All posts by Financial Independence Hub

Defined Benefit plans in good health with opportunity to use surplus, but prepare for risks ahead

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Image courtesy Mercer/Getty Images

By Jared Mickall, Mercer Canada

Special to Financial Independence Hub

Since the beginning of the year, Canadians saw the Bank of Canada maintain the overnight rate at 5.00% as inflation eased to be less than the upper end of the Bank of Canada’s inflation-control target of 3%.

Amidst this economic backdrop, Canadians who participate in defined benefit (DB) pension plans may be interested in the financial health of their DB plans.

The Mercer Pension Health Pulse (MPHP) is a measure that tracks the median solvency ratio of the defined benefit (DB) pension plans in Mercer’s pension database. At March 29, 2024 the MPHP closed out the year at 118%, an improvement over the quarter from 116% as at December 31, 2023. The solvency ratio is one measure of the financial health of a pension plan.

Throughout Q1, most plans saw positive asset returns coupled with decreased DB liabilities, which resulted in an overall strengthening of solvency ratios. In addition, compared to the beginning of the year, there are more DB pension plans with solvency ratios above 100%.

In other words, Canadians who participate in DB plans are likely to have seen the financial health of their DB pension plans improve over Q1.

Inflation in Canada and interest rates

Canadian inflation eased to 2.9% in January, which is less than the upper end of the Bank of Canada’s inflation-control target of 3%. It is the Bank of Canada’s expectation for inflation to remain close to 3% during the first half of 2024 before gradually easing. On March 6, the Bank of Canada continued its policy of quantitative tightening by maintaining the overnight rate at 5.00%. On March 19, Canadian inflation for February 2024 came in at 2.8%, which ignited industry speculation on the timing and amount of a cut to the overnight rate.

In addition, on April 10, the Bank of Canada announced that it was maintaining the overnight rate at 5.00%. The next scheduled date for announcing the overnight rate target is June 5, 2024. Continue Reading…

Markets, Patience, & The Rolling Stones

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Image by Shutterstock, courtesy Outcome

By Noah Solomon

Special to Financial Independence Hub

Time is on my side, yes it is
Time is on my side, yes it is

Now you always say
That you want to be free
But you’ll come running back (said you would baby)
You’ll come running back (I said so many times before)
You’ll come running back to me

— The Rolling Stones

The Rolling Stones’ iconic hit, “Time Is On My Side,” is a testament to the power of patience. Its lyrics remind listeners that even though things can seem challenging, eventually everything will fall into place. Although this message may be conceptually appealing, it is increasingly ringing hollow with many investors.

Discipline is one of the most important principles of successful, long-term investing. Successful investors tend to stick to their knitting, even during times when this entails avoiding “hot” stocks and underperforming over the short or medium term.

However, even the most disciplined investors have their limits, which have been sorely tested over the past decade, courtesy of the blistering appreciation of mega-cap growth stocks. Such companies are largely represented by the aptly named Magnificent 7 (MAG7), which includes Apple, Microsoft, NVIDIA, Meta, Alphabet, and Tesla. The “pain trade” of prolonged, MAG7-related underperformance has been pervasive across investment styles, countries, and active management in general.

Value managers have been caught in the wrong place (or style) at the wrong time, to say the least. As the table below demonstrates, growth stocks have left their value counterparts in the dust over the decade ending in 2023.

S&P 500 Growth Index vs. S&P 500 Value Index: 2013-2023

This incredible dispersion has caused investment styles to dominate investment acumen to the point where even some of the best value managers have underperformed some of the worst growth managers. Alternately stated, there has been little, if anything that a value-based investor could have done to avoid getting outrun by the growth trade juggernaut that has dominated markets over the past 10 years.

The effect of the tremendous run of MAG7 companies has also had a profound effect on the relative performance of different countries and regions.

Comparative Returns: 2013-2023 (in USD)

To put it mildly, the S&P 500 Index, which its heavy exposure to MAG7 companies has turbocharged, has left non-U.S. indexes in the dust. The bottom line is that if you were underweight U.S. stocks, you were doomed to underperform.

Lastly, the MAG7 juggernaut has cast a dark shadow over active management (more on this later).  According to Morningstar, during the decade ending in 2023, 90.2% of U.S. large cap managers underperformed their benchmarks. When it comes to active equity strategies, most clients’ experiences have been less than inspiring, if not disappointing.

From Big is Bad to Big is Beautiful

The dramatic outperformance of mega-cap companies over the past 10 years stands in sharp contrast to their longer-term historical pattern. Over the past several decades, underweighting the very largest stocks has been a winning bet. Since 1957, the 10 largest stocks in the S&P 500 have underperformed an equal-weighted portfolio of the other 490 stocks by an average of 2.4% per year. Continue Reading…

A Smart Balance for Retirees: HBIG Blends Tradition with Innovation

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Image by Harvest ETFs

By Ambrose O’Callaghan

(Sponsor Blog)

Canadians in or nearing retirement may be seeking out an investment that provides stability in the face of broader market and economic challenges. Balanced mutual fund portfolios have remained the most popular form of investment fund among Canadians.

However, most current balanced mutual funds and ETFs in the Canadian market provide income at levels below inflation rates. Moreover, these balanced funds/ETFs often pay quarterly, semi-annual, and annual distributions as opposed to monthly.

Today, we zero in on a balanced ETF designed to offer stability, growth opportunities, and high monthly cash distributions.

Today — April 15, 2024 — Harvest ETFs launches the Harvest Balanced Income & Growth ETF (HBIG:TSX). This exchange-traded fund (ETF) is designed to provide Canadian investors of all ages — and especially those in retirement — with access to a balanced portfolio consisting of primarily Harvest Equity Income ETFs and Harvest Fixed Income ETFs that deliver high monthly cash distributions.

For those  looking for more cash flows to help bridge the income gap, or who want to meet RRIF withdrawal minimums, we have also launched the Harvest Balanced Income & Growth Enhanced ETF (HBIE:TSX), an alternative fund that uses leverage. This ETF seeks to provide unitholders with high monthly cash distributions and the opportunity for capital appreciation by investing, on a levered basis, in a portfolio that seeks to replicate HBIG. With the use of the leverage, the risk rating for HBIE is slightly elevated relative to HBIG.

Here is a link to the Business Wire news release issued this morning.

What is a balanced portfolio? How is Harvest changing the original formula to meet investor needs in 2024? Let’s jump in.

What makes up the traditional 60/40 portfolio?

According to the Investment Funds Institute of Canada (IFIC), the number of mutual fund assets in Canada totalled $2.012 trillion at the end of February 2024. That was up 2.9%, or $57.1 billion, from January. Meanwhile, ETF assets totalled $403 billion at the end of the same period – up 4.1% month over month.

Balanced mutual funds make up $923 billion, nearly half of the total mutual funds operational in Canada. That means that Balanced portfolios are the most popular among Canadians who are invested in mutual funds. ETFs, by comparison, are heavily weighted in Equity and Bond funds, while Balanced ETFs only make up $16.5 billion out of $403 billion.

A balanced fund typically refers to a portfolio that is broken down by 60% equity and 40% fixed-income exposure. That ratio allows for capital appreciation while mitigating risk and providing protection from volatility with the exposure to bonds. While the 60/40 ratio is a proxy for the typical balanced portfolio, it is not one-size-fits-all. Some balanced portfolios may aim for ratios that weigh either equities or bonds more heavily.

How do covered calls generate high income?

Harvest ETFs believes wealth is created and preserved by owning leading businesses and high-quality fixed income securities. Moreover, Harvest is a market leader in covered call options ETFs. Harvest has been writing covered call options for 15 years. Moreover, the firm has a strong track record for delivering consistent distributions. Continue Reading…

Retirement Spending Experts debate 4% versus 8% withdrawal rates

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By Michael J. Wiener

Special to Financial Independence Hub

On episode 289 of the Rational Reminder podcast, the guests were retirement spending researchers, David Blanchett, Michael Finke, and Wade Pfau.
The spark for this discussion was Dave Ramsey’s silly assertion that an 8% withdrawal rate is safe.  From there the podcast became a wide-ranging discussion of important retirement spending topics.  I highly recommend having a listen.

 

Here I collect some questions I would have liked to have asked these experts.

1. How should stock and bond valuations affect withdrawal rates and asset allocations?

It seems logical that retirees should spend a lower percentage of their portfolios when stocks or bonds become expensive.  However, it is not at all obvious how to account for valuations.  I made up two adjustments for my own retirement.  The first is that when Shiller’s CAPE exceeds 20, I reduce future stock return expectations by enough to bring the CAPE back to 20 by the end of my life.  These lower return expectations result in spending a lower percentage of my portfolio after doing some calculations that are similar to required minimum withdrawal calculations.  I have no justification for this adjustment other than that it feels about right.

The second adjustment is on equally shaky ground.  When the CAPE is above 25, I add the excess CAPE above 25 (as percentage points) to the bond allocation I would otherwise have chosen in the current year of my chosen glidepath.  Part of my reasoning is that when stock prices soar, I’d like to protect some of those gains at a time when I don’t need to take on as much risk.

Are there better ideas than these?  What about adjusting for high or low bond prices?

2. How confident can we be that the measured “retirement spending smile” reflects retiree desired spending levels?

I find that the retirement spending smile is poorly understood among advisors (but not the podcast guests).  In mathematical terms, if S(t) is real spending over time, then dS/dt has the smile shape.  Many advisors seem to think that the spending curve S(t) is shaped like a smile.  I’ve looked at many studies that examine actual retiree spending in different countries, and there is always evidence that a nontrivial cohort of retirees overspend early and have spending cuts forced upon them later.  Both overspending retirees and underspending retirees seem to have the dS/dt smile, but at different levels relative to the x-axis.  Overspenders have their spending decline quickly initially, then decline slower, and then decline quickly again.  Underspenders increase their real spending early on, then increase it slower, and finally increase it quickly at the end.

I don’t see why I should model my retirement on any data that includes retirees who experienced forced spending reductions.  The question is then how to exclude such data.  I saw in one of Dr. Blanchett’s papers that he attempted to exclude such data for his spending models.  Other papers don’t appear to exclude such data at all.  In the end, it becomes a matter of choosing how high the smile should be relative to the x-axis.  If it is high enough, the result becomes not much different from assuming constant inflation-adjusted spending. Continue Reading…

Vanguard S&P 500 is a third of my portfolio

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Vanguard S&P 500

 

By Alain Guillot

Special to Financial Independence Hub

My investment strategy is to buy more every time I have more money. I don’t time the market. I know that investments (on the long run) will eventually go up.

No one knows when the market will tank or when it will rally. So why waste my brain energy trying to stay informed and anticipate, or react to the market? I just buy and buy some more.

When will I sell? Hopefully never, but the second best answer is: When I retire, when I need the money for personal living expenses. In that case, I will just take the money out when I need it, not when the market conditions are right (we never know when the market conditions are right).

Generally I divide my investment in three parts: 1/3 Canadian stocks, 1/3 U.S. stocks, and 1/3 international stocks.

I don’t know how much money I have made since I don’t know how to account for all the dividend payments I have been getting. But it’s a lot.

Investing in the stock market is safest way to invest your money. Yes, there is day to day volatility. If you learn how to ignore the new, the latest development, the latest emergency crisis, the latest election, you will be OK.

Of course, it’s not easy to avoid all the noise. Media companies spend billions of dollars every year finding new ways to capture your attention. The worst part is that “bad news” is a very potent attention-grabbing tool and many people fall victims of it. I have friends who have their money in cash, gold, or silver because the next financial catastrophe is coming. If they only knew how to calculate all the money they have left on the table, it’s worse than any catastrophe they have envisioned.

The bedrock of my U.S. investment is the Canadian dollar Vanguard S&P 500 Index; here is the symbol, VFV. It trades in the Toronto Stock Exchange. My strategy is to buy some more every December.

The Vanguard S&P is a fund that invests in the stocks of some of the largest companies in the United States.

This is a great investment because it’s well diversified and is made up of the stocks of the largest U.S. corporations. These large corporations tend to be stable with a solid record of profitability.

How much money can you earn?

We are not in the business of predicting the future, but here are some of the past results:

Rate of return investing on the S&P 500

As you can see the rate of return for 3 years is 42%, for 5 years is 66%, and for 10 is 304%. This is the best return you can get for your money. This is a great investment opportunity if you have the patience to wait for it.

How to invest in the Vanguard S&P 500

You can buy shared of the S&P 500 as you buy shares of any stock. Continue Reading…