All posts by Financial Independence Hub

How did the Pandemic Portfolio hold up?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

I was the first investment blogger to ‘jump on’ the investment risks that might be created by the coronavirus. In fact, when I first penned on the subject in February of 2020, the virus was not then known as COVID-19. And we were not yet in a global pandemic. New cases were just starting to move around the globe, and most felt that the strange new coronavirus would be contained. Today, I can’t claim that I knew it would result in the first modern pandemic. But I did address the risk, and I did offer some thoughts on how an investor might prepare, if they needed to protect their wealth. Let’s have a look, how did the pandemic portfolio perform?

Here’s the original post from February of 2020.

How to prepare your portfolio for the coronavirus outbreak.

Do nothing, stay the course

That almost goes without saying. You don’t fix a ship in a hurricane offers our friends at Mawer Investments. If you have a solid investment plan, and you are investing within your risk tolerance level —

Image by S K from Pixabay

De-risk your portfolio

This suggestion is controversial to some, but to me it is common sense. Fear was mounting in February of 2020, and the stock markets were offering a minor hissy fit. It is safe to say that most investors are not safe. They are investing outside of their risk tolerance level. These market scares offer the opportunity to discover that you are investing outside of your comfort level.

The timing from February of 2020 to de-risk was still quite favourable.

That would have allowed an investor to move to their risk tolerance level before the market corrected by nearly 35%. While that move to a lower risk portfolio might create lesser returns over time, it can remove the greater risk of permanent losses. Investors are known to too-often sell out in fear near the bottom of the market declines. Of course that’s the complete opposite of – buy low and sell high.

And a typical balanced portfolio would have delivered about 21% to 22% to date, from February of 2020. That’s a greater return compared to the Canadian stock market from that date.

Pandemic portfolio construction

I had suggested that investors consider two of the greater risk-off assets. Risk-off will refer to the defensive investments that protect your portfolio. And typically, investors run to these assets in times of trouble. That influx of dollars can drive up prices.

Gold is known as a safe haven asset.

Gold was the lead image on the original post on how to prepare your portfolio for the pandemic. The precious metal did shine in the pandemic, when needed.

I had suggested that investors consider U.S. long term treasuries. They punch above their weight as risk mangers (keeping an eye on those unruly stock markets.

You’ll find those long term treasuries in the Permanent Portfolio post.

And mostly, at the core is a sensible and well-balanced portfolio. From the original post …

. the best investment strategy is to diversify across geographic locations, asset classes and currencies to protect against the unknowns.

Ray Dalio

That said, one of the beautiful all-in-one balanced asset allocation ETF portfolios would have performed wonderfully. It’s the same story if you held a balanced ETF portfolio.

If an investor had shaded in some gold and long term treasuries, they would have experienced some greater returns, and would have been treated to better risk-adjusted returns.

The pandemic portfolio performance

For demonstration purposes I used the asset allocation offered on the ETF Portfolio page, for a balanced model. You certainly could have (successfully) held a conservative, balanced growth or all-equity model through the pandemic. But for those with a balanced model that holds some risk-off assets, the inclusion of gold and treasuries would have helped the cause. Continue Reading…

Invest as I say, not as I do

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By Michael J. Wiener

Special to the Financial Independence Hub

When I answer investing questions for friends and family, I tend to steer them to simple solutions that are consistent with their level of interest in investing.
However, I run my own portfolio differently in certain ways.  In reading Dan Bortolotti’s excellent book Reboot Your Portfolio, I noticed that the advice I give usually matches his advice, and it’s my own portfolio choices that sometimes differ from what’s in the book.
Here I see if the differences between my portfolio and Bortolotti’s advice hold up to scrutiny.

Before I go any further, I want to be clear that this isn’t a case of me having a “smarter” portfolio where I’m actively trading to beat the market.  I steer people to low-cost passive investing and that’s what I use myself.  The main difference between me and other do-it-yourself (DIY) investors is the degree to which I’ve built most of the complexity of my portfolio into an elaborate spreadsheet that alerts me by email when I need to take some action.  I’m happy to automate complexity in this way and let the spreadsheet tell me what to do.  I can safely ignore my portfolio for months without worry.

Pay yourself first

Bortolotti says “‘Pay yourself first’ has become a cliché because it works.”  “Sure, you could wait until the end of the month and then save whatever is left after paying all your expenses.”  “People following this approach rarely wind up with any surplus cash.”  “Make your savings a fixed expense, too, and you’ll be well on your way to meeting your investment goals.  It’s impossible to overstate how important this is.”

This is excellent advice.  I recommend it to my sons.  My wife and I never followed it ourselves.  From a young age we were used to only spending money on necessities.  It’s taken us decades to get used to spending money more freely.  During our working years, our savings rate bounced around, but it was rarely below 20%, and reached 80% for a while when the family income rose and the kids cost us less.  This wasn’t a case of us scrimping or having a savings target.  That’s just what was left after we bought what we needed and wanted.

Expected future returns

Vanguard research showed “that most of the techniques people employ to forecast future stock returns are utterly worthless.”  “So don’t get clever when you’re trying to estimate stock returns in your own financial plan.  That average over the very long term — about 5% above inflation — is a reasonable enough assumption.”

As a retiree, I find it wise to back off from the long term average of 5% and use 4%; I’d rather spend a little less starting now than be forced to spend a lot less in the future if stocks disappoint.

Bortolotti is right that P/E ratios have little predictive value.  I made this point myself recently.  However, long-term data show a consistent weak correlation between P/E levels and future stock returns.  This effect is almost unmeasurable over a year, and is very weak over a decade.  However, it builds over multiple decades.  I model this effect by assuming that P/E levels will decline to a more normal level by the time I turn 100, and corporate earnings will grow at an average rate of 4% annually above inflation over that time.  At the time of writing, this amounts to assuming stocks will return 2.6% above inflation over the rest of my investing life.  The missing 1.4 percentage points comes from the assumed drop in P/E levels over the decades.

The difference between my assumption of 2.6% and Bortolotti’s 5% is substantial.  It’s probably not important to those still a decade or more away from retirement; they have time to try to save more, work longer, or plan a more modest retirement.  Current retirees are another matter.  If they assume their stock allocation will beat inflation by 5%, high spending in early retirement could leave them with meagre later years.

Factor Investing

Investment research over the decades has shown that stocks with certain properties have outperformed.  These properties are called “factors,” and this whole area is sometimes referred to as “smart beta.”  Some well known factors are value (“stocks with low prices relative to their fundamentals”), small cap (small companies whose market capitalization is below some threshold), and momentum (“when stocks rise in price, they continue that trend for months before eventually settling back to earth”). Continue Reading…

How to pick US and Canadian Dividend-paying stocks

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By Ian Duncan MacDonald

Special to the Financial Independence Hub

Once upon a time there was a man who loved apples so much that he wanted to own an apple tree. So, he went to an apple-tree broker to buy one.  The man was impressed to see an apple tree one hundred feet tall with apples the size of basketballs. He asked how much it would cost to buy such a magnificent tree.

The apple-tree broker smiled tolerantly and said, “No one person can own such a magnificent tree. You can only own one tiny piece of it, a small branch a few inches long. How much do you have to invest?”

The man replied that he would like to own more than one tiny branch. Surely there must be something in your orchard that I can buy?”

The apple-tree broker said of course there is, but you must understand that for twenty years the apples that come from this magnificent tree have got increasingly bigger and even more plentiful. Even these  little twigs, in time, will produce several more giant apples than they do now.

“What else do you have?”

“Well over in this corner are 10 trees you could buy for the same amount of money; however, some years they do not produce apples and the apples are very small but if you really want a  bargain, I can give you 100 apple trees for one dollar. Hold out your hand.”

The apple broker poured one hundred apple seeds into the man’s palm who testily responded, “These aren’t magnificent apple trees?”

“No, these are speculative apple trees.  You are buying them for their potential.”

“What else do you have?”

“Well, see those fellows over there. They operate apple tree funds.  They buy 500 apple trees at a time and sell people like you a piece of their apple tree fund.”

“Are these 500 apple trees all magnificent trees?”

“No. Of course not. There are fewer than 100 magnificent trees available to buy.  The fund may have partial ownership of a dozen magnificent trees but for diversification they spread the risk of apple trees over five hundred trees. They call it their safe apple tree index.”

”Would this include some that are just seeds, some a few inches high, some a few feet higher and some fully grown ones whose production of apples may be spotty from year to year?

“It would but some might grow into magnificent trees, and you might be able to sell units in the fund for more than you paid.”

Safer to invest in 20 dividend-paying stocks than funds

This allegory is an attempt to explain why you are safer investing in 20 financially strong companies paying high dividends then investing in index funds, mutual funds, and ETFs. Why would you invest in hundreds of weak, mediocre stocks when you could invest the same amount of money in financially strong companies paying high dividends?  Strong companies with easily accessible historical records that can show their share price and dividend payments increasing yearly for decades.   Continue Reading…

How to invest for retirement when time is no longer your friend

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub

 

Save early, save often.

Time in the market is your friend.

Get started, stay invested.

Let’s face it: easy to say, hard to do.

How to invest for retirement when time is no longer your friend?

Read on in today’s post, including answering a reader email on this very subject.

Time in the market 

Cutting to the chase: time in the market, as opposed to timing the market, works because it does not involve short-term predictions or any guesswork at all. This strategy proves that time and patience in the market is better than a quick sale. For example, when a person has a stock or ETF for many years, the power of compounding simply tells us that investment growth will do all the heavy lifting for us. Patient investors will gain larger profits by allowing their investments to grow over time.

“The wonderful magic of compounding returns that is reflected in the long-term productivity of American business, then, is translated into equally wonderful returns in the stock market. But those returns are overwhelmed by the powerful tyranny of compounding the costs of investing. For those who choose to play the game, the odds in favor of the successful achievement of superior returns are terrible. Simply playing the game consigns the average investor to a woeful shortfall to the returns generated by the stock market over the long term.” – John Bogle, founder of Vanguard Group.

John said things better than I did. Most investors should consider investing as a multi-year long-term endeavour.

The secret sauce therefore is spending time in the market – staying invested – and not diving in and out.

I’ve seen this play out myself, in real time, with my dividend investing journey. See the chart below. Sure, I’ve added new money over the years but going forward, my portfolio will continue to grow and is likely to double every 10 years or so even if I don’t add another five cents.

My Own Advisor Dividend Income Update

Further reading: read more about my progressive dividend income journey here.

Waiting for growth can be painful. Or maybe life throws a curveball at you and you simply can’t invest as much as you’d like. Life happens.

I’ve been on record to say if you haven’t saved a cent by age 50, for any retirement at all, you might be kissing any middle-class retirement lifestyle away. With inflation running higher, that might be more true than ever.

But it is never too late to right the ship. It’s never too late to learn something new. It’s never too late to get started with investing: you can invest for retirement when time is no longer your friend.

How to invest for retirement when time is no longer your friend – reader question

Here is the reader question, adaptedly slightly for the site for today’s post:

Hi Mark,

I appreciate all that you do. I recently sold a property and I’m starting all over.

I’m newly self-employed. I have a new rental apartment, but starting from scratch. I’m 55 and have an empty TFSA. I would like to max it out with investments that will act as my long-term account. I don’t need to touch that money for probably 15 years. I hope to put any savings, about $77,000 in there next year.

I’ll also be putting another $150,000-$200,000 into my new business. Day trading? Kidding.

Back to my biggest question – most articles and advice I’ve read about is focused on long-term investing that caters to a younger person whose age allows them to exploit compound interest – I know you write about that too. Because I’m not in that category, I thought I’d reach out and see what you can help with. What is possible? 

Please accept my request or send me any articles on your site that address investing for someone older, with limited funds like myself for the TFSA. 

Thanks so much for your time and consideration.

Thanks for your email and readership.

Well, a few thoughts and I’ll put them in order of what I would consider myself, based on my personal lessons learned as your food for thought.

How not to invest for retirement when time is no longer your friend

I’ll cover how much wealth you can still generate with your TFSA in a bit, but I think it’s important for me to call out that based on market history, because equity markets can be volatile in the short term but rather predictable over the long-term (they rise), an investor who stays invested is probably going to win the race.

Case in point.

Did you predict this massive fall, and rise, in our pandemic-era?

If you’re being totally honest with yourself, I doubt it. I know I didn’t see this comeback coming but I’m sure glad it happened ….

The Cash Wedge

So, whether you invest in stocks, bonds, real estate or more speculative plays like Bitcoin, you should know that you’re mainly rewarded with returns for your exposure to just one thing: risk.

Risk, on the whole, is difficult to define and measure, especially at the personal level but essentially it comes in two main flavours: short-term and long-term.

Short-term risk might be easier to relate to. Stocks, bonds, and other assets can lose money in the short-term. See above!

But investing history consistently tells us for any short-term headaches, by staying invested, “this too shall pass.”This means that an investor who stays in the market (and does not trade) generally speaking has a much higher probability of long-term success than one who tries to pick the perfect time to get in and out.

Further reading: I used to sabotage my portfolio. Don’t repeat my mistakes!

How not to invest for retirement when time is no longer your friend

Another concept I want to bring up is the fact that at any age, there is one major piranha you need to avoid for successful, more predictable wealth-building: the investment industry itself.

Did I just call out all the entire wealth industry? Only some to a point! Continue Reading…

9 ways Entrepreneurs finance their Startups

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As an entrepreneur, how have you financed your startup?

To help finance your next startup, we asked business professionals and leaders this question for their insights. From crowdfunding to savings from a full-time job, there are several ways to fund a startup.

Here are 9 ways entrepreneurs finance their startups:

  • Look into Commerce Authority Programs
  • Partner with Others
  • Finance with Commercial Bridge Loans
  • Connect with Local Non-Profits and Support Networks
  • Raise from Crowdfunding
  • Apply for Small Business Grants
  • Pitch to Potential Investors
  • Ask for Support from Family and Friends
  • Save Your Full-Time Salary

Look into Commerce Authority Programs

I’ve bootstrapped the financing of our company for 10 years, but programs from a local commerce authority can certainly help support and fund new initiatives. For example, the Arizona Commerce Authority offers programs such as the Small Business Capital Investment Incentive Program, where the ACA may certify up to $2.5M [US$] in tax credits each fiscal year, or the Rapid Employment Job Training Grant, a reimbursement for training and development expenses. Look into the programs at your local commerce authority, as many small businesses and startups may discover funding and grant incentives designed just for them. — Brett Farmiloe, Markitors

Partner with Others

Financing your business with partners to fund your growth in exchange for special access to your product, staff, distribution rights, ultimate sale, or some combination of those items using strategic partner financing is the best strategy to finance your startup. I’ve noticed that this option is often neglected. Strategic investments are similar to venture capitalism in that it is typically a stock sale (rather than a loan), yet it can also be royalty-based, in which the partner receives a portion of every sale, in my opinion. Partner financing is a great option because the firm you partner with is likely to be a huge corporation, and it may even be in a similar industry or one that has a stake in your company. — Carey Wilbur, Charter Capital

Finance with Commercial Bridge Loans

We like to overcome the obstacle of financing small businesses by bringing innovative solutions to the table. One such solution is our commercial bridge loans, which are flexible short-term financing options for commercial real estate properties. This might be a great option for fast growing businesses as they continue to grow and scale their operations.

As loan experts, we commit to truly helping clients as advisors. If you’re just starting a business, consider consulting a lending expert. Make sure your needs are heard and that you are provided with affordable options to choose from. — Allan J. Switalski, AVANA Capital

Connect with local Non-Profits and Support Networks

In addition to bootstrapping, local not-for-profit organizations and networks that support female entrepreneurs are some great ways to fund your startup. You can find funding and investors through these kinds of organizations like we did when we found Beam. One of the other great things about organizations like Beam is that you will become part of a network you can lean on for support and can also find mentorship from business professionals in your area. This mentorship can make a huge difference in helping you grow your business. Also, there’s a lot of grants out there that support female-founded businesses which require a little extra upfront research and work but another great avenue to fund the business.

— Sara Shah, Journ

Raise from Crowdfunding

Crowdfunding may be an alternative if you have a hot idea and are good at social media. When crowdfunding platforms like Kickstarter and Indiegogo were launched, there were a lot of enterprises that had significant success raising funds through their reach.

What’s the disadvantage? Because many businesses seek funding through crowdfunding, you must build a lot of buzz in order to cut through the total signal noise. Unfortunately, it’s also easy to overextend yourself and irritate backers, which can lead to a lot of resentment before your firm even gets off the ground. — Veronica Miller, VPNOverview

Apply for Small Business Grants

I usually advise startups to consult small business grant administrators to fund your startups. Especially, when your new company is a pioneer and investing in innovative technologies and techniques, more funding opportunities arise.  What’s more, small businesses founded by women, minorities, or veterans are often eligible for grants from the Small Business Administration (SBA) and other organizations that promote entrepreneurship. If you fall into one of these categories, you should contact your local SBA branch or chamber of commerce to see if there is any local grant money available. — Spiros Skolarikis, Comidor

Pitch to potential Investors

We joined an accelerator program that connected us to investors. In turn, they take a share in the company in exchange for capital. The ownership-to-capital ratios are variable and are usually determined by a company’s valuation. I believe this is a wonderful option for companies who don’t have physical collateral to serve as a lien on a bank’s loan. However, it is only a good fit when there is a proven high growth potential as well as a competitive advantage of some sort, such as a patent or a captive consumer. Another advantage of working with investors is that they may give you a wealth of information, industry connections, and a clear path for your company. — Guy Katabi, Lightkey

Ask for support from Family and Friends

Borrowing money from friends and family is a traditional method of starting a business. While it may be more difficult to persuade investors or banks of the excellence of your idea, your family and friends will typically trust in your ambition.

They might be more willing to contribute to the funding of your company. If you do seek loans from friends and family, make sure that each of you has appropriate legal guidance, especially if the money is taken as a loan. However, what about the disadvantages? Borrowing money is an easy way to alienate friends and ruin family relationships. If you decide to go this route, go with caution. — Edward Mellett, Wikijob

Save your full-time Salary

I financed my startup with the salary from my full-time job. I was fortunate to have a good paying job as a software engineer, which enabled me to fuel my startup while it was just a side hustle. I’ve never been a big spender, and I live modestly:  this low-cost lifestyle left me with enough money to feed my business while getting it off the ground. I have since quit my job and operate my small business with the money it generates. –– Andy Kolodgie, Cash Home Buyers Georgia

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