mercer Pension Health Index published October 2, 2017

By Brent Simmons, Sun Life Financial

Special to the Financial Independence Hub

Recently, employees and retirees of Sears were stunned to learn they may not receive all of their defined benefit (DB) pension when it declared bankruptcy. They learned their pension plan was underfunded and the company had requested that it be allowed to stop making the contributions required by Ontario laws. The plight of Sears employees and retirees has left many Canadians wondering if their DB pension plan is healthy and if their DB pension is safe.

The pension challenge

With a DB pension plan, a company promises their employees a pension for life and is responsible for paying the pension: whatever the cost ends up being. The problem is that low interest rates and choppy equity markets have made the funding level of many pension plans look like a roller roaster ride. This can be seen in the chart at the top of this blog.

Another challenge facing pension plans is that Canadians are living longer, meaning that pensions need to be paid for a longer time. A common rule of thumb is that one year of additional life expectancy at age 65 can increase the cost of the pension plan by 3% to 4%.

In a tough economy, the need to contribute to a pension plan can often come at a time when a company’s core business is also facing financial difficulties. If a company becomes bankrupt, then the company likely won’t be able to pay the contributions owed to the pension plan and employees may indeed face a shortfall in its pensions.

How Group Annuities protect their employees’ pensions 

The good news is that a growing number of Canadian companies are taking steps to protect their employees’ pensions. They are buying group annuities to transfer the financial risk of their pension plans to insurance companies, which are subject to strict regulations and must have funds on hand at all times to pay promised pensions. With a group annuity, an insurer assumes responsibility for providing the pensions to a company’s retirees in exchange for a fee, and the retirees continue to receive their promised pension.

Continue Reading…

How Millennials’ financial priorities differ from previous generations

By Gabby Revel

Special to the Financial Independence Hub

There is some truth and some fiction to the idea that millennials are not responsible with their finances. On the one hand, today’s youth is particularly adept at saving money and meeting their financial responsibilities on a monthly basis. However, millennials appear to have less foresight, as they’re not as interested in planning for their financial future as Generation Xers and Baby Boomers were.

Financial freedom

The most important element of a paycheck for millennials is the financial freedom it offers them. A study by Bank of America and Merrill Edge discovered that this generation is better at saving money compared to other generations, but what they choose to spend this money on differs greatly from older workers.

This same study discovered that 63% of millennials value financial freedom above all, meaning they set aside a certain amount of money to continue living their lifestyle of choice. This means planning for social trips or vacations, eating out at fancy brunch restaurants on Sundays and using Uber as one of their primary forms of transportation.

A survey by BMO Wealth Management found that 26% of millennials  —  ages 18 to 34 — believe “saving more” is their most important priority with finances. A further 25% value reducing and eliminating debt at the top of their list, while 20% want to invest effectively, 17% focus on budgeting and 5% believe in spending on personal needs or goals above all. All in all, millennials are reinventing the wheel in regards to where their finances should go, but they might pay the price moving forward.

Disregard for retirement

 A chunk of today’s youth has yet to begin planning for retirement, as they’re not thinking about what their needs will be in the future. Some believe Social Security (or in Canada CPP/OAS) will get them through their golden years, which only nets the average retiree about $1,300 per month nowadays. Others buy into the carpe diem or YOLO mentality that’s been instilled within millennials.

Continue Reading…

10 ways to spot investment opportunities before the herd piles in

By Dakota Findley

Special to the Financial Independence Hub

If you learn how to spot investment opportunities early, you could significantly increase the profits you make. Fortunately, doing this isn’t as hard as many people believe. Here are the ten essential components of spotting investment opportunities before everyone else jumps on the bandwagon.

1.) Find a Problem Solver

In 2009, Professor Raffi Amit of the University of Wisconsin noted that “Customers don’t buy technology. Customers buy products that add value.” These two sentences are vital to understanding which investment opportunities are worth pursuing.

An effective problem-solver is a company that:

  • Has identified one or more problems that a potential market is experiencing,
  • Has a plan, product, or service designed to address that problem, and
  • Can implement their solution in a scalable and cost-effective manner

In other words, you’re not just looking for companies to invest in: you’re looking for businesses that will be selling what customers are looking for.

2.) Learn to Understand the Criteria for an Investment’s Success

A 2011 study found that firms receiving angel investments (capital provided mainly for business startups) were about 25% more likely to survive for at least four years than companies that did not receive such funding.

The reason this fact matters is that a good early investment is one that gets enough funding to succeed. If your investment isn’t sufficient to help an opportunity succeed and nobody else is buying in, then it doesn’t matter how good their ideas are.

3.) Assess Your Risk Tolerance

How much risk are you willing to take on? We’ll be blunt with you: many early investments fail. Perhaps they didn’t get enough funding to succeed, or they suffered from poor management by people who were good at making products but not so good at running a company.

Whatever the reasons for failures, though, you’ll need to learn how to ass                                ess both how risky a given investment is and how much you can afford to lose.

As a good rule of thumb, you should never invest more than you could safely afford to lose.

4.) Practice Patience

Continue Reading…