Can Bitcoin work alongside Traditional Currencies?

 

Image from Deposit Photos

By Alain Guillot

Special to Financial Independence Hub

Compared with fiat money and other legal tender, can Bitcoin work to benefit our everyday lives? This is a loaded question, to say the least, with some complex answers, mainly due to the nature of crypto itself. Can BTC beat inflation? And how can you use it in life? Here, we explore.

Bitcoin and Fiat Legal Tender

Fiat money is a currency that is declared legal tender by a country. Think the British pound, the US dollar, and the Euro. These are mainly backed by the country’s gold reserves, known as the gold standard, except for the US dollar, which is backed by the United States’ oil reserves. Yet Bitcoin is becoming legal tender in some countries because of its inherent value. This article by Jonathan Martin explores the backing of Bitcoin in El Salvador if you want to know more.

Will Bitcoin Work to Beat Inflation?

Inflation has been almost out of control for a while now and shows little sign of slowing in some countries. Yet Bitcoin can be something of a hedge against inflation as its price often decreases with high inflation. This makes for interesting investments as you wait for the price to rise and offset any inflationary losses during the period and over the long term. However, it is also notable that Bitcoin itself does experience its own times of inflation but cannot be manipulated.

Beating the Banks

If you have ever sent money overseas, then you know it can be expensive and isn’t always quick. All banks place a relatively high fee on international bank transfers, and it can be slow at the weekend and during holidays. Bitcoin doesn’t experience these issues. And while there is often a fee, it is comparatively low, and transfer is almost instant at any time. This makes Bitcoin an excellent method of both paying for goods and services and receiving money for your own.

The Pros and Cons of Bitcoin Today

Bitcoin can be a great alternative to traditional fiat payments and is widely known as a good investment. But it isn’t without its risks. So, here are some documented pros and cons:

Pros

  • Bitcoin offers a high degree of anonymous data for its users and is transparent.
  • There is no centralized banking system controlling Bitcoin or cryptocurrency.
  • The returns on an investment can be massive if you invest at the right time.

Cons

  • The investment opportunities of BTC are extremely volatile, with long, low periods.
  • There is no government oversight as to how Bitcoin and crypto operate.
  • Even today, there is limited use potential for Bitcoin for most everyday people.

Bitcoin has its uses and is somewhat more secure than money. Given it is relatively new, there are limitations as to how you can use BTC and other cryptocurrencies in daily life.

How Accessible is Bitcoin?

Bitcoin is known as a very accessible medium of payment. Anyone can use it, and anyone can trade it. This is because there is no single entity that controls Bitcoin, even centralized global banks. However, while most developed nations allow Bitcoin, it is worth noting that Bitcoin is banned in some countries. Rather unsurprisingly, these include China and Saudi Arabia. It is also regarded that last year’s dramatic drop in BTC value was caused by China’s actions. Continue Reading…

A Life-Long Do-It-Yourself Investing Plan

Deposit Photos

By Michael J. Wiener

Special to Financial Independence Hub

The financial products available today can make do-it-yourself (DIY) investing very easy, as long as you don’t get distracted by bad ideas.  Here I map out one possible lifetime plan from early adulthood to retirement for a DIY investor that is easy to follow as long as you don’t get tempted by shiny ideas that add risk and complexity.

I don’t claim that this plan is the best possible or that it will work for everyone.  I do claim that the vast majority of people who follow different plans will get worse outcomes.

Most of my readers will be more interested in the later stages of this plan.  Please indulge me for a while; the beginning lays the foundation for the rest.

Starting out

Our hypothetical investor – let’s call her Jill – is at least 18, currently earns less than $50,000 per year, and has a chequing account at some big bank.  She has a modest amount of savings in her account earning no interest.  It’s about time she opened a savings account to earn some interest on her savings, but big bank savings accounts barely pay any interest.

So, Jill opens an online non-registered savings/chequing account at a Canadian bank that is not one of the big banks.  She chooses it because it’s CDIC-protected, transactions are free, and it currently pays much higher interest than the big banks offer.  If this bank ever changes its policy on offering competitive interest rates or free transactions, Jill will just switch to somewhere else that offers better terms.  It’s not worth switching for a small interest rate increase or for a limited-time offer, but if she can ever get say 0.5% more elsewhere, she’ll go.

For now, Jill probably needs to keep a chequing account at a big bank.  Accounts at smaller banks sometimes need to be linked to some other bank account, and you can’t access a bank machine through most smaller banks.  It’s also good to be able to talk to a big-bank teller the rare time you need a certified cheque, to make a wire transfer, or to pay some bill you can’t figure out how to pay online.

Jill also opens a TFSA at the small bank.  It pays even higher interest, and she might as well earn the interest tax-free.  Sometime much later, Jill may want all of her TFSA room devoted to non-cash investments, at which time she can close this TFSA.  But for now her TFSA will hold some cash.

At this point Jill is learning about how TFSA contribution room works.  She’ll find that it’s best not to deposit and withdraw too often because you don’t get TFSA room back until the start of the next calendar year.  She should use her regular non-registered account for more frequent transactions.

This plan will work well for Jill as long as she has fairly short-term plans for her savings, such as going to school.  As long as she will likely need her savings within 5 years, there’s nothing wrong with keeping it in cash earning as much interest as she can get safely and conveniently.

Let’s look at some potential distractions Jill faces on her current plan.

The bank teller says Jill should open a savings account and get a credit card.

Jill needs a good savings account, such as what some small banks offer, not a big-bank savings account that pays next to no interest.  If Jill gets a credit card, she should look for one that suits her needs, not take the conflicted advice of a teller.

All the cool kids are buying Bitcoin.

Jill is level-headed enough to know that she knows next to nothing about investing, never mind wild speculation in Bitcoin, or whatever is currently holding people’s interest.

Savings Start to Grow

At some point, Jill’s savings will grow beyond what she thinks she will need within 5 years.  Perhaps she has graduated, is working full time, and has no immediate plans to use all her savings as a down payment on a house.  She doesn’t carry credit-card debt, has paid off her student loans, and has no other debts.  We’ll assume for now that Jill has no group RRSP at work and is making less than $50,000 per year, so that she’s not in a high tax bracket and has no reason to open a self-directed RRSP.

Jill will still hold some cash savings she might need in the next 5 years in her small bank savings accounts.  Now it’s time to start investing in stocks with her longer-term savings.  Jill knows that stocks offer the potential for great long-term returns, but she has no idea which ones to buy.  Fortunately, she’s heard that even the most talented stock-pickers often get it wrong, so she’s best off just owning all stocks.  This may sound impossible, but the exchange-traded fund (ETF) called VEQT holds just about every stock in the world.  She can own her slice of the world’s businesses just by buying VEQT.  There are a few other ETFs with similar holdings, and it doesn’t matter much which one Jill picks.  (I mention VEQT because it appears to be among the best available stock index ETFs right now; I get no money or other consideration for mentioning it.)

Jill opens a TFSA at a discount brokerage.  It’s okay for her to have both this TFSA and the one holding just cash at a small bank, as long as her combined contributions don’t exceed the government’s limits.  Any savings she adds to this new TFSA she uses to buy VEQT.  That’s it.  Nothing fancier.

The biggest lesson Jill needs to learn while her stock holdings are small is to ignore VEQT’s changing price.  Many people hope that their stocks won’t crash.  This is the wrong mindset.  Stocks are certain to crash, but we don’t know when.  We need to invest in such a way that we can live with a crash whenever it happens.

Jill should just add new money to her VEQT holdings on a regular basis through any kind of market, including a bear market.  Trying to predict when markets will crash is futile.  She needs to accept that she can’t avoid stock crashes and that prices will eventually rise again.  This lesson is so important that Jill needs a different plan if she will panic and sell the first time VEQT drops 20% or more.  Learning that stock crashes are inevitable and calmly doing nothing different through them is critical for Jill’s investment future.  Fortunately, in the coming years, Jill will focus on the safe cash cushion in her savings accounts when VEQT’s price drops.

What distractions could throw Jill off her plan now?

The bank says they can help Jill open a TFSA and invest her money.

The bank is just going to steer Jill into expensive mutual funds that will likely cost her at least 2% per year, which builds up to a whopping 39% over 25 years.  As incredible as it sounds, 39% of her savings and returns would slowly become bank revenue during those years.  It’s no wonder that bank profits are so high.  In contrast, VEQT’s fees are just 0.25% per year, which builds up to just 6% over 25 years.

The smart, sophisticated twenty-somethings are getting rich day-trading on Robinhood.

No, they’re not.  We only hear the stories about rare big temporary successes, not the widespread mundane losses.  Very few traders will outperform VEQT.  Over the long term, Jill will be ahead of more than 90% of investors and an even higher percentage of day traders.

Investing has to be harder than just buying one ETF.

In most endeavours, working harder gives better results.  With investing, you need to learn enough to understand the power of diversified, buy-and-hold, low-cost investing.  Beyond that, taking courses in stock picking will just tempt you to lose money picking your own stocks.

VEQT’s price is dropping! What should I do?

Inevitably, stock markets crash.  It’s hard to know how you’ll react until you experience a crash.  If Jill decides she really can’t handle a sudden VEQT price drop, her best course of action is to gut out this market cycle until VEQT prices come back up, and then choose a different asset allocation ETF that includes some bonds to smooth out the ride.  She can then stick with this new ETF into the future.

Rising income

Jill’s income is now enough above $50,000 per year that it makes sense to open an RRSP account at her discount broker.  She also has a group RRSP at work, and she contributes the minimum amount required to get the maximum match from her employer.  She would have participated in this group RRSP even if her income was lower because the employer match is valuable.

Jill figures out how much she’d like to contribute each year to her RRSP at the discount brokerage.  This has to take into account her RRSP contribution limit, her group RRSP contribution as well as the employer match, and the fact that there is little to gain from reducing her taxable income below about $50,000.  If she wants to add even more to her long-term savings than these RRSP contributions, she can save some money in her discount brokerage TFSA.

Next comes the decision about what to own in her self-directed RRSP.  Once again, she buys only VEQT.  Nothing fancier is needed, and most people won’t do as well as just owning VEQT.

When Jill looked into the details of her group RRSP, she was disappointed that the fees were so high; VEQT isn’t one of the investment options.  But she can’t get the employer match without choosing among the expensive funds.  So, her plan is to learn the vesting rules of her group RRSP, and once she’s allowed to transfer assets to her self-directed RRSP without penalties or losing the company match, she’ll make this transfer every year or two.  She’ll be careful to make these direct transfers from one RRSP to another rather than withdrawals.  However, when asking questions about the group RRSP rules, she’ll be careful not to reveal her plans to avoid the expensive fund choices.  The company operating the group RRSP may become less than cooperative if they know Jill has no intention of paying their excessive fees on a large amount of savings.

So, Jill now has VEQT holdings building in her RRSP and TFSA at the discount brokerage.  Her investment plan remains wonderfully simple.  But there are distractions ready to push her off this plan for easy success.

All the savvy thirty-somethings are talking about dividend stocks.

Most dividend investors are poorly diversified, but it’s possible to own enough dividend stocks to be properly diversified.  Does Jill really want to spend her time poring over company financial statements to choose a large number of dividend stocks?  Some people like that sort of thing.  Jill doesn’t.  She’s better off with VEQT.

Now that Jill’s savings are growing, surely she’s ready for a more sophisticated investment strategy.

Just about everyone who tries more complicated strategies won’t do as well as just owning VEQT.  Jill is best off just sticking with her simple plan.  She’s not keeping it simple because she’s not capable of handling something more complex.  It’s just that there’s no guarantee that a more complex strategy will perform better, and she’s not interested in doing the necessary work.  Jill used to be annoyed at people with more complex strategies because it made her feel dumb to have such a simple plan.  But now she just wishes these people well; she knows she has a smart strategy no matter what it sounds like to others.

Buying a home

Jill decides to buy a home in the next couple of years.  The cash she has in her savings account isn’t enough for a down payment; she plans to use all of her investments in her discount brokerage TFSA as well as $35,000 of her RRSP investments through the home buyer’s plan.

Suddenly, money that she didn’t plan to use for at least 5 years has become money she wants to use sooner.  So, she sells the VEQT in her TFSA, and sells $35,000 of the VEQT in her RRSP.  This protects her home-buying plans in case VEQT’s price suddenly falls between now and when she buys her new home.

Jill still wants to earn good interest on her cash, so she checks out the options for cash interest at her discount brokerage.  Unfortunately, the interest rates are not nearly as good as what some small banks offer in their savings accounts.  So, she opens an RRSP at her small bank, and arranges for TFSA-to-TFSA and RRSP-to-RRSP transfers from her discount brokerage to her accounts at the small bank.  She’s careful to make sure she isn’t making withdrawals, but direct transfers.

From now until she buys the home, she directs all new TFSA savings to cash in her small bank TFSA to build her down payment. But she won’t use all her cash on hand as a down payment, because there will inevitably be expenses with a new home.

After buying the home, she plans to direct new savings to paying down the mortgage.  She’ll still participate in her group RRSP, but she won’t contribute to her TFSA or self-directed RRSP for a while.  She wants to get the mortgage down to a less scary level in case mortgage interest rates rise.  Once the mortgage is somewhat tamed, she’ll resume adding to her TFSA and self-directed RRSP, and she’ll invest in VEQT.

New distractions as well as the old ones are ready to push Jill away from her simple plan.

Isn’t it better to invest than pay off the mortgage while rates are so low?

(Editor’s note: keep in mind this blog originally ran in 2021.)

This is good reasoning to a point.  It comes down to how stretched you are.  A quick test is to calculate what your mortgage payment would be if interest rates rise 5 percentage points.  If this payment would cause you serious problems, you’re probably best to pay extra on the mortgage for a while.  With her life ticking along so well, Jill sees no need to add risk.  Once the mortgage principal is down to a more comfortable level, she’ll resume adding to her investments. Continue Reading…

Mastering Monetization: A Comprehensive Guide for Podcast Owners

Image courtesy Canada’s Podcast

By Philip Bliss

Special to Financial Independence Hub

As a podcast owner, the dream goes beyond sharing your passion and insights with the world: it includes turning that passion into a sustainable source of income. Monetizing your podcast requires strategic planning, consistent effort, and a deep understanding of your audience. In this comprehensive guide, we’ll walk you through practical steps, timelines, and essential tasks to help you successfully monetize your podcast.

Task 1: Define Your Niche and Audience (Timeline: 1-2 weeks)

Before diving into monetization strategies, it’s crucial to have a clear understanding of your podcast’s niche and target audience. Identify the topics that resonate most with your listeners and refine your content to cater to their interests. This process involves analyzing your current audience demographics, studying popular episodes, and researching industry trends. This step lays the foundation for effective monetization by ensuring that your content aligns with the needs and preferences of your audience.

Task 2: Optimize Your Content and Branding (Timeline: 2-4 weeks)

Enhance your podcast’s marketability by investing time in optimizing your content and branding. Develop a memorable podcast name, design eye-catching cover art, and create a compelling podcast description. Consistency in branding helps build a strong identity, making it easier for potential sponsors and advertisers to recognize and trust your podcast.

Image courtesy Canada’s Podcast/unsplash royalty free

Task 3: Build a Solid Listener Base (Timeline: Ongoing)

Monetization success relies heavily on having a dedicated and engaged audience. Implement strategies to grow your listener base, such as promoting your podcast on social media, collaborating with other podcasters, and encouraging audience interaction through surveys or Q&A sessions. A strong and loyal community is an attractive proposition for potential sponsors and advertisers.

Task 4: Research and Approach Potential Sponsors (Timeline: 4-6 weeks)

Identify companies or products that align with your podcast’s theme and audience. Craft a compelling pitch that highlights the value of advertising on your podcast, emphasizing your reach and engagement metrics. Reach out to potential sponsors via email or through networking events, showcasing the unique opportunities your podcast offers for their brand exposure. Continue Reading…

When Low Rates cause people to do Dumb Things

Image courtesy Outcome/ShareAlike 3.0 Unported 

By Noah Solomon

Special to Financial Independence Hub

When cash, high quality bonds, and other safe assets offer little yield, investors get caught between a rock and a hard place. They can either (1) accept lower returns and maintain their allocation to safe assets or (2) liquidate safe assets and invest the proceeds in riskier assets such as equities, high yield bonds, private equity, etc.

Using history as a guide, when faced with this dilemma many people choose the second option. This decision initially produces favorable results as the increase in demand for stocks pushes prices up. However, as this reallocation progresses, prices reach levels which are unreasonable from a valuation perspective, and the likely returns from risk assets do not compensate investors for their associated risk. At this juncture, committing additional capital to risk assets becomes akin to picking up pennies in front of a steam roller. For the most part, this narrative is what played out across markets following the global financial crisis of 2008.

Following the global financial crisis, near-zero rates pushed investors to take more risk than they would have in a normal rate environment, which entailed making outsized allocations to stocks and other risk assets.

Unable to bear the thought of receiving negligible returns on safe assets, people continued to pile into risk assets even as their valuations became unsustainable.

Had central banks not begun raising rates aggressively in 2022 to combat inflation, it is entirely possible (and perhaps even likely) that stocks would have continued their ascent, valuations be damned!

Instead, rising rates provided risk assets with some worthy competition for the first time in over a decade, which in turn caused investors to rethink their asset mix and shed equity exposure.

The Equity Risk Premium: A Stocks vs Bond Beauty Contest

The equity risk premium (ERP) can be loosely defined as the enticement which investors receive in exchange for leaving the safety of Uncle Sam to take their chances in the stock market. More specifically it is calculated by subtracting the 10-year Treasury yield from the earnings yield on stocks. For example, if the P/E of the S&P 500 is 20 (i.e. earnings yield of 5%) and the yield on 10-year Treasuries is 3%, the ERP would be 2%.

Historically, stocks tend to produce higher than average returns following elevated ERP levels. Intuitively this makes sense. When valuations are cheap relative to the yields on safe assets, investors are getting well compensated for bearing risk, which tends to portend strong equity markets. Conversely, at times when stock valuations are rich relative to yields on safe assets and investors are getting scantily compensated for taking risk, lower than average returns from stocks have tended to ensue.

Chart courtesy Outcome
  • At the end of 2020, the S&P 500 Index’s PE ratio stood at 20 (i.e. an earnings yield of 5%), which by no means can be considered a bargain. However, stocks were nonetheless rendered attractive by ultra-low rates on cash and high-quality bonds. It’s easy to look good when you have little competition!
  • By the end of 2021, the Index’s PE ratio was above 24 (i.e. an earnings yield of 4.2%). Stocks were even less enticing than valuations suggested, given that 10-year Treasury yields had risen from 0.9% to 1.5%. This set the stage for a decline in both prices and valuations in 2022.
  • From an ERP perspective, 2022’s decline in valuations did not make stocks less stretched vs. bonds. The contraction in multiples (i.e. increase in earnings yield) was more than offset by a rise in bonds yields, thereby causing the ERP to be lower at the end of 2022 than it was at the start of the year.
  • In 2023, the S&P 500’s PE ratio expanded from approx. 18 to 23, which was not accompanied by any significant change in 10-year Treasury yields. By the end of the year, U.S. stock multiples had nearly regained the lofty levels of late 2021, despite the fact that Treasury yields had actually increased by over 2% during the two-year period.
  • In contrast, the relative valuation of Canadian stocks vs. bonds currently lies at levels that are neither high nor low relative to recent history.

 Low Rates: The Growth Stock amphetamine

Growth companies, as the term implies, are those that are projected to have rapidly growing earnings for many years. Whereas an “old economy” stock such as Clorox or General Mills might be expected to grow its profits by 2%-10% per year, a juggernaut like NVIDIA could be expected to double its profits every year for the foreseeable future. Continue Reading…

Retired Money: Plan for Retirement Income for Life with Fred Vettese’s PERC

My latest MoneySense Retired Money column focuses on a free retirement calculator called PERC, plus the accompanying new third edition of Fred Vettese’s book, Retirement Income for Life: Getting More Without Saving More.

You can find the full column by clicking on the highlighted headline: Retirement Income for Life: Why Canadian retirees love Frederick Vettese’s books and his PERC. Alternatively, go to MoneySense.ca and click on the latest Retired Money column.

As the column notes, I have previously reviewed the earlier editions of the book but any retiree or near retiree will find it invaluable and well worth the C$26.95 price. Also, there is a free eBook offer.

PERC of course is an acronym and stands for Personal Enhanced Retirement Calculator.

PERC is itself a chapter title (chapter 15 of the third edition) and constitutes the fourth of five “enhancements” Vettese describes for getting more without saving more. Vettese developed PERC while writing the first edition in 2018: it is available at no charge at perc-pro.ca.

In another generous offer, anyone who buys the print edition can get a free ebook version by emailing details of proof of purchase to ebook@ecwpress.com.

I reviewed the previous (second) edition of Fred’s book for the Retired Money column back in October 2020, which you can read by clicking on the highlighted headline: Near retirement without a Defined Benefit pension? Here’s what you need to know. Continue Reading…