All posts by Financial Independence Hub

Justwealth: The advantages of Evidence-based Investing

 

One of the most important developments in the financial world in recent years has been the growth of evidence-based investing. But what exactly is it? In the first of a new series of exclusive articles for Justwealth, the UK based author and journalist Robin Powell explains why founding your investment strategy on four basic principles can dramatically improve your chances of achieving your long-term goals.

By Robin Powell, The Evidence-Based Investor 

Special to Financial Independence Hub

It takes between seven and nine years to train to be a doctor in Canada. For surgeons it takes as many as 14. Even then, both doctors and surgeons are required to engage in continuous learning throughout their careers.

Becoming a financial adviser, investment consultant or money manager is considerably less onerous. What’s more, unless you deliberately set out to defraud your clients, you’re unlikely to be stripped of your right to operate.

Of course, there are still examples of poor medical practice. It was only as recently as the early 1990s that a group of epidemiologists at McMaster University in Hamilton, Ontario, first coined the phrase evidence-based medicine. Sadly, though, professional malpractice in the investing industry is far more common, and there are many who have worked in it for decades and yet act as if they have little or no grasp of the evidence on how investing works.

A glaring illustration of this is a study published in May 2018 called The Misguided Belief of Financial Advisers. The researchers analyzed the returns achieved by around 4,400 advisers across Canada: both for their clients and for themselves. They found that the advisers made the same mistakes investing their own money as they did when investing their clients’ money.

For example, they traded too frequently, chased returns, preferred expensive, actively managed funds, and weren’t sufficiently diversified. All of those things have been shown, time and again, to lead to lower returns. On average, the clients of the advisers analyzed underperformed the market by around three per cent a year: a huge margin.

What is evidence-based investing?

In recent years, we’ve seen the development of what’s called evidence-based investing (EBI). Like evidence-based medicine, it entails the ongoing critical appraisal of evidence, rather than relying on traditional practices or expert opinions.

So what sort of evidence are we talking about? Essentially there are four main elements to the evidence that underpins EBI.

First, the evidence is based on research that is genuinely independent; in other words, the research wasn’t paid for or subsidized by organizations with a vested interest in the outcome.

Secondly, it’s peer-reviewed. This means that the findings are published in a peer-reviewed journal which is closely examined by experts on the subject.

Thirdly, the evidence is time-tested. Investment strategies often succeed over short time periods, but fail over longer ones. Investors should disregard any evidence that hasn’t stood the test of time.

Finally, the evidence results from rigorous data analysis. As everyone knows, data can be very misleading if it hasn’t been properly analysed.

The good news is that, even when all four of these filters are strictly applied, there is still plenty of evidence to inform our investment decisions. Since the 1950s, finance departments at universities across the globe have produced many thousands of relevant studies.

What does the evidence tell us?

What, then, are the main lessons from academic research on investing? This is a wide-ranging subject, and one we’ll look at in more detail in future articles, but there are four main takeaways.

Markets are broadly efficient

Because markets are competitive and prices reflect all knowable information, it’s very hard to identify stocks, bonds or entire asset classes which are either undervalued or overvalued at any one time. No, prices aren’t perfect, but they’re the most reliable guide we have as to how much a security is worth.

Diversification is an investor’s friend

It’s vital for investors to diversify across different asset classes, economic sectors and regions of the world. As well as reducing your risk, diversification can also improve your returns in the long run, and it is rightly referred to as “the only free lunch in investing.”

Costs make a big difference

The investing industry and the media tend to focus on investment performance. But while performance comes and goes, fees and charges never falter. Continue Reading…

Then and Now – Revisiting the need for bonds

Image courtesy myownadvisor/Pexels

By Mark Seed, myownadvisor

Special to Financial Independence Hub

It has been said bonds make bad times better.

Is this the reason to own bonds?

Welcome to another Then and Now post, a continuation of my series where I revisit some older blogposts and either rip them to shreds (because my thinking has totally changed on such subjects) or I’ll confirm my position on various personal finance topics or specific stock and ETF investments.

Since my last Then and Now post (whereby I shared I sold out of all Johnson & Johnson (JNJ) stock to buy other equities in recent years), I figured it might be interesting to review this post and update my thinking from a few years ago before the pandemic hit – on bonds.

Then – on bonds

Back in 2015 when the original post was shared, I referenced this quote that frames my own portfolio management approach when it comes to my bias to owning stocks over bonds:

“If you want to make the most money, you should invest in stocks. But if you want to keep the money you made in stocks, you should invest in bonds.” – Paul Merriman.

Bonds are essentially parachutes when equity markets fall; bonds will cushion the portfolio landing. And equity markets can fail big at times!

While I understand there are different ways to measure the “equity risk premium,” the summary IMO is the same: the risk premium is the measure of the additional return that investors demand or expect for taking on a particular kind of risk, relative to some alternative.

Buy a bond and hold it until it matures and you know what you will get back.

Invest in equities and the range of outcomes is wide.

With equities, you could make a lot of money, but you could lose a lot.

Equities have to have a higher expected return to compensate investors for taking on this risk.

Otherwise, if the risk premium is not there – why bother with stocks at all?

Now – on bonds

That’s the rub these days, for many investors. Why invest in stocks when interest rates are higher and you can earn 4-5% essentially risk-free?

Of course, there is no way of knowing how equities or bonds will perform until returns for each happen. You can consider rebalancing your portfolio from time to time between stocks and bonds because you expect equities will do better longer-term but that doesn’t mean they will short-term.

Which brings me back to this: risk is the price of the entry ticket to buy and hold stocks. Continue Reading…

Is a Tax Credit a better way to support Social Housing?

image courtesy CMI Financial Group

By Kevin Fettig

Special to Financial Independence Hub

One of the biggest challenges in Canada’s rental housing crisis is the lack of new affordable housing units being built.

Despite efforts through the National Housing Strategy’s five programs, only 17,000 units were delivered after four years. This disappointing outcome is only a modest improvement over Ottawa’s track record in the past 30 years. For example, between 1996 and 2013, fewer than 7,000 new units were provided by federal and provincial governments.

In contrast, the United States built 3.5 million subsidized rental units from 1987 to 2021. Adjusted for population, this is equivalent to building 11,000 units per year in Canada. Both countries have tightened the tax benefits of rental real estate, but the U.S. offset this policy shift by introducing the Low-Income Housing Tax Credit (LIHTC) to mitigate the impact of these changes on low- and middle-income renters.

A Canadian LIHTC would offer an alternative method of federal funding by leveraging private-sector expertise in owning, building, and managing low-income rental housing. The LIHTC would provide tax credits to both for-profit and nonprofit owners of rental housing, with nonprofits having the option to sell these tax credits. A key aspect of the program would be its efficient resource allocation, achieved by creating competition among developers for tax credits and using a market-based test for the viability and need for low-income housing.

Complements existing Renter Support Initiatives

The program could be designed to complement existing renter support initiatives, such as local government programs, housing allowances, and rent supplements. It would work by providing tax credits to developers, who would then pass them on to investors to offset their income tax.

Unlike earlier tax credit programs like the Multiple Unit Residential Buildings (MURB) provision, this program would have a cap, with credits allocated annually to each region based on population. The credits would be federally funded and awarded according to provincial objectives. Continue Reading…

Beat the TSX portfolio, Canadian Wide Moats rule

By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

In this Sunday Reads we’ll begin with a look at the first half returns for the Beat The TSX Portfolio and the Canadian Wide Moat Portfolios. The Beat The TSX Portfolio is a pure value play, discovered by those big dividends. The Canadian Wide Moat Portfolio relies on the moats – a lack of competition. There are a few key oligopoly sectors in Canada. While both Canadian stock portfolio approaches have a nice history of beating the market, the BTSX is more volatile, while the Wide Moats are more low volatility by design. The BTSX Portfolio continues to struggle while the Wide Moats continue to best the market.

Here’s the updated post on The Beat The TSX Portfolio.

For the first half of 2024, it’s 6% vs 1.3% in favour of the passive TSX Composite.

And here’s the updated post for the Canadian Wide Moat Portfolios.

The wide moat portfolio has beat the TSX by some 1.6% annual over the last decade. That said, it has underperformed from 2023. I can still find no better model for the large cap Canadian space. It tracks closely to (but slightly outperforms) the BMO Low Volatility ETF – ZLB.TO.

Shareholder yield

I really liked this post and screen in the Globe & Mail (sub required). Companies that have a lot of free cash flow typically perform very well. They can buy back shares (increasing your ownership) and pay bigger and increasing dividends. We call that combination the shareholder yield. The screen also looked at valuation, quality and more. Here’s where it landed. It’s a nice sixpack …

And check out the buy back and dividend history for Canadian Natural Resources. My favourite oil and gas stock …

More on oil and gas …

The markets last week Continue Reading…

Navigating the Challenges of Solo Entrepreneurship

Unsplash

By Devin Partida

Special to Financial Independence Hub

Solo entrepreneurs face unique financial challenges, including inconsistent income streams, high operational costs, limited access to capital and the difficulty of separating personal and business finances. Effective financial planning becomes crucial to navigating these hurdles and ensuring sustainable business operations and long-term success.

Creating realistic budgets, building emergency funds and managing expenses allows solo entrepreneurs to stabilize their financial health. Additionally, seeking professional financial advice offers personalized strategies, tax planning and investment guidance, which are essential for securing a stable and prosperous future.

Unique financial hurdles for Solo Entrepreneurs

Variable revenue presents significant challenges for solo entrepreneurs in budgeting and managing expenses. The unpredictable nature of income makes it difficult to plan for consistent cash flow, often leading to financial strain. According to a recent survey, 77% of respondents reported their expenses increased by 6% or more due to inflation, further complicating financial planning.

Solo entrepreneurs also face the challenge of managing overhead costs without the benefit of economies of scale. Unlike larger businesses that can reduce per-unit costs through bulk purchasing, they must find ways to cover operational expenses efficiently. In fact, 37% of small businesses resort to borrowing to meet their operating expenses, which highlights the financial pressure they endure.

Securing loans and investments is another hurdle for solo entrepreneurs. Financial institutions and investors may view them as high-risk due to their lack of a proven track record and limited collateral. This makes it difficult for single proprietors to obtain the necessary funding to grow and sustain their businesses. Continue Reading…