All posts by Financial Independence Hub

Tackling your Stock Market fears

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By Anita Bruinsma, CFA

Special to the Findependence Hub

Investing has become more accessible to more people over the years. The emergence of mutual funds, ETFs, online brokers and robo-advisors has given pretty much everyone the means to invest. So why are so many people still reluctant to invest, and in particular, why don’t they think they can do it themselves? Judging by the people I’ve talked to the answer is: they’re scared. 

This is unfortunate and unnecessary. The investment industry has made investing look so complicated. We are led to believe that we need an MBA, a Bloomberg terminal and a proficiency in Excel modeling to invest. This is absolutely not true. Investing can be simple when you buy and hold broad-market ETFs. 

Compounding the problem are the tales of fortunes lost in the stock market, either by gambles taken or being swindled by an unscrupulous financial sales person. These horror stories, although real, are uncommon, and like many of our fears, are bigger in our imaginations than in reality. 

Investing can be simple

Have you heard of imposter syndrome? That’s when you think you aren’t talented or skilled enough to deserve your job, your income, or the accolades bestowed on you. I had terrible imposter syndrome when I was hired as an equity analyst 16 years ago. I thought everyone around me was way smarter than me when it came to investing in the stock market. 

Over the years, though, I realized that so much of what people were talking about was irrelevant, and the excessive amount of information and analysis was unnecessary. The highly-paid “experts” who came to meet with us couldn’t simply say “The stock market goes up over the long term.” Why would anyone be paid to give that simple piece of insight?

The thing is, that’s all that matters. The fact that the U.S. stock market has, historically, always recovered from dips and crashes and continued the march upward is all that matters. Don’t let all the other market-related noise distract you from this point.

Fewer decisions, better outcomes

Here’s how to de-complicate investing: don’t make predictions. The smartest investors on Bay Street don’t try to guess where the market is going: they buy their investments and hold onto them for the long term. The more decision-making you remove from investing, the better off you’ll be. This means don’t pick stocks and don’t choose when to get in and out of the market. Buy ETFs or index mutual funds that mirror the broad market, buy when you have the money, and sell when you need it.  Continue Reading…

The all-weather portfolio. Ready for almost anything

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By Dale Roberts

Special to the Findependence Hub

I recently posted a portfolio concept for the all-weather portfolio for 2022. The idea behind an all-weather portfolio is that it can prosper during periods of sun, rain, storms, hurricanes, earthquakes and tsunamis. Of course, in the above analogy weather serves as a proxy for the economic conditions that might arrive. The all-weather portfolio is ready for most anything.

On Seeking alpha I posted the all-weather portfolio for 2022. The portfolio is designed for U.S. investors, though Canadians can certainly mimic the approach or apply the greater concepts. The big idea of the all-weather portfolio is to hold assets in four buckets. It is an extension of the Permanent Portfolio.

There is a bucket of investment assets ready to thrive no matter what the weather offers (economic conditions). For example, for the last 40 years or so we’ve had favourable weather. Inflation has been low and economic growth has been modest, but positive. We’ve been in a disinflationary environment. Inflation has been low and mostly falling.

The weather has been nice

Stock markets and bond markets perform quite well during these disinflarionary periods.

To view some longer dated returns have a look at the RBC Select Balanced Fund. Of course, you could do better by way of an all-in-one asset allocation ETF.

Stocks have performed quite well over time. That said, investors needed to be armed with some very impressive umbrellas (and risk tolerance) to withstand the Great Financial Crisis (2008-2009) and the dot-com crash of the early 2000’s. Stock markets declined in spectacular fashion in both of these events.

Given that we were still in the midst of a mostly disinflationary period, bonds did the trick in lowering the volatility of the typical balanced portfolio. Bonds will mostly go up when stocks go down, offering that useful inverse relationship. We can think of bonds as portfolio shock absorbers.

These two major stock market corrections came and went, and we returned to our mostly fair-weather disinflationary times. Modest economic growth returned as well.

And now for something completely different

Yes, the above subhead is referencing a catch phrase made famous by Monty Python’s Flying Circus.

Monty Python’s Flying Circus

The comedy troupe was certainly different. And so is today’s economic environment. We have inflation, real inflation. It might even turn into stagflation when most everything fails for the investor. Stagflation is a period of persistent inflation that is accompanied by economic decline. The worst of all worlds you might say. Some nasty weather.

What works during stagflation or unexpected inflation (persistent inflation above those central bank 2-3% targets)? It’s not stock markets; it’s certainly not bonds. Oooops. That’s the traditional balanced portfolio. Continue Reading…

Rethinking the 4% Safe Withdrawal Rate

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By Fritz Gilbert, TheRetirementManifesto

Special to the Financial Independence Hub

The 4% safe withdrawal rule is a well-known “rule of thumb” for those planning for retirement.

One thing it has going for it is that it’s simple to apply.

If you have $1 Million, the 4% safe withdrawal rule says you can spend $40,000 (4% of $1M) in year one of retirement, increase your spending by the rate of inflation each year, and you’ll never run out of money.

Simple, indeed.

But, I’d argue that simplicity comes at a potentially very serious cost.  Like, potentially running out of money in retirement.

Today, I’ll present my argument against the 4% safe withdrawal rule given our current economic situation, and propose 3 modifications I’d recommend as you determine how much you can safely spend in retirement.

Rethinking the 4% Safe Withdrawal Rule

I read a lot of information on retirement planning, and lately, I’ve been seeing more content challenging the 4% safe withdrawal rule.  I agree with those concerns and felt a post outlining my position was warranted.

As a brief background, the 4% Safe Withdrawal Rule is based on the “Trinity Study,” which appeared in this original article by William Bergen in the February 1998 issue of the Journal of the American Association of Individual Investors.  For further background, here’s an article that Wade Pfau published on the study.  I’ll save you the details, you can study them for yourself at the links provided.

The conclusion, based on the study, is summarized below:

“Assuming a minimum requirement of 30 years of
portfolio longevity, a first-year withdrawal of 4 percent,
followed by inflation-adjusted withdrawals in
subsequent years, should be safe.”

My Concerns With The 4% Safe Withdrawal Rule

In short, some key factors about the study are relevant, especially as we “Rethink The 4% Safe Withdrawal Rule”

  • It’s based on historical market performance from 1926 – 1992.  

My Concern:  Relying on past performance to predict future returns can mislead the investor, especially given the unique valuations in today’s markets (more on that below).  This point is driven home by this recent Vanguard article that projects future returns based on current market valuations:

4% safe withdrawal rule assumptions

If you think the Vanguard outlook is depressing, check out this forecast from GMO as presented in this Wealth of Common Sense article titled “The Worst Stock and Bond Returns Ever”:

stock and bond forecast

  • Note the VG forecast is nominal (before inflation) whereas the GMO is real (after inflation).

Why Are Future Returns Expected to Be Below Average?

The biggest driver for the projected below-average returns is the high valuation in today’s equity market (particularly in the USA), and the fact that interest rate increases would negatively impact bond yield.  In my view the CAPE Ratio is one of the best indicators of market valuations.  Below is the current CAPE ratio as I write this post on November 16, 2021:

CAPE Ratio

The reason current valuations matter is the fact that they’re highly correlated to future returns, as indicated from this concerning chart that I saw last weekend on cupthecrapinvesting:

CAPE ratio correlation to future returns

Based on today’s CAPE ratio, the historical correlation suggests the forward total returns over the next 10 years could be close to 0%.  Scary stuff for someone who’s planning on equity growth to pay for their retirement expenses.  Scary stuff for someone who’s committed to the 4% safe withdrawal rule.

In addition to the bearish outlook for US equities, bonds could be negatively impacted if when interest rates increase.  To get a sense of how low the US 10-year Treasury yields are now compared to long-term averages, below is the current chart of 10-year yields from CNBC:

4% safe withdrawal rate rule - bond impact

Bond prices are inversely related to interest rates, so as rates go up, bond prices go down.  So, if you’re holding 60% stocks and 40% bonds, it’s possible that you could see decreases in both asset classes.

As cited in this Marketwatch article, The Fed has begun signaling that interest rates are “on the table” for 2022, especially if the current bout of inflation proves to be less than a transitory event (for the record, I suspect it will be more than transitory, but what do I know?).

This brings us to the next concern …

My Other Big Concern With The 4% Safe Withdrawal Rule:

In addition to my concern above (the risk of an extended period of below-average market returns), I don’t like the part of the rule which states you should “increase your spending the following year based on the rate of inflation.”  As most of you know, inflation has been on a bit of a tear lately, as demonstrated in this chart from usinflationcalculator.com:

Based on the 4% Safe Withdrawal Rule, you would be increasing spending next year based on the higher inflation rate, which could well be the same time you’re seeing lower than expected returns.

I don’t know about you, but that doesn’t sit well with me.

Suggested Modifications to the 4% Safe Withdrawal Rule

It wouldn’t be fair to cite my concerns with the 4% Safe Withdrawal Rule without suggesting an alternative. Following are the 3 modifications I’d suggest for your consideration.  I’m applying all 3 of these modifications in our personal retirement strategy. Continue Reading…