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The Market and the Economy are not the same
By John De Goey, CFP
Special to the Financial Independence Hub
We’re now into the last week of the first half of 2020: and what a six months it has been! The news for capital markets has been mixed, as markets have tumbled frighteningly and then rebounded smartly. If one were to naively look at market levels at the start of the year and at the end of June, one might think that very little happened: that it was a pedestrian, non-descript half year. In stark contrast, no one would say anything of the sort regarding the broad economy. Unemployment was at generational lows at the start of the year yet stands at generational highs presently. The same goes for economic output and GDP growth. What gives?
In previous posts, I’ve noted that there are certain things that are, by definition, unknown and … in a very real sense … unknowable. Pundits, however, are all over the map in their presumptuousness and certitude about what is known. Since my day job involves acting as a fiduciary for a select number of Canadian families, I want to stress that I do not hold out as having any unique insights about current conditions, but that I do have some serious concerns. The future is unknowable. The present, however, looks awfully risky to me.
What I continue to find fascinating is the way identical facts can be given radically different narrative spins. The stock market (or, more properly…. ‘stock markets’) is/are indeed very different animals from the broader economy. My concern remains that a disproportionate number of commentators point this out as justification for markets going ever-higher over the last three months or so. In short, these pundits suggest that the market is “right” and that the economy is “wrong.”
A massive disconnect
I find that narrative telling. After all, the same facts could just as easily lead to the opposite conclusion. What if the market is “wrong” and it is “right” to be deeply concerned about the overall economy? No reasonable person would dispute that there is currently a massive disconnect between the two. Valuations for stock markets are pretty much universally in the top decile (meaning they have been cheaper less than 10% of the time based on historical metrics). Meanwhile, the overall economy is unequivocally in the bottom decile based on historical standards and – depending on who you believe and how current your data is – possibly even in the worst 1% (!) ever. There are many credible people who believe the economy has not been this bad since the depths of the great depression in the 1930s. Continue Reading…
The Ultimate Work-Life Balance: building a business from Home
By Jim McKinley
Special to the Financial Independence Hub
For those individuals with an entrepreneurial streak, building a business from home could be the perfect launching point for a new career. Not only will you have the luxury of eliminating your commute, but you’ll also have complete control over when and how much you choose to work. While you may have the perfect idea for a home-based business, there are some steps you need to consider as your ideas take shape.
Turning your idea into Reality
Building a business from scratch is exciting, but it certainly isn’t a walk in the park. While the creative process is fun and necessary as you form your ideas, there are some steps that will help you establish yourself as a company.
Be sure you know the essentials when you start, such as getting a business license and setting up a website and email address. Learn what you can from your local Small Business Development Center (SBDC); often, you can qualify for free small business consulting if you’re just getting started. Take time to educate yourself about taxes, and think about how you’ll manage bookkeeping and accounting.
Along with the admin, you’ll want a bulletproof business plan. What do you want to accomplish with your business? How do you see it growing in the coming years? By making a solid plan, you can start goal setting and really get the ball rolling.
How to grow: hiring remote workers
Most successful companies all have one thing in common: they understand that it takes a team to pull off something extraordinary. As you think about growing your business, consider how you might recruit remote workers to join you.
Be sure to craft an honest and compelling job description. Most remote workers value flexibility, so consider how you might portray the position in a way that would appeal to qualified candidates. Post to online job boards, and consider perusing LinkedIn to see if you can recruit someone with the right background and skills.
Managing your Team
Luckily, there are several online platforms and tools designed to keep remote teams connected. For example, Slack is a great option for ensuring good communication. Through Slack, it’s possible to create both team-wide and project-specific channels to help manage concurrent conversations. The platform also allows for a newsfeed, which you can use for updating the entire team with important information. Continue Reading…
Why the 4% rule is actually (still) a decent rule of thumb
By Mark Seed
Special to the Financial Independence Hub
I’m not a huge listener to podcasts but I do enjoy them from time to time – beyond the ever popular Joe Rogan Experience that is.
Recently, I found the BiggerPockets Money Podcast with financial independence enthusiast, financial planner, along with a host of other financial designations Michael Kitces very interesting.
For an hour+ the hosts of that podcast dove deep into the simple math behind the 4% safe withdrawal rate so many investors in the early retirement community rely on, and, why Michael Kitces ultimately believes the 4% rule actually remains a very good rule of thumb to plan by.
If you don’t have an hour and 22 minutes to listen to this episode (not many people do…) then no worries, I’ve captured the essence of the interview from this solid podcast below. Kudos to the folks at BiggerPockets for the deep dive.
Let me know your thoughts about the 4% rule in the comments section. I look forward to them.
Mark
Background – what is the 4% rule???
In general terms, the “4% rule” says that you can withdraw “safely” 4% of your savings each year (and increase it every year by the rate of inflation) from the time you retire and have a very high probability you’ll never run out of money.
Some things to keep in mind when you read this:
- This ‘rule’ originated from a paper written in the mid-1990s by a financial planner in the U.S. who looked at rolling 30-year periods of a 50% equity/50% fixed income asset allocation. His name was Bill Bengen.
You can find the details of the report here.
2. This rule was developed almost 30-years ago. A lot has changed since then including real returns from bonds. There are also products on the market now that allow investors to diversify far beyond the mix of large-cap U.S. stocks and treasuries the Bengen study was based on.
3. The study was designed to answer the question: “How much can I safely withdraw from my retirement savings each year and have my nest egg last for the duration of my retirement?” Little else.
4. The study assumed (at the time) most retirees would retire around age 60. Therefore, a “good retirement” would be ~30 years thereafter; what is the safe withdrawal rate to make it through retirement until death.
5. The rule takes none of the following into account:
- Will you (or your spouse) have a defined benefit pension plan?
- Do you expect to receive an inheritance?
- Will you downsize your home?
- Do you have a shortened life expectancy or health issues that should be considered?
- Will you continue to earn some form of income in your senior years?
- And the list of what ifs goes on and on and on
My 4% rule example:
My wife and I aspire to have a paid off condo AND own a $1 M personal portfolio to start semi-retirement with in the coming years.
If we can grow our portfolio to that value, markets willing, the 4% rule tells us we could expect to withdraw about 4% of that million nest egg (or about $40,000 per year indexed to inflation) and have virtually no concerns we would run out of money for the next 30 years (mid-70s by then).
To the podcast and my takeaways!
On the subject of a 4% withdrawal rate – is that conservative?
Michael: Yes. If your time horizon is 30-years, it probably is. Because, when Bengen looked at his different rolling periods … he found the worst case scenario was a withdrawal rate of about 4.15%. “It was the one rate that worked in the worst historical market sequence…”
Does recent data say anything different since the 1994 study?
Michael: Not really. Continue Reading…
4 essential End of Life preparations
By Sia Hasan
Special to the Financial Independence Hub
End of life preparations are difficult to think about, for obvious reasons, but they’re something that everyone needs to work out in advance. Ensuring the best possible situation for you and your family, or for loved ones, is crucial. When a loved one passes, it’s a hard time for everyone involved, and squaring away your end of life preparations gives your family and friends much less to worry about. Here are some key ways you can make end of life preparations in a timely and intelligent fashion.
Get a Life Insurance policy
Life insurance is likely the single most important facet of end of life preparations, and that’s because life insurance provides your loved ones with funds that can allow them to make funeral arrangements and also continue to thrive in your absence. Because of the weight of the topic, the average person doesn’t even consider life insurance until later on in life. However, it’s best to set up your life insurance policy as early as possible. For one thing, the cost of a life insurance policy increases with your age, and your policy generally provides greater benefits the longer it remains in effect. When setting up your life insurance policy, carefully consider your dividend options, because they vary tremendously, and the right answer depends on your needs and your circumstances.
Write a Will
In much the same way one declines to think about life insurance, a person’s will is often relegated to one’s twilight years. However, the reasons for getting it out of the way early are very different. Continue Reading…
