All posts by Financial Independence Hub

Pros and cons of investing only in Canada

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By Mark Seed, myownadvisor

Special to Financial Independence Hub

Image courtesy of MyOwnAdvisor/Pexels

There are certainly pros and a few cons when investing in just Canada…

Given it’s “tax season” and tax refund season for some, I shared my ideas related to managing your tax refund this year.

Thanks to Rob Carrick The Globe and Mail,  who mentioned my post in his column: Look what’s happened to the cities with average $1-million home prices (subscription).

“Housing has definitely come down in cost since 2022. The average price of a resale home in February 2024 was $685,809, 16 per cent below the peak average of $816,720 in February 2022. Still, prices in several of the million-dollar cities have held up well.”

Rob mentioned this post: where to put your cash right now.

For the most part, if you’re not earning at least 4% on most of your cash these days you’re falling behind…

Weekend Reading – Pros and cons of investing in just Canada

As a follow-up to this Weekend Reading edition, highlighting where I personally believe our TSX and some key stocks that drive it could rebound in 2024…I stumbled upon this article this week from 5i Research – partners of my site and work:

Pros and cons of investing in the Canadian vs. U.S. stock market.

I’ll let you read that 5i post for more insights but the punchline from Chris White’s article is something that resonated with me (and always has):

“The US stock market is home to an extensive array of publicly listed companies, and with thousands of stocks available, navigating this vast landscape can be overwhelming. Investors must decide which companies to research, analyze, and potentially invest in. The sheer volume of options can lead to decision paralysis. It is vital that investors understand a company’s financials, growth prospects, and management quality.”

The U.S. market is a challenging space to pick stocks, if your goal is to beat the market.

Conversely, Canada tends to run on oligopolies — a few moaty stocks in some key sectors more than not.

  • You have our big-6 banks.
  • You have a few major telcos. You know the names.
  • You have a few major utility companies. You can count them on two hands.

The list goes on.

Beating the TSX (BTSX) can happen but it’s certainly not guaranteed nor consistent owning higher-yielding stocks.

Investing in our oligopolies, in theory, is the concept behind the 6-Pack (or 12-Pack) Canadian Portfolio which can work well at times:

  1. Own a few Canadian large-cap stocks from key sectors for growth and income.
  2. Own such companies for a long period of time because they enjoy a competitive advantage in Canada: since all things being equal, a moaty firm should offer shareholders a higher, sustainable, competitive advantage than companies with smaller moats or no moats at all; scrambling for market share.

In recent years, for the latter, I’m eating more of my own cooking.

Thank goodness, since many Canadian blue-chip stocks are suffering while the U.S. market has been thriving.

via GIPHY

When it comes to the U.S. selections, I’ve sold off many U.S. dividend kings in my portfolio like JNJ and instead used the proceeds to buy other U.S. stocks or low-cost ETFs that I believed (at the time) could deliver more value.

So far, I’ve been right…including with BRK.B and QQQ but the financial future is always very cloudy.

I mean, it’s only been a year or so since I’ve sold all JNJ stock and added to those existing names I’ve held for a few years….that’s hardly a successful career change.

Every stock or ETF seems like a great idea until it’s not. 

And not all ETFs are created equal…far from it.

I read in October 2023, in just that month alone, the Canadian market experienced a notable surge in new ETFs: 37 of them coming to market.

37??

Here are some examples:

  • Should you invest in the Dynamic Active Global Equity Income ETF (DXGE-T)?
  • What about owning some Purpose Active Conservative Fund (PACF-T)?
  • There is also the Hamilton Technology Yield Maximizer ETF (QMAX-T)…and let’s not forget,
  • The BMO US Equity Accelerator Hedged to CAD (ZUEA-NE) that uses 2x leverage on an equally weighted bank strategy and hedged S&P 500, respectively.

Oh boy. 

Long gone are the days (??) from March 1990, when the Toronto Stock Exchange listed the Toronto 35 Index Participation Fund. The fund tracked the TSX 35 index under the ticker symbol “TIPs.”

You might know this ETF better today as: iShares S&P/TSX 60 Index ETF (XIU).

Thankfully, XIU is still around and doing well overall as long as you have a long-term time horizon. 

Since the launch of TIPs, the Canadian ETF market has seen remarkable growth with over 1,000 ETF available to retail investors today. Source: my friends at https://cetfa.ca/. @cetfassn

While some niche ETFs can offer (and have delivered) great returns, the majority of them are not worth owning IMO. Investing risk taken doesn’t always translate to rate of return rewards.

Pros and cons of investing in just Canada

Give or take, Canada’s economy makes up just 3-4% of the world’s investing markets – so putting all your investing eggs into just Canada immediately eliminates most of the investing world on purpose. In doing so, you are shrinking your investing universe. Especially on the growth side. Continue Reading…

Comparing Disability Insurance and Critical Illness Insurance

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By Lorne Marr, LSM Insurance

Image courtesy LSM Insurance

Disability Insurance and Critical Illness Insurance: Why the Choice Is Not Straightforward

Choosing between disability insurance and critical illness insurance is a decision filled with complexities and nuances that go beyond simply comparing premiums and payouts. One of the primary confusions arises from the overlap in coverages between disability insurance and critical illness insurance. Both types aim to provide financial support in the event of serious health issues, yet they serve different purposes.

Disability insurance replaces a portion of your income if you’re unable to work due to an illness or injury. Critical illness insurance, on the other hand, provides a lump-sum payment upon diagnosis of specific conditions listed in the policy, such as cancer, heart attack, or stroke.

The cost of disability insurance is closely linked to one’s occupational class, with higher premiums for those in jobs deemed higher risk or seasonal. This categorization means that individuals in professions with greater physical demands or inherent risks — such as construction workers or miners — may face significantly higher costs for disability insurance. This aspect can make disability insurance less accessible or more expensive for those who potentially need it the most, complicating the decision-making process.

For freelancers, entrepreneurs, and others without a steady paychecque, obtaining disability insurance can be particularly challenging. Insurers often require proof of income to determine benefit levels, making the quoting and application process more complex for those with variable incomes.

Many people may already have some form of disability or critical illness coverage through group insurance plans provided by employers, unions, or associations. Additionally, government programs like the Workers’ Safety and Insurance Board (WSIB) in certain jurisdictions offer protection against work-related injuries and illnesses. Awareness of these coverages is essential to avoid unnecessary duplication and to identify any coverage gaps that private insurance could fill.

It is also important to note that your smoking status has a differing impact on disability insurance and critical illness insurance premiums and eligibility. Since many critical illnesses covered by these policies, such as heart disease and cancer, are directly linked to smoking, smokers may find critical illness insurance to be more expensive or harder to qualify for compared to disability insurance.

Before deciding on which one – or if both – are right for you, it’s crucial to understand these products on a deeper level. So, let’s dive in and learn more.

What are Disability Insurance and Critical Illness Products?

The table below provides a detailed comparison of disability insurance and critical illness insurance. Note that there are some areas of overlap between the two coverages.

Where Disability Insurance and Critical Illness Coverages Overlap

It is important to note that some health conditions are unique based on the type of policy selected, but there is still some crossover between what is covered on disability insurance, and what is covered by critical illness insurance.

If you are interested to read more about Disability insurance, here is a detailed overview of all long-term disability insurance components and all short-term disability insurance elements.

What Scenarios do we Compare and Why

We compare a few typical scenarios, which results in significant differences between critical illness and disability insurance quotes. For all the scenarios we use the following coverage values:

  • Disability insurance: 70% of the current monthly salary of $7,500 = $5,250/month
  • Critical illness Insurance: $300,000

 Scenario 1: Disability Insurance vs Critical Illness Insurance Premiums for An Office Employee (AKA “Safe Job”) Continue Reading…

How much do you need to invest to become a Millionaire?

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By Dale Roberts

Special to Financial Independence Hub

There was a time when becoming a millionaire was a big deal. That meant that you were “rich.” These days, becoming a millionaire might be commonplace for an investor with modest or reasonable free cash flow to invest. Most of us should become “rich.”

But of course, a million dollars ain’t what it used to be. The Bank of Canada inflation calculator suggests that in 2024 you’d need $1.87 million to have the spending power equivalent of $1 million in 1994. That said, stocks historically beat inflation over longer periods, and that is the path to wealth creation. How much do you need to invest to reach your financial goals?

Canadian rock band The Barenaked Ladies had a massive hit with their song – If I had a million dollars. I don’t think they adjust for inflation to now sing: If I had $1.87 million dollars.

Keep inflation in mind. To compensate you will increase contributions as your income increases and as you eliminate debt.

Here’s a chart shown on BNN. I took a pic and posted on Twitter / X.

Find that free cash flow

You’ll need to find the money to invest on a regular schedule. That takes a free cash flow plan, and that would usually include a personal and family budget. We need to know how much we’re spending and where. In the end we need to spend much less than we make. The financial planning basics would include paying off high interest debt and keeping your spending in check. You’ll see in that post that I found $888,000 in your takeout coffee (and other discretionary spending).

And here’s a good post on financial planning basics from Get Smarter About Money.

Those incredible stock markets Continue Reading…

Can Savvy Stock-picking outperform Investment Funds?

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By Ian Duncan MacDonald

Special to the Findependence Hub

Why spend days building a stock portfolio when you can almost instantly invest the same amount of money in the units of a popular mutual fund or Exchange Traded Fund [ETF]?

One of the most popular are the Standard and Poor’s  500 Index Exchange Traded Funds and Mutual Funds that are sold by probably hundreds of banks and investment dealers. The rise and fall of the S&P index has become a standard by which the success of all portfolios are often measured against.

The Standard and Poor’s 500 Index is a compilation of stocks selected by a committee called the S&P Dow Jones Indices. It is managed by S&P Global Inc., which sells financial information and analytics. This company is an evolution of the century old McGraw-Hill publishing company.

The S&P 500 tracks the 500 largest American companies selected by their stock market capitalization, which is the value of all the shares held by investors in a company. Fund management companies selling units in their S&P 500 mutual funds and ETFs are quick to brag that just nine of the 500 companies account for 31% of the market capitalization of all 500 companies. These nine are Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, Tesla, Berkshire Hathaway, and JP Morgan Chase. The sales pitch for buying fund units is, how you can lose with such well known, successful companies in your S&P 500 fund.

These very high-profile companies are the bait to distract you from considering the hundreds of mediocre, but large low-profile stocks in the S&P 500.

I have described the “Magnificent Seven,” which are included in the above nine, as being overvalued when you compare such things as their very high share prices to their much lower book values. For example, Apple’s book value was $4.00 compared to its share price at the time, which was $185. Book values are calculated by professional auditors subtracting what is owed by a company from their assets. The net figure is then divided by the number of outstanding shares to arrive at the stock’s book value. A book value’s logical calculation is far removed from the chaos of optimistic and pessimistic speculators bidding daily for millions of Apple shares in a stock market influenced by media hype, greed, and fear.

Many Investors seek safe stocks that will provide them with a reliable income to support them in their retirement. They look for companies that have demonstrated for years that they share the company profits with the company owners, who are the shareholders. This sharing is done through significant regular dividends.

Only 2 Mag 7 stocks pay dividends

Only two of the Magnificent Seven pay dividends. Their dividends are so small you wonder why they bother. Nvidia is paying a token dividend yield of 0.03% and Microsoft is paying 0.71%.

There are about 25 million companies in the United States. Surely “owning” shares in the 500 largest stocks must be a good investment? However, that very much depends on what your definition of a “good investment” is? My definition of a good, strong, safe stock investment has nothing to do with high market capitalization, which is the primary qualification for being classified as an S&P 500 company.

To me a good stock investment primarily includes:

  • A share price that has steadily increased over the last 20 years.
  • A high operating margin percent that is calculated from the percentage of the amount remaining after you have subtracted the expenses to generate the revenues from the revenues.
  • A company that shares its profits with its shareholders by paying ever-increasing annual dividends yields of at least 5% over the last 20 years.  These would include even the market crash years of 2000, 2008 and 2020.
  • The profitability of a company as reflected in a price-to-earnings ratio that would be below 20.
  • A book value for the company that would be close to or even higher than the share price.

Perfect stocks meeting all these criteria rarely, if ever exist.  You thus are required to make compromises based on how close you can come to your ideal stock.

Creating stock-scoring software

To make such compromises easier, I invented for myself stock scoring software that calculates an objective number from zero to 100. This number allows the sorting of stocks from the most to least desirable. The higher the number the more desirable the stock. Having scored thousands of stocks, the lowest I have ever calculated was an 8 and the highest was a 78. I avoid stocks scoring under 50.

For safe diversification and to avoid disastrous surprises you should aim at investing equally in 20 carefully chosen stocks. Your expectation from historical trends of strong companies is that most of your dividend payouts and your share prices will increase steadily.  This will keep your dividend income well ahead of inflation.

There are about 16,000 stocks available in North America to choose from. Sorting through these thousands of stocks for your “best” 20 is not difficult once you are shown how to do it. It can be done in hours, not days.

When I reviewed all the stocks that make up the S&P 500, I found only 5 stocks that would qualify for consideration in my portfolio. 113 of the S&P 500 had been immediately eliminated for consideration because they pay no dividend. Even some of the very largest companies in the S&P 500 like Amazon, Alphabet, Tesla, Berkshire Hathaway, Facebook, and Disney pay no dividends. A further 288 of the S&P 500 stocks only paid dividends between 3.5% and 1%.

Why would a 3.5% minimum dividend yield be important? For the last 100 years the average inflation rate is reported to have averaged 3.5%. If you had bought a share that never increased or decreased in value but paid out a steady 3.5% in dividends your stock would theoretically have stayed ahead of inflation if it were invested back into the portfolio.

Strong shares have histories of steadily rising share prices.

As share prices increase many companies steadily increase their dividend payouts out of pride and competitive reasons to at least maintain their traditional high dividend yield percents. Usually, the dividend payout increase percentages rise much faster than share prices. This can be easily observed.

Only 100 S&P500 stocks pay dividends higher than 3.49%

Within the 500 stocks you are left with only 100 that are paying dividends higher than 3.49%. To give you a reasonably generous income, the ideal is to realize an annual dividend income generating at least 6% of your portfolio’s value. On a million-dollar portfolio this would be $60,000.

There are only 12 of the S&P 500 companies paying a dividend greater than 5.97%. Two of the 12, AT&T and Altria Group, had return-on-expense percentages of zero or less which eliminated them from consideration. When the remaining 10 were scored it was found that 7 of them were now paying a dividend of less than 6% which eliminated them. Of the remaining three only one had an operating margin greater than zero. This left just one company, Verizon, out of all 500 that would meet my minimum requirements for inclusion in my portfolio. It had a good score of 62.

Verizon’s score was based on a share price of $40.48, a price 4 years previously of $58.22, a book value of $21.98, Ten analysts recommending it as a buy, a dividend yield percent of 6.57%, an operating margin of 16.57%, a daily trading volume of 12,645,534 shares and a price-to-earnings ratio of 14.7.

We still needed 19 more stocks to create a strong diversified portfolio.  Fortunately, there is a wide choice of companies with lower capitalization who are paying dividends of 6% and will have scores higher than 50. Some of these are foreign based companies traded on the New York Stock Exchange who were automatically excluded from being included in the American centric S&P 500. Some had high capitalizations that could have easily included them. Foreign stocks can give a portfolio a geographic diversification which strengthens it.

If you had $200,000 to invest, you could do far better investing the $200,000 in 20 carefully chosen, high-scoring, high-dividend stocks than investing that $200,000 in S&P 500 fund units. While the 20 stocks could generate a dividend income of $12,000, the dividend income  generated from the fund units of an S&P 500 fund would be a diluted 1.3% or an annual dividend return of $2,600. The total dividend income received from all 500 stocks becomes diluted when it is split among all those S&P 500 stocks paying little or no dividends. Continue Reading…

Greed, Expectations & Goldilocks

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“Where there are no expectations, there is no disappointment.”

  • Charles Krauthammer
Image courtesy Outcome/QuoteInspector.com

By Noah Solomon

Special to Financial Independence Hub

Although April’s slide in risk assets was by no means disastrous, it was uninspiring to say the least. Almost every single bourse suffered losses, with the notable exception of Chinese equities. In this month’s missive, I will discuss both the “setup” behind April’s market volatility as well as the catalysts which triggered it.

Greed is Good, Except When it’s Not

In the 1987 film Wall Street, Michael Douglas portrays Gordon Gekko, a Wall Street tycoon who is utterly devoid of morals. In 2003, the American Film Institute named Gekko number 24 on its top 50 movie villains of all time. Gekko’s classic line, “Greed, for lack of a better word, is good,” is perhaps one of the most iconic lines in the history of cinema.

Notwithstanding that greed is generally frowned upon (Gekko was, after all, a villain) there are times in markets when greed should be encouraged. When investors suffer severe losses during bear markets, there is little appetite for risk and sparse demand for stocks. At such junctures, equities become “washed out” and valuations reach levels where the risk of owning stocks is below average and their prospective returns are above average.

In contrast, there are times when greed, and its close relative, FOMO (fear of missing out) can have painful consequences. When stocks have experienced a largely uninterrupted string of above average returns, greed tends to be in abundance, while its counterpart, fear, is nowhere to be seen. Such lopsided sentiment pushes up valuations to the point where stocks offer little (or negative) return and pose elevated risk. Putting fresh money to work in such environments is akin to picking up pennies in front of a steam roller.

S&P 500 Index: Performance Following Valuation Extremes

By the end of 1999, euphoric sentiment had pushed the S&P 500 to nearly 30 times forward earnings, which marks its highest valuation over the past 30 years and set the stage for a “lost decade” for investors. At the other end of the spectrum, the global financial crisis caused investors to sour on stocks to the point where the S&P 500 Index was valued at less than 12 times forward earnings, which placed it in the bottom 1% of its valuation range over the past 30 years. From this starting point, U.S. stocks subsequently rose at a breakneck pace.

Since time immemorial, one of the constants in markets is that human behavior and emotions lead to unsustainable conditions. Losses tend to follow extremes of confidence, while outsized gains tend to follow extremes of despondency. Buffett best summarized this cycle in his statement, “Be fearful when others are greedy and greedy when others are fearful.”

What can go Wrong? Nothing and Everything … Depending on your Expectations

As 2023 was drawing to a close, the prevailing narrative was that:

  • The U.S. economy would avoid a recession and expand at a healthy clip.
  • Inflation would continue its downward trajectory, which would allow the Fed to enact six quarter-point rate cuts over the course of the following year.

Short of a future which entailed solid economic growth coupled with a return to zero interest rates, investors could not have hoped for a better environment than the one which was anticipated for 2024.

We acknowledge that there were good reasons for this optimism, including the recent decline in inflation and a surprisingly resilient economy. However, these sentiments were fully reflected (and perhaps over-reflected) in asset prices.

Whether things go right or wrong per se is not what moves markets. At least as important is what is embedded in asset prices at the time when things go right or wrong. At the beginning of 2024, valuations were discounting a scenario in which pretty much everything would go the “right way” for equities. As such, when April’s inflation readings failed to register the anticipated improvement, stocks had an adverse reaction. Had markets (and by extension valuations) been less optimistic prior to this negative surprise, it is likely that April’s decline in prices would have either been less severe or nonexistent.

Goldilocks has left the Building: from Tailwinds to Headwinds

Between 2008 and 2020, inflation remained extremely well-behaved, often running below 2%. This gave the Fed little reason to tighten monetary policy, especially since markets tended to react adversely to any sign of rising rates. Central bankers were in the enviable position of having their cake and eating it too. They left rates at record low levels for an extended period and stimulated economic growth while simultaneously keeping the inflation genie safely contained in its bottle. This fostered a near-perfect backdrop for strong gains in asset prices.

Perhaps the single most important factor that enabled this Goldilocks environment was a dramatic increase in international trade and global integration. From the 1990s through mid-2016, total international trade rose from roughly 39% to 56% of global GDP, propelled largely by the consistently rapid growth of the Chinese economy. According to the National Bureau of Economic Research, this surge in trade led to an annualized reduction in U.S. inflation of between 0.1% and 0.4% between 1997 and 2018. Continue Reading…