All posts by Financial Independence Hub

Investing themes in a post-Covid world

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By Aman Raina, SageInvestors.ca

Special to the Financial Independence Hub

Update from Author:
Since I posted this in the early days of the pandemic, it’s been quite interesting to see how some of these mind maps have played out. Global supply chains are more stressed creating bottlenecks and driving prices up.  Alternative payment mechanisms and digital currencies are becoming more embraced. The exodus to suburbs has been joined. Curb-side pickup  and other retail distribution channels are being more accepted. There have been struggles in how we educate our kids and social media thanks to the ramblings of a Mad King have now come under the eye of regulatory bodies around the world. Many mechanisms will need to be refined. Even though we’re closer to getting to the other side of the pandemic, many seismic shifts I describe are still in the early days of playing out and as they evolve, investing opportunities will also emerge.  

 

The COVID pandemic has become the seminal moment in our lives. As of this writing, we are still well into growth phase of the virus but there are signs that the spread may be flattening out. The literal full-stop of our daily lives, socially, economically, and psychologically will be embedded in how we approach how we live, work, trade and invest much in the same way the Depression of the 30’s and the two world wars shaped the people of those generations.

What’s different is those periods were man-made. This episode has been driven by a virus introduced by Mother Nature. Unlike our parents and grand-parents, we are not hunkering in a bunker covering our ears while our countries get bombed or are being drafted to carry a gun and lie in rat infested bunker. We are isolating at home watching Netflix, baking bread, and washing our hands every 30 minutes. It’s different but I feel the impacts could be the same.

The COVID period like the Depression will also shape how we approach investing. Many research studies have delved into the investing behaviour of people living through the 30’s and 40’s and how much it shaped their decision-making and risk tolerances. The generations that are living through this period will have developed a value system, and biases that will shape their attitude, confidence, and ultimately how successful they will be as investors. We are seeing literally millions of people who have lost their jobs and livelihoods overnight. Their approaches to saving and investing will not be the same.

I’ve been thinking about how the events we are living through right now are going to influence our behaviours going forward and trying to map to how society and business will respond, adapt and subsequently mind map out possible new investing themes that could emerge. I haven’t tried to identify specific companies or stocks. In fact some companies probably don’t even exist right now. Times of stress can be viewed as opportunities. In between home schooling my kids, and answering many questions from worried people about how to manage their shell-shocked portfolios, I took a shot and put together some preliminary ideas and mind maps that may trigger some ideas to consider.

We’re not in charge

If isn’t clear now, it should be … we’re not in charge.

Up until now, the narrative regarding our earth and environment has been very superficial and revolved around the premise that the planet is getting hotter and altering our environment in profound ways. There has been an ideological debate about how valid this is. We’ve been conditioned to think that climate change is associated with extreme weather events such as hurricanes, flooding, tsunamis or mass earthquakes that level cities or bleaching of coral reefs. The other narrative that we have overlooked is at the molecular level which as we are discovering that while not as dramatic cinematically (Contagion movies not withstanding) viruses can be just as devastating. These debates are revolved on the premise that we as human beings are in charge and will dictate the rules of engagement with the planet. The planet will do what we tell it.

This is false.

What is incredibly clear is we as humans are not in charge of this narrative. The earth is … and the earth is not happy with us.  It has watched as we fumble and delay and make excuses back and forth about respecting the planet. It has watched as we put a priority over material wealth, living vicariously through Kardashiean and Justin Beiber instagram posts and immediate gratification at the cost of the health of the planet. The earth has sat there politely and taken the abuse we have unleashed upon it.

The earth has had enough of all this. It has decided to give us a timeout and sent us to our homes to isolate and think about we have done.

We’re not in charge. The earth is in charge and if we want to live happy lives, we need to respect the earth. It has called a time-out on us. It is telling us the status quo is unacceptable and that we better get our sh$t together … now. Whatever attempt we have initiated to respect the planet have been superficial and full of platitudes.

Wall Street, Bay Street, Governments of all shapes and stripes are working under a narrative that once a vaccine is created, we’ll get our injections and go back “normal.” The stock market is pricing in this narrative. I think it’s completely wrong.

It’s going to cost us in so many ways …. and it’s going to make us better in so many ways.

Whatever happens, I’m convinced that whatever comes out of this event will be inflationary in the long-term. Everything is going to cost more and it’s going to take longer. The days of being spoiled with low cost of goods made in China, India, and wherever have ended. To live and function under this paradigm will require complete rethinks on how we will exist while respecting our planet and will require significant investment and behavioural changes.   If we can identify these new paradigms then as investors we can participate and profit from these new paradigms. The core performance metric for investment decisions is making decisions that protect our purchasing power of our savings. We need to grow our savings to insulate us so we can afford the necessities we need in our older years to survive. Owning GIC’s won’t cut it. Heck we’re entering a world of negative interest rates! We will need to invest in people, ideas, goods and services. As investors we need to consider what these opportunities will look like in a post-COVID world.

The Earth is breathing better

During this time, as I walked around my neighborhood or went on what has become my more frequent jogs, I noticed how much more quiet the neighbourhood has been. The air has also felt crisper and cleaner. There seems to be less smog in the air. I thought it was just me but apparently in many parts of the world, air quality has dramatically improved as a result of the idling of the economies. For the first time in decades people in India can see the Himalayas, The traffic is quieter and I can drive to downtown in 5 minutes when it normally took 45 minutes. Who would have thought that a virus would create so much beauty in the world.

I don’t know about you but I like this and I suspect that we like this new arrangement and will want to keep it that way as much as possible.

Climate friendly products and services are now a default, not a theoretical concept. We’ve seen the proof of concept and we will want this be the status quo going forward, costs be damned.

It’s funny to watch OPEC countries trying to agree on cutting production as a result of the pandemic. It’s ironic that reduction at some point has a better chance of being permanent. Some of them are aware of it, most notably Saudi Arabia. All the arguing about oil prices is useless. They know the jig is up now. Coal, forget it. We could see a big push into electrical vehicles and solar based/geothermal forms of energy. There could be more willingness to invest in the infrastructure around it now.

Post COVID Theme – How we trade: Globalization gets re-calibrated

We have become dependent on sourcing goods from a few countries or from one part of the world. COVID has shown how risky this is. I suspect we will see a recalibration of how our goods and materials get sourced. Supply chains will become regionalized/localized. Congratulations Mr. Trump, you’re getting what you asked for, just realize that the cost of doing business will go up. With COVID, we may be more comfortable with the concept now. I expect we will be flattening our supply chains.

Post COVID Theme – How we wait: Reacquainting ourselves with time

 COVID introduced or reintroduced us to the most precious and finite natural resource we have…time. When we have time, we think, we relate, we reset, we prioritize and we appreciate what is truly important during our finite personal existence. We reacquainted ourselves with reading, playing board games, talking and sleeping. During this time, I’ve been running 2-3 times per week compared to barely once a week pre-COVID. I’m getting more sleep now, almost 9 hours versus 6, and I’m feeing totally different, more at peace and not in a rush. I like it. I’m loosing weight! Continue Reading…

Checking in on Vanguard’s VRIF

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Cutthecrapinvesting: Image by Cris Ramos from Pixabay

By Dale Roberts

Special to the Financial Independence Hub

In September, Vanguard’s VRIF ETF was launched. The ETF is an all-in-one retirement funding solution. It is designed to pay out 4% of the portfolio value in 12 monthly distributions. That level of income is set at the end of each calendar year, based on the year end value. After the Santa Claus rally, it looks like VRIF holders will be getting a modest raise.

Here’s my original review of the Vanguard VRIF ETF. Simple and cost effective asset allocation portfolios can (historically) work very well to provide consistent and generous retirement income. The Vanguard VRIF option does it all for you, from portfolio management to paying out that income each month. Of course, you can also create your own ETF portfolio for retirement funding.

The key message is that simple works. And fees are important. I am a big fan of financial planning at the right cost, but keep in mind that investment fees and advisory fees will reduce the amount that your investments can deliver each year. You would subtract that percentage off the top. That’s why you might consider a fee-for-service advisor. In the end they might provide that retirement funding plan that would include an investment option such as VRIF.

The VRIF payout

The initial monthly distribution for VRIF was set at .083333 cents per unit.

As per the ETF mandate the distribution will stay the same throughout the year. The amount in your pocket includes fees and any withholding taxes within the ETF assets. It’s 4% in the clear. Of course, you would (most often but depending on your tax situation) create taxes payable from receiving the income in an RRSP, RRIF or taxable account. Within your TFSA the income would be tax free.

The performance of VRIF

In addition to paying out the monthly distributions, the ETF has also increased in price by 4.5% from inception. Continue Reading…

Variable Percentage Withdrawal: Garbage In, Garbage Out

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By Michael J. Wiener
Special to the Financial Independence Hub

 

The concept of Variable Percentage Withdrawal (VPW) for retirement spending is simple enough: you look up your age in a table that shows what percentage of your portfolio you can spend during the year.

The tricky part is calculating the percentages in the table.  Fortunately, a group of Bogleheads did the work for us.  Unfortunately, the assumptions built into their calculations make little sense.

If we knew our future portfolio returns and knew how long we’ll live, then calculating portfolio withdrawals would be as simple as calculating mortgage payments.  For example, if your returns will beat inflation by exactly 3% each year, and your $500,000 portfolio has to last 40 more years, the PMT function in a spreadsheet tells us that you can spend $21,000 per year (rising with inflation).

Instead of expressing the withdrawals in dollars, we could say to withdraw 4.2% of the portfolio in the first year.  If the remaining $479,000 in your portfolio really does earn 3% above inflation in the first year, then the next year’s inflation-adjusted $21,000 withdrawal would be 4.26% of your portfolio.  Working this way, we can build a table of withdrawal percentages each year.

Of course, market returns aren’t predictable.  Inevitably, your return will be something other than 3% above inflation.  You’ll have to decide whether to stick to the inflation-adjusted $21,000 or use the withdrawal percentages.  If you choose the percentages, then you have to be prepared for the possibility of having to cut spending.  If markets crash during your first year of retirement, and your portfolio drops 25%, your second year of spending will be only $15,300 (plus inflation), a painful cut.

A big advantage of using the percentages is that you can’t fully deplete your portfolio early.  If instead you just blindly spend $21,000 rising with inflation each year, disappointing market returns could cause you to run out of money early.

Choosing Withdrawal Percentages

One candidate for a set of retirement withdrawal percentages is the RRIF mandatory withdrawals.  These RRIF withdrawal percentages were designed to give payments that rise with inflation as long as your portfolio returns are 3% over inflation.

Unfortunately, the RRIF percentages would have a 65-year old spending only $20,000 out of a $500,000 portfolio.  Some retirees chafe at being forced to make RRIF withdrawals, but when it comes to the most we can safely spend in a year, most retirees want higher percentages.

A group of Bogleheads calculated portfolio withdrawal percentages for portfolios with different mixes of stocks and bonds.  Most people will just use the percentages they calculated, but they do provide a spreadsheet (with 16 tabs!) that shows how they came up with the percentages.

It turns out that they just assume a particular portfolio return and choose percentages that give annual retirement spending that rises exactly with inflation.  You may wonder why this takes such a large spreadsheet.  Most of the spreadsheet is for simulating their retirement plan using historical market returns.

The main assumptions behind the VPW tables are that you’ll live to 100, stocks will beat inflation by 5%, and bonds will beat inflation by 1.9%.  These figures are average global returns from 1900 to 2018 taken from the 2019 Credit Suisse Global Investment Returns Yearbook.

So, as long as future stock and bond returns match historical averages, you’d be fine following the VPW percentages.  Of course, about half the time, returns were below these averages.  So, if you could jump randomly into the past to start your retirement, the odds that you’d face spending cuts over time is high.

For anyone with the misfortune to jump back to 1966, portfolio spending would have dropped by half over the first 14 years of retirement.  More likely, this retiree wouldn’t have cut spending this much and would have seriously depleted the portfolio while markets were down.

The VPW percentages have no safety margin except for your presumed ability to spend far less if it becomes necessary.

Looking to the Future

But we don’t get to leap into the past to start our retirements.  We have to plan based on unknown future market returns.  How likely are returns in the next few decades to look like the average returns from the past? Continue Reading…

The pros and cons of RRSPs: What you need to know

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By Allan Small

Special to the Financial Independence Hub

If there is one thing COVID-19 has not impacted, it’s RRSP season. March 1, 2021 is the deadline for contributing to an RRSP for the 2020 tax year. The question is, should you?

The basics: Anyone who files an income tax return can contribute 18% of earned income to a maximum of $27,230 for the 2020 tax year. If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the Pension Adjustment (PA). Unused contribution room can be carried forward to use in the future.

Generally speaking, RRSPs make sense for anyone who wants and can afford to invest for the long term. Here’s why:

Pros

  • Contributions are tax deductible.
  • Earnings grow tax-sheltered within the plan.
  • You can defer tax on investment earnings and contributions to the future. This is particularly useful if you are a high-income earner and your marginal tax rate is likely to be lower in the coming years.
  • RRSPs can hold a wide range of qualified investments. For example, you can hold GICs, savings bonds, Treasury bills, bonds, mutual funds, Exchange Traded Funds (ETFs), equities (both Canadian and foreign), and income trusts in an RRSP.

Deciding what to hold in your RRSP really comes down to the same factors you have to consider when making any type of investment: your comfort level with risk, your investment objectives and your time horizon. For example, if your goal is to grow your wealth over time and market volatility doesn’t keep you up at night, then you may want to consider growth investments such ETFs, mutual funds and stocks. If you want income, then income-generating and interest-paying investments are worth looking into.

All of this said, RRSPs do have their drawbacks.

Cons

  • While you can withdraw funds from an RRSP before you retire, you will have to pay a withholding tax and you also have to report that money as taxable income to the Canada Revenue Agency.
  • The Government of Canada controls the amount of money that must be withdrawn annually once the RRSP matures. When you convert the RRSP to an Registered Retirement Income Fund, which must be done when you turn 71, you are required to withdraw a minimum amount each year starting at age 72 even if you don’t need the money.

RRSPs work best for people who can use a tax deduction and can afford to put money away for the future. Another consideration: Is your income in retirement (and therefore the marginal tax rate you’ll have to pay) going to be equal to or greater than it is during the years you can contribute to an RRSP? If this is the case, you won’t be achieving any tax savings by contributing to an RRSP. However, you could still benefit from deferring tax. The question then becomes, do you pay the income tax now or later? Continue Reading…

Banking from home and Canada’s seniors: RBC sees surge in digital & online banking by older clients

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By Rick Lowes,

Vice-President, Retirement Strategy, RBC

(Sponsor content)

As the pandemic took hold in early 2020, many Canadian seniors quickly learned how to bank safely and securely from home. Now that winter is setting in, many seniors who’ve continued to use their branch through the pandemic are likely exploring these options. We’re looking forward to helping more seniors across Canada discover the simplicity of not having to go outside their home to do their banking, while resting assured their bills will be paid correctly and on time.

We’ve already heard from many of our senior clients about how pleased they are to have made the transition to online or mobile banking. An elderly client in Prince George, British Columbia who thought he could only transfer funds out of his eSavings account in person is now very happily doing online banking from home.

A senior in Burlington, Ontario – who wanted to know how he was supposed to pay his bills while the branch across the street was temporarily closed – is now paying all his bills online. And an older client in St. John’s, Newfoundland – who had fears about using a computer – couldn’t believe how easy and secure it was to do online banking, when one of our advisors walked her through the process over the phone. From coast to coast to coast, seniors like these have been engaging with our online platforms, spurred on by the realities of ongoing physical distancing.

To share some statistics of our own around what this new activity looks like, over this past year we’ve seen seniors aged 60+ increase their use of electronic money transfers by 101% and digital payments by 46%. Among seniors aged 70+ who are newer to online banking, mobile banking has quickly become their favoured channel for banking from home.

Seniors have been receiving one-on-one support from our advisors that is helping to make them more comfortable with online banking. As a result, we’ve seen that comfort level translate into empowerment and the ability to make decisions about their finances while banking from the comfort of their homes.

 Responding to Canada’s new Seniors Code

We’ve also responded quickly to ensure we had comprehensive support in place for seniors and for our employees who work with seniors, aligned with the new Code of Conduct for the Delivery of Banking Services to Seniors (“Seniors Code”). This Seniors Code guides banks in their delivery of banking products and services to Canada’s seniors. Continue Reading…