All posts by Financial Independence Hub

Early retirement planning – steps we’re taking in 2026

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By Bob Lai, Tawcan

Special to Financial Independence Hub

Image courtesy Tawcan/Unsplash

Life is uncertain. We are living our day-to-day lives with a certain level of uncertainty, but that’s part of the fun. Some people don’t like having too many uncertainties, so they take actions and precautions to reduce uncertainty.

The same thing can be said for early retirement and living off one’s investment portfolio. There are many steps you can take to increase the margin of safety of your investment portfolio to ensure it can sustain your lifestyle and you don’t run out of money.As we draw closer to achieving Financial Independence through dividend income, also known as living off dividends, we are spending more time on the steps needed to prepare ourselves for this significant financial and life milestone.

I thought it would be interesting to explore the steps we are taking in 2026 when it comes to our early retirement planning.

Building up our Cash Reserve

Along our Financial Independence journey, we have been extremely focused on building up our dividend portfolio. As a result, we have been working hard to grow our savings gap and invest the saved-up money to buy dividend stocks and index ETFs.

For the most part, we don’t keep a lot of cash in our chequing and savings accounts, because we see too much cash sitting around as opportunity cost.

But as we get closer to Financial Independence, it is important to start building up our cash reserve. Cash reserve is important because it provides flexibility and prevents us from having to sell off our investments during a sudden market crash because of some unexpected need.

Last year, we managed to save enough money so that we had over $25,000 in our Long Term Savings for Spending account. Unfortunately, at the time of writing, we are below that number because of the yearly RESP contributions and having to buy a new fridge. Since one of our financial goals is to have more than $35,000 in our cash reserve, this means we need to save up more to first bring the amount in our LTSS account to above $25,000 first, then try to save more to hit the $35,000 market.

But building up our cash reserve is more than just having cash sitting around in our bank account. It’s also about having cash available in our investment accounts, too, as I’ll explain in the next section.

Turning off DRIPs 

We are currently investing 100% of our dividend income. We enroll in dividend reinvestment plans (DRIPs), so dividends are automatically used to get additional shares. Years ago, when fractional DRIPs weren’t available, we could only drip full shares (i.e. dividends received were more than the share price). We’d let the remaining dividends accumulate in our accounts until we had over $1,000 before we bought more dividend stocks or index ETFs (we did this so the trading commission was less than 1% of the overall transaction).

Nowadays, with the existence of fractional DRIPs from brokers like WealthSimple and TD, most of our dividends are reinvested right away. Before fractional DRIPs were enabled with TD, and because TD charges $9.99 per trade, we would move the remaining dividends collected in our taxable account with TD to WealthSimple to take advantage of the no-commission trading. We no longer have to do this.

Questrade still doesn’t support fractional DRIPs (and only fractional share purchase on certain securities), so we can only drip full shares and the remaining dividends get deposited in our accounts. Since Questrade no longer charges trading commissions, we don’t need to wait for dividends to accumulate to over $1,000 before reinvesting the money. Lately, we would use dividends to buy more stocks & ETFs when there’s a red day in the markets.

As we get closer to Financial Independence, we plan to change the way we utilize DRIPs. We want to drip selectively. We plan to turn off drip in our taxable accounts and RRSPs by the middle of this year (or by Q3). We will keep DRIP on in our TFSAs to allow investments/dividends to compound.

That’s step one in building up a cash wedge in our taxable accounts and RRSPs for the eventual withdrawals when we do live off dividends. But we certainly don’t want money sitting in cash and not doing anything for us.

So what’s our plan with the dividends received in taxable accounts and RRSPs?

This is where investing in safe Cash Alternatives comes in.

Investing in safe Cash Alternatives

For dividends received in taxable accounts and RRSPs, we want to put them to work. But we don’t want to reinvest them into dividend-paying stocks, then have to sell stocks when we start withdrawing. Nor do we want to be waiting for dividends to accumulate before withdrawing.

With the money accumulating in our taxable account, RRSPs, and savings account, we need to look at alternative ways to grow the money so we are not losing purchasing power due to inflation.

The current plan is to invest dividends collected in high-yield high-interest savings account (HISA) ETFs like CASH and HSAV because these HISA ETFs have high liquidity.

Since distributions from these high-yield HISA ETFs are taxed as 100% interest income, they are not overly tax-efficient. Therefore, it makes sense to invest in these HISA ETFs inside of our RRSPs.

Note: I know that withdrawals from RRSPs are taxed as working income as well so there may not be too much of a difference, but income inside RRSPs is tax-deferred so we can let the interest grow until withdrawals. This is a lot better than taking the tax hit in the same year as when you receive the interest.

For dividends sitting in our taxable accounts, if we invest in “safer” investments like GICs, HISAs, HISAs ETFs, bond ETFs, or even money market, all the interest earned would be taxed as 100% interest income, and not very tax efficient. Unfortunately, there’s no other way around it. If we really want, I suppose we can invest the money in dividend-paying Canadian stocks, but that’d go against the idea of building up a cash reserve in our taxable accounts.

What would we do with the cash sitting in our LTSS? Well, we may consider parking some of it in cash inside a flexible high-interest savings account for planned expenses. To make sure money is working hard for us, it probably makes sense to invest the money in a high-yield HISA ETF.

Our plans with money in taxable accounts and LTSS aren’t 100% decided. More tax calculation and planning is needed, considering I will be working full-time and earning income in 2026 and Mrs. T is generating income via her side hustles.

If any readers have other suggestions or recommendations on what to do with cash in our LTSS and taxable accounts, I would love to hear them.

Alternatively, we can consider turning DRIP off first in our RRSP and invest the money in one of the HISA ETFs. Then, in the latter half of 2026, turn off DRIP in our taxable accounts to minimize tax consequences. This approach, however, means we won’t have as big a cash reserve.

It’s complicated to plan everything and that’s part of the fun of planning for early retirement!

Planning extended healthcare coverage

We currently have extended healthcare benefits through my employer. The extended healthcare benefits allow us to get coverage on prescription drugs, out-of-country trip medical coverage, paramedical services like massage, acupuncture, counselling, physiotherapy visits, vision care, and dental care. Continue Reading…

AI Stock Bifurcation: Why Hardware Soars while SaaS Fails

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AlainGuillot.com

By Alain Guillot

Special to Financial Independence Hub

The technology sector is currently experiencing an historic AI stock bifurcation. While semiconductor giants are reaching all-time highs, many established software companies are struggling to maintain their valuations.

This “inner fight” in tech has created a massive performance gap. For example, the iShares Semiconductor ETF (SOXX) has skyrocketed by over 150% in the last year, while the iShares Expanded Tech-Software Sector ETF (IGV) has decline 8% over the same time period.

As an investor, understanding why this split is happening is crucial for protecting your portfolio. We are witnessing a transfer of value from the application layer to the infrastructure layer.

The Rise of Infrastructure: Why Hardware is King

Currently, the market is in the “Build” phase of the AI revolution. Companies are racing to build the data centers required to train Large Language Models (LLMs).

This has created a massive tailwind for companies that provide the “physicality” of AI. These are the “picks and shovels” of the modern gold rush.

  • Nvidia (NVDA): The undisputed leader in AI training chips.
  • Broadcom (AVGO): A dominant force in networking and custom AI silicon.
  • Vertiv Holdings (VRT): A crucial provider of cooling and power systems for data centers.

The Software Struggle: The Fear of “Seat Compression”

The AI stock bifurcation is most painful for traditional Software-as-a-Service (SaaS) providers. The primary reason is a phenomenon known as “seat compression.” The sharp decline in software stocks is called the SaaSpocalypse and we can blame it all on Claude.ai, which is powerful enough to do the work that many of those software companies were doing for a small fraction of the cost.

Historically, software companies sold licenses per human user. However, as AI agents become more capable, companies may need fewer human employees to perform the same tasks. If an AI agent can do the work of five people, the software provider loses four paid “seats.”

The companies affected most fall into three categories: horizontal point solutions, “per-seat” model giants, and UI-heavy applications.

1. Most Impacted Public Companies (2026 Performance)

The following heavyweights have seen significant year-to-date (YTD) declines as of early 2026 due to fears of AI disintermediation:

2. Why These Companies are Struggling

The crisis isn’t just about stock prices; it’s a fundamental challenge to how these companies make money.

  • The “Death of the Seat”: Traditional SaaS revenue is tied to the number of human users (seats). As AI agents like Claude Cowork or OpenAI Frontier handle the work of multiple people, enterprises are demanding consumption-based or outcome-based pricing rather than paying for idle software seats.
  • Vibe Coding & Low Barriers: New AI tools allow startups to replicate complex software features (“vibe coding”) much faster than before, eroding the “moats” that protected billion-dollar companies.

  • Budget Cannibalization: Enterprises are not increasing total IT spend; they are shifting funds away from “incremental” software updates to pay for expensive AI compute and specialized AI agents.

3. The “Safe” Exceptions

While the sector is in turmoil, analysts (including those from JP Morgan and HSBC) suggest that “mission-critical” infrastructure is more resilient. Companies like ServiceNow (NOW), Microsoft (MSFT), and CrowdStrike (CRWD) have fared better because their software acts as the “operating system” for the enterprise, making them harder to replace with standalone AI agents.

Summary of the “SaaSpocalypse” Narrative

This narrative drove the S&P Software & Services Index down over 20% in early 2026. While some view this as an overreaction, the shift toward Vertical SaaS (industry-specific tools for healthcare or manufacturing) and AI-native architectures is now a requirement for survival in the public markets.

The Winners of the Software Pivot

Not all software is doomed. The winners will be those who control the “System of Record” or successfully pivot to outcome-based pricing. It’s important to distinguish between companies that provide disposable tools (vulnerable) and those that provide essential infrastructure (resilient).

Here are the software sectors and specific companies currently showing strength:

1. The “Orchestrators” (AI-Native Infrastructure)

These companies don’t just sell a “seat” for a human to sit in; they provide the brain that runs the enterprise.

  • Palantir (PLR): While it felt the initial market tremors, Palantir is emerging as a winner. In early 2026, it projected 61% growth, positioning itself as the “operating system” for AI. Unlike traditional SaaS, Palantir thrives on complexity—integrating AI into massive, messy datasets that standalone agents can’t handle.
  • ServiceNow (NOW): Despite a 30%+ price drop in early 2026, it is being touted as a “value opportunity.” By acquiring Moveworks and launching Autonomous Workforce, they’ve pivoted to selling “AI agents” that resolve 90% of IT issues, effectively shifting their model to capture the value AI creates rather than just charging for human logins.

2. The Cybersecurity “Moat”

Security is non-negotiable, and the rise of AI agents has actually increased the “threat surface” for companies.

  • CrowdStrike (CRWD): Recognized as a core “safe” play. They have integrated AI into their Falcon platform to secure the very AI infrastructure everyone else is rushing to build.

3. Vertical SaaS & High-Complexity Platforms

Software that is deeply embedded in a specific industry’s regulatory or physical workflow is much harder to replace.

  • Shopify (SHOP): Standing out with a 26% gain recently. Because Shopify controls the physical flow of commerce — payments, shipping, and inventory — it isn’t as easily “disintermediated” by a coding agent as a simple marketing or HR tool might be.
  • Datadog (DDOG): As companies deploy more AI models, they need more monitoring to ensure those models aren’t “hallucinating” or breaking. Datadog’s observability tools are seeing a 30%+ gain as they become essential for the AI era.

Summary: What Makes a “Winner” in 2026?

The Bottom Line: The companies doing well are those that have stopped fighting the AI agents and have instead started becoming the platform that manages them.

The Next Layer: Where to Focus Now

If you feel you missed the initial semiconductor surge, you can take a look at the Secondary Infrastructure layer — often called the “Physical Layer” — is arguably where the most durable value is being built right now.

While chips get faster every 12 months, the power grids, cooling loops, and transformers being installed today are 20-to-30-year assets. The “Secondary” layer extends into three specific sub-sectors:

1. The “Power Hungry” Layer (Electrical Equipment)

As GPU density increases, the electrical bottleneck isn’t just the chip; it’s the ability to get high-voltage power to the rack without melting the wires.

  • Eaton (ETN): It is the “blue chip” of this layer. They manufacture the switchgear and power quality hardware that prevents AI data centers from blowing out the local grid. It recently committed over $30 million to a new Nebraska facility just to keep up with data center demand.
  • Schneider Electric (SBGSY): A global leader in data center energy management. Its EcoStruxure platform is the standard for managing the complex power architectures required for liquid-cooled AI clusters.
  • Powell Industries (POWL): A “hidden gem” in this space. It specializse in custom-engineered switchgear. It recently reported record earnings and announced a 3-for-1 stock split due to the surge in massive-scale industrial power orders.

2. The “Nuclear & Grid” Layer (Utilities)

Hyperscalers (Amazon, Google, Microsoft) are now the world’s largest buyers of clean energy. They need “always-on” power that solar and wind can’t provide alone.

  • Vistra Corp (VST) & Constellation Energy (CEG): These are the primary owners of the U.S. nuclear fleet. They have signed massive, long-term power purchase agreements (PPAs) directly with hyperscalers. Vistra is currently seen as a high-conviction “power-as-a-service” play.
  • GE Vernova (GEV): Since spinning off from GE, they have become a pure play on the electrification of the world. They make the gas turbines and grid orchestration software that utilities use to balance the sudden, massive loads from AI campuses.

3. The “Cooling & Enclosure” Specialists

Air cooling is dead for AI. Liquid cooling is now the industry standard for racks exceeding 50kW.

  • nVent Electric (NVT): While Vertiv handles the overall system, nVent specializes in the “liquid-to-chip” manifolds and high-tech enclosures. It recently raised their three-year organic sales growth targets specifically because of the data center supercycle.
  • Modine (MOD): Originally an automotive cooling company, it has pivoted hard into data center liquid cooling. It is   often viewed as a smaller, more specialized alternative to the larger players.

Summary Comparison for the Secondary Layer

Frequently Asked Questions

1. Why is software falling while chips are rising? Investors are prioritizing hardware because it is a tangible requirement for AI. Software faces uncertainty due to “seat compression” where AI replaces human users who previously paid for licenses.

2. Is it too late to buy semiconductor stocks? While valuations are high, the transition to the “Inference Era” suggests long-term demand remains strong. However, focus on companies providing cooling and power (the infrastructure) rather than just the chips.

3. Which software stocks are safe? Software companies with a deep “data moat” or those that own the “System of Record” are safer. Look for companies moving toward usage-based or outcome-based pricing models.

 

Alain Guillot is a part time event photographer, part time Salsa teacher, and part time personal finance blogger. He came to Quebec as an immigrant from Colombia. Due to his mediocre French he was never able to find a suitable job, so he opened a Salsa/Tango dance school and started his entrepreneurship journey. Entrepreneurship got him started into personal finance and eventually into blogging. Now he lives a Lean FIRE lifestyle and shares his thoughts in his blog AlainGuillot.com. This blog appeared first on his blog and is republished here with permission.  

How Elder Law Attorneys Protect your Post-Work Savings

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Image by Unsplash

By Devin Partida

Special to Financial Independence Hub

Navigating the complex world of Elder Law Asset Protection requires expert guidance to maintain independence and ensure appropriate financial resources for your future well-being. Proper legal planning is a critical strategy in wealth preservation.

Elder Law experts, including Ettinger Law Firm, offer the best services for protecting savings, including Medicaid asset protection trusts, long-term care planning and the creation of irrevocable trusts. These services help seniors qualify for aid while shielding their nest eggs from depletion by healthcare costs.

What are the Hidden Financial Threats to your Retirement Savings?

Aside from market fluctuations, one of the biggest dangers to retirement savings is the cost of long-term care. The national average for a semi-private room at a nursing facility is $112,420 annually, and is expected to reach $186,000 in 20 years with inflation. This outlay alone is enough to deplete your assets entirely.

Without proper Asset Protection for seniors, one’s estate could also be drained by probate. Additionally, sudden incapacitation could leave your finances vulnerable and result in costly guardianship proceedings that jeopardize the nest egg you have worked tirelessly to build.

How do Elder Law Attorneys Strategize Estate Planning for Retirees?

An Elder Law attorney deploys comprehensive legal tools designed for direct financial benefit. These methods help them shield your savings from long-term health care costs, probate and unforeseen incapacity before they ever arise.

Asset Protection Trusts

Planning for incapacity is critical. A revocable living trust allows you to designate someone you trust to manage your affairs, ultimately avoiding the costly and restrictive court-appointed guardianship.

Attorneys might also use an irrevocable trust to shield assets from long-term-care creditors. By transferring assets into this specialized trust early on, you can add legal protection to your savings so you do not spend them on nursing home costs. This effectively preserves your legacy for your spouse and heirs.

Medicaid and Government Benefits Planning

An Elder Law attorney can restructure your finances so you are qualified for Medicaid’s long-term care requirements. Rather than hide your money, they will arrange it to circumvent complex government rules. The approach preserves a portion of your assets for the living spouse’s expenses or as an inheritance for your children.

Long-term Care Insurance

Long-term Care Insurance is a financial product that helps you cover future care expenses by paying a benefit for services. While it is an excellent tool, it is not suitable for everyone due to complex policies and high costs.

However, if you have a good income, Long-term Care Insurance is worth considering. A person turning 65 has a 70% chance of requiring long-term care services. On average, women need care for 3.7 years while men need it for 2.2 years.

Durable Power of Attorney and Advance Directives

A durable power of attorney gives a trusted individual of your choosing control over paying your bills, managing your investments and handling affairs that you can no longer do yourself. It ensures seamless management of your assets without needing court intervention. Also, advance directives for health care help prevent family disputes and ensure everyone follows your medical wishes.

What Differs among Estate Planning Strategies?

It is beneficial to compare the asset protection and estate planning services for retirees.

Strategy Primary Financial Goal How It Protects Assets Best For Key Consideration
Asset Protection Trust Protect assets from creditors and lawsuits so they remain preserved for your heirs Transfers ownership of assets to a trust, so they are removed from your personal estate Those with substantial assets who want to ensure a legacy for their family Usually requires giving up direct control over your assets that are placed in a revocable or irrevocable trust
Medicaid Planning Qualify for federal assistance to cover long-term care without depleting your savings Strategically structures assets to meet Medicaid’s eligibility limits People with moderate assets who may not be able to fund long-term care on their own Subject to a five-year look-back period, requiring advance planning
Long-Term Care Insurance Pay for future long-term care needs with a dedicated insurance policy instead of your personal savings An insurance policy offers a defined benefit for approved care services Healthy individuals who can afford the premiums and want a predictable way to cover future care costs Must qualify according to health, as premiums are usually costly and may increase over time
Power of Attorney Prevent expensive court-appointed guardianship for seamless financial management if you become incapacitated Legally appoints a trusted individual to manage your finances on your behalf Everyone — it is a foundational tool for all adults, regardless of their wealth The chosen individual retains power over assets, so trust is critical

How do you Choose the Right Asset Protection Specialist?

Selecting a reputable Elder Law attorney is critical for protecting your assets as an older adult. You want to partner with a firm that has the experience to navigate intricate eligibility requirements for various options while prioritizing your comfort. Continue Reading…

The Case for an All-Weather Portfolio

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By Dana Anspach for Fritz Gilbert and The Retirement Manifesto  
Special to Financial Independence Hub

 

Like many teenage girls, I had my high school bedroom walls covered in posters. Actor Rob Lowe took center stage, with a bit of Matt Dillon sprinkled in. (Ladies of the ’80s … any of you relate?)

Mixed in with the heartthrobs were glossy posters of red sports cars. Ferrari. Lamborghini. Later, in college, an Acura NSX.

Looking back, it’s strange. I’ve never been much of a car person:  especially not sports cars. I don’t see well out of them. They’re low to the ground. I scrape rims, bump curbs, and the quick handling leaves me feeling slightly queasy.

So why the fascination? 

I think those cars represented success. Flashy. Fast. The kind of thing people ‘oohed’ and ‘ahhed’ over.

Defining success by external standards is dangerous business. Thankfully, I outgrew that particular distortion: though I’m sure plenty of others remain.

As an adult, I gravitate toward practical, balanced cars. What I think of as the all-weather vehicle. I don’t need to go 200 mph down the autobahn. But I do want traction in heavy rain. I don’t care about making a statement at the valet. I care about glancing in the rearview mirror and seeing my dog’s smiling face as we head to his favorite place on earth: the park.

That preference for balance turns out to matter far beyond cars. It’s also the way I believe we should approach retirement planning and investing.

The Case for an All-Weather Approach

In hindsight, those sports car dreams and investing have something in common.  Sometimes, it’s hard not to hop into the shiny red sports car and drive away.

In investing, a shiny investment (like the shiny red sports car) promises speed and excitement. It may not be as reliable, but for a brief moment, it makes us feel brilliant. Powerful. Maybe even a little invincible. In touch with our inner James Bond. And who doesn’t want to feel like a secret service spy just once in their lifetime?

Often, it shows up as a single stock. Sometimes it’s a real estate deal. Or a business venture. It feels adventurous. Sophisticated. Like we’re seeing something others don’t.

In the late 1990s, tech stocks were the shiny red sports car.

The firm I worked for at the time offered a Science and Technology Fund that rose 99% in twelve months. One day, a middle-aged couple came in and asked me to move their entire portfolio into it.

Durability vs. Speed

Their portfolio had been built for durability:

  • blue-chip stock funds,
  • international exposure,
  • a few bond funds,
  • and a small allocation to the Science and Tech Fund.

They had spent a year watching the tech fund soar, while everything else stood still.

I balked at their request. I explained the logic of balance. Sure, in perfect weather, the shiny red sports car looked great. But the weather wouldn’t always be so accommodating.

My logic sounded silly to them: like a mom insisting you put on your helmet to ride your bike down the street.

They insisted on the change. I acquiesced on one condition: they sign a disclosure acknowledging that this was against my recommendation. They signed without hesitation.

I left that firm before the dot-com crash and the miserable weather that followed. I’ve often wondered what happened to that couple. The allure of speed was too strong.

You can go all in with a play account. But a professional financial advisor can get sued if they do the same thing with your entire life savings. That should give you pause. Risk and return are sides of the same coin. But each time you flip, if it’s several years of heads, it is all too easy to forget that the coin even has another side.

Beware the Slight Upgrade

Not everyone is tempted by flashy sports cars. Sometimes the pull is subtler.

We start to think maybe a small upgrade will help. Something just a little faster. A little more responsive. Even if it doesn’t handle storms quite as well.

I watched this at the end of 2024 when a long-time client, whose retirement plan and portfolio were in solid shape, left because they felt they should be earning higher returns. Continue Reading…

The Problem with Alternative Investments

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Why I do not recommend them — private or liquid — and what most investors do not fully understand

Unsplash: Markus Winkler

By Steve Lowrie, CFA

Special to Financial Independence Hub

I am often asked about alternative investments. My first response is always the same: alternative to what?

Because most of what is being presented as “alternative” is not something new or better. It is often the same wine in a different bottle.

I do review alternative strategies, as I look at all types of investment strategies, but from a high-level, evidence-based perspective. Not by spending time on the individual deals and marketing pitches that arrive almost daily.

Let me be direct. Despite the heavy marketing push behind private credit, private equity, liquid alternatives and similar strategies, I do not recommend them. I have not recommended them in the past, and I do not recommend them now.

In my experience, investors in these structures often do not fully understand what they own, how they are priced, when they can access their money, or the underlying risks.

Those are not minor details.

A recent reminder

At a portfolio manager roundtable a few months ago, one advisor shared that more than half of his clients’ assets were invested in private alternative structures. It was presented as a sign of sophistication.

Only a few months later, U.S. press coverage began highlighting private-credit funds facing large redemption requests. In response, many of these funds have been limiting withdrawals or placing restrictions on how much investors can redeem.

Closer to home, several large, well-known Canadian alternative asset managers have recently halted redemptions, leaving investors unable to access their money for extended periods. If you have lived through that, you already know how it feels. If you have not, the experiences of those investors are worth taking seriously before you ever considered investing.

None of this should be surprising. If you invest in illiquid assets, there will be limits on liquidity. The underlying investments, such as private loans or real estate, cannot be sold quickly. That is how the structure is designed.

The concern is that this reality is often lost in how these investments are presented.

When new information becomes available, it should shape how we think about risk.

It raises a more important question. Is this actually improving outcomes for clients, or is it introducing risks that have not yet surfaced?

Concentrating that much of a portfolio in illiquid, opaque investments is not sophistication. It is risk, just not the kind you see right away.

What are alternative or private investments?

Alternative investments are investments that are not publicly traded. They include private credit (lending directly to businesses), private equity (ownership in private companies), direct real estate or infrastructure assets held in pooled structures.

The key difference is not what they invest in, it is how they are structured. These investments vehicles are:

  1. Not continuously priced
  2. Not easily sold
  3. Not fully transparent

The underlying exposures, corporate lending, real estate, business ownership, can all be accessed through public markets. The issue is the structure, not the asset class. I have made this point before in the context of real estate, where publicly traded REITs offer a cleaner path than direct property ownership, and in the context of gold, where exposure already exists indirectly through the broader market.

Why are these strategies being sold so aggressively to individual investors?

The pitch typically centres on three claims: better diversification, lower volatility, and higher expected returns. These claims do not naturally go together. Higher expected returns typically come with higher risk, not less.

There is some historical basis for this, but only in a very specific context, and one that is not usually explained clearly.

What about the endowment model?

A common argument from advisors recommending alternative investments is that large U.S. university endowments, such as those at Harvard, Princeton, and most famously Yale, have used meaningful allocations to private investments for decades and have generated strong long-term returns.

A bit of background: The Yale Endowment, under the late David Swensen, became the most well-known example of what is sometimes called the “endowment model” – a portfolio approach that allocated heavily to private equity, hedge funds, real assets, and other alternatives, rather than to traditional stocks and bonds. The strategy delivered strong results over an extended period, and many other institutions tried to copy it.

That history is real. But two things are worth noting before applying it to an individual investor’s portfolio.

First, those results depended on advantages most individuals cannot replicate: first-look access to the very best private fund managers, negotiated fee structures, multi-decade time horizons that genuinely do not need liquidity, and full-time investment teams to perform deep due diligence.

Second, the asset class itself has changed. As private investments have been packaged for broader distribution, more capital is chasing the same opportunities, the return advantage has narrowed, and the best managers are generally not the ones marketing to retail and mass-affluent investors. Even some of the original endowment-model institutions have been reassessing their allocations.

What has worked well in the past is often difficult to repeat going forward.

In some cases, sophisticated investors are reducing exposure while less experienced investors are being encouraged to step in. Whether intentional or not, that raises an important question. Is this about better investing, or better marketing?

Is the illiquidity a problem?

Yes, it can be.

There is a concept known as the illiquidity premium. If you give up access to your money, you should expect a materially higher return in exchange.

For that trade-off to make sense, two things must be true. You actually receive the higher return, and you fully understand and accept the loss of liquidity.

What we are seeing now raises questions about both. Liquidity rarely feels important until the moment you need it and that is typically when it matters most.

As an example, several large alternative asset managers, including in Canada, have had to limit withdrawals, delay redemptions, or fully gate funds. Gating means you ask for your money back, but you cannot get it on your timeline. You get it at the manager’s discretion. And this often happens at the same time the underlying investments are under pressure, which is usually the reason for the restrictions in the first place.

Why do private investments appear so stable?

Because they are not priced in real time.

Private investments are typically valued periodically, often using models rather than actual transactions. That creates the appearance of smoother returns. But smoother does not mean safer.

Lower reported volatility often reflects how the investment is priced, not what is actually happening underneath.

It often just means changes in value are being reported more slowly.

A recent Dimensional article makes this point clearly. Without continuous pricing, it is difficult to assess the true condition of private credit investments, and publicly traded proxies may provide a more current signal. Exhibit 1 in the Dimensional piece shows that while broad stock and bond markets were positive over the past year, a publicly traded proxy for private credit declined by more than 13 per cent.

That difference is not trivial, and it highlights how private valuations can lag what is happening in real markets.

What about liquid alternatives?

A common response to the liquidity concerns above is: “But what about liquid alternatives, the ones offered as ETFs or mutual funds with daily liquidity?”

These products solve the liquidity problem on the surface. You can buy and sell them like any other fund. But they do not solve the underlying problem with the strategy.

The fees are still high, often well above what you would pay for traditional equity or fixed income exposure. The strategies inside are often complex, opaque, and difficult to evaluate. And the long-term net-of-fees track records of many liquid alt strategies have been weak or negative.

There is also a more subtle issue. When a fund offers daily liquidity for strategies whose underlying instruments are not themselves daily-liquid, the wrapper is promising something the underlying cannot reliably deliver. Under normal conditions, this is not visible. Under stress, it can be.

Changing the wrapper does not change the strategy. If the underlying approach is expensive, complex, and unlikely to add value over time, putting it in a more liquid package does not fix that. It just makes it easier to buy.

So no, I do not recommend liquid alternatives either.

A simple framework for evaluating any investment

When clients ask me about a new investment idea, I encourage them to ask three questions before going further:

  1. Does it produce a reliable expected return that compensates me for the risk?
  2. Can I access my money when I need it?
  3. Can I clearly understand what I own and how it is priced?

Most alternative investments, private or liquid, struggle to meet all three.

There is also a common belief that access to private investments provides an advantage. In reality, broader access often comes after the most attractive opportunities have already been captured.

That does not make them useless in every context. But it does make them difficult to justify as a meaningful holding in a long-term portfolio. Continue Reading…