All posts by Financial Independence Hub

How is your portfolio holding up? How are you holding up?

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CutTheCrapInvesting: Image by Christian Dorn from Pixabay

By Dale Roberts, CuttheCrapinvesting

Special to the Financial Independence Hub

It’s possible that you haven’t looked at your portfolio. It’s possible as well that you haven’t looked in the mirror. To not look at your portfolio might be a good strategy. I’ve heard from a few readers who offer that they will not look, just yet. But it’s certainly important to be aware. Your portfolio has likely lost some value. Today we’ll frame that for you with a look at the iShares one-ticket asset allocation portfolios. How is your portfolio holding up in the recent correction? Let’s have a look at the recent performance of Balanced Portfolios.

 

If you’ve been awake the last week or two you know that we’ve had a quick and violent market correction. Here’s a wonderful post on the irrelevant investor that frames the market corrections over the last 100 years.

This chart says it’s the fastest correction ever.

That this is, the path to the initial 20% and bear market territory. Hey no worries there. If you’re going to tear off that band-aid, do it quick. And of course the chart is showing US stock market performance.

Don’t worry, markets have recovered quickly.

Of course charts are just flying around the web these days. There’s a stock chart for most everything. Of course, past performance does not guarantee future quick recovery. But …

We usually see these ‘good recovery’ charts after these ‘catastrophic’ stock market events. Why? Because stock markets mostly go up. But they deliver these shocks with regularity. But they haven’t barfed up a good one in quite some time.

Hope you don’t mind the analogy, that’s the first time I’ve used the B word on Cut The Crap Investing. And keep in mind, we have no idea if this correction is over, or just getting warmed up.

And I’ve previously stated that because the stock markets have been quite calm over the last 11 years, our risk tolerance level has drifted out of whack. That was not nice of Mr. Market to lull us into a warm place of relative calm and comfort and then crack us with the fastest correction, ever.

How did that feel?

That’s what risk assessment is all about. Feelings. Nothing more than feelings.

How did if feel to watch your portfolio decline by some 20% or so? I certainly hope that Cut The Crap Investing readers (and anyone who found this article) is OK. And it’s also OK to feel nervous and unsure, even scared. The key is to be aware of possible outcomes. We need a plan. We need the ability to stick to that plan.

Ben Carlson offers some random thoughts on a big down day in the stock markets.

These are the days when you don’t need financial advice, you need a psychologist. This is why managing people is always more important than managing investments when you work in the financial services industry. Anyone can build a portfolio. Not everyone can stick to a plan.

Ben Carlson

Lucy, as financial advisor

Ben also offered …

“Waiting for the dust to settle” is not a legitimate investment strategy. “What do I do now?” is not a fun place to be either?

More common sense from Ben

Yes investing is 90% psychology and 10% portfolio. It’s not that difficult to create a great portfolio. The other 90% is where too many get tripped up. Don’t get tripped up.

Got a plan – no sweat.

Awareness + Plan = Success

Of course that plan includes a portfolio that is aligned with your risk tolerance level.

You know stock markets can correct violently. That’s all normal and expected stock market (mis)behaviour. After all the stock markets are ridiculous as they proved recently. So you were prepared. The potential of your portfolio value to drop matches the amount you’re prepared to watch, and feel.

Of course we add bonds and other assets to work as shock absorbers. On February 1, before this coronavirus outbreak was really scaring the heck out of the asset managers who price the markets I offered up …

How to prepare your portfolio for the coronavirus outbreak.

Again, the hope was that you were already prepared. But if not, there were some options outlined in that post. Bonds, gold, long term US Treasuries, inverse ETFs and more.

So how are those traditional shock absorbers working?

We’ll look to the iShares one ticket asset allocation portfolios.

In the top two columns we see the stock to fixed income ratios.

  • XEQT down 16.4%
  • XGRO down 12.5%
  • XBAL down 10%
  • XCNS down 5.3%
  • XINC is down 0%

Yup, and XINC is up for the year. Bonds are doing their thing. That’s a bond heavy portfolio.

XINC returns YTD, 2020 to March 9.

And that rebalancing mechanism will have that fund selling bonds and buying stocks as they go ‘on sale’. If you have a lower risk tolerance level, there’s nothing wrong with a lower risk portfolio IMHO. It’s likely going to outperform cash.

Pick your risk level. There’s no guarantees on how well those shock absorbers will work, but perhaps take that stock market correction down another 20%. Take the above returns and multiply x 2. How will you feel?

Robo risk profiling.

Of course if you are investing with a Canadian Robo Advisor, your tolerance for risk was assessed. I hope you were honest. If so, you should be investing within your risk tolerance level. If you’re not sure, call in to speak with an advisor. You can call in as well if you’re with Tangerine Investments. Continue Reading…

Is USA 2020 like Japan 1990?

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Tokyo. From a high of 38,915 late in 1989 the Nikkei then fell 82% by March 2009

By John DeGoey, CFP, CIM

Special to the Financial Independence Hub

It sure looks like there’s a fair amount of hubris in the American stock market these days.  The American 30-year bond just hit an all-time low of 1.89%.  We had three rate cuts in late 2019 despite strong employment and GDP numbers.  Household debts are again high as are defaults on car loans.  Many people (and especially many advisors) continue to blithely opine that we might be the middle of a more than 20-year supercycle and that it’ll be another decade before we have a major pullback in capital markets.

I call B.S.  Perhaps more to the point, my view is that this is a clear example of groupthink / herding / motivated reasoning that will almost certainly give way to narrative fallacy justifications down the road.

What if the pundits got it exactly wrong?  I want to stop here and remind that I’m asking a question; not making a statement.  I don’t know (neither does anyone else), but … what if instead of this being the beginning of a supercycle, we’re at the tail end of a 11-year long bull market?  What if this is as good as it gets for a long, long time?

Nikkei fell from a high of 38,915 late in 1989, to low of 7,055 by March 2009

I’d like to take this opportunity to remind you of what has already happened to the second-largest stock market on the planet.  On December 29, 1989, the Tokyo Nikkei hit an all-time high of 38,915.  That high, coinciding nearly exactly with the end of the decade, has not been seen since.  Ironically, stock markets around the world also took a big tumble at the end of 1999 heading into the scare around Y2K.  Again, a big tumble coincidentally occurred at the end of a decade.  As I write this, we’re in Q1, 2020 and the roaring 2010s have just ended.

Getting back to Japan, their market dropped all the way down to a low of 7,055 in March 9, 2009 – a total drop of nearly 82%.  That’s comparable to the experience of the Great Depression.  Even now, more than 30 years after hitting that peak, the Nikkei is below 24,000.  That’s STILL a drop of well over one-third more than thirty years AFTER hitting an all-time high.  With Japan as a backdrop, we could  point to that experience as a potential cautionary tale.  I personally would not be particularly surprised if the U.S. market was trading at a lower number in 2030 than it is today.  Does your plan take that possibility into account?

John De Goey, CIM, CFP, FP Canada™ Fellow, is a Portfolio Manager with Toronto-based Wellington-Altus Private Wealth Inc. This blog originally appeared on the firm’s “Newswire” site on March 9, 2020 and is republished on the Hub with permission.

Is this 2008 all over again? Corrections, coronavirus and crisis: no time to panic

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By Tyler Mordy, Forstrong Global Asset Management 

Special to the Financial Independence Hub

Speed Read:

  • This is not a repeat of 2008.
  • Once more, with feeling: COVID-19, though a deep human tragedy, will be a transitory shock.
  • The world is now experiencing the largest stimulus since 2009. Lower interest rates, lower oil prices and loaded fiscal bazookas will lead to a V-shaped recovery.
  • Fear is a poor adviser. Selling into a panic is rarely rewarded.

Blood is in the streets. And the biggest fear over the last decade — a repeat of an economic fallout like the global financial crisis — is trending hard right now. For over a decade now, clients and industry colleagues have repeatedly asked our team about another 2008. And we have repeatedly countered that the big surprise is that this will not occur any time soon.

But does recent market action challenge that view? In some ways, this feels just like 2008. US long bonds just delivered their best 2-week performance since the Lehman Brothers meltdown (if you squint hard enough, you can see the current yield of 0.99%). Global stock markets are regularly tripping exchange circuit breakers. A meeting between OPEC and its allies collapsed over the weekend, causing Brent crude prices to plunge more than 30%. And, apparently, families are now fighting over toilet paper supplies (pro tip: don’t google the footage).

We are now in the grips of a full-blown financial market panic. The major risk is always the same: people’s reactions to panic can amplify the real economic pain, causing a vicious feedback loop into financial markets. Reflexive risks are even higher today with a spreading virus. Event cancellations, reduced travel and tourism, and other economic interruptions will produce ugly numbers in the coming months. Many businesses will remain stuck in the ICU for some time.

Crucially, the US is also set to see a steep rise in coronavirus cases in the coming weeks. The figures should be similar to Italy’s — less than 1 in 10,000 will be infected. But statistics are hardly relevant here. Fear is in the driver’s seat. And, as we have recently written, the rise of social media has allowed hysteria to be transmitted more effectively. Misinformation has gone viral and digital channels are now clogged with fake news (see “Straight Talk On COVID-19”).

Yet, the idea that this is similar to 2008 rests on a few flimsy pillars. In fact, there are crucial differences:

No major global imbalances

To start, there are no major imbalances like the ones we saw in the runup to the global financial crisis. The biggest macro story since 2008 has been the unwinding of massive private sector excesses in the two major growth regions of the world: the US and Eurozone. Deleveraging has now occurred in these regions. The household sector is in much better shape than prior to the crisis. Banks have cleaned up their balance sheets. And globally, aggregate imbalances in these economies have now diminished substantially. No credit unwinding threatens the entire financial system. This also remains true for emerging markets who have built up significant buffers to protect against another 1990s-style balance of payments crisis.

COVID-19 will be a transitory shock

COVID-19, though scary, will be a temporary phenomenon. As my colleague Wilfred Hahn wrote last week (“The End Of Civilization As We Know It?”), epidemics are transitory shocks. Of the nine major epidemics since 1983, all had stock market recoveries afterwards. The average S&P 500 surge was 16.3% within six months of the nadir of the crisis.

This is very different from credit-driven recessions which can alter the economic and financial landscape for years to come — whether this is in changes to capital spending (like the period after 2001) or changes in investor behavior (like the investor skittishness since 2008).

China is a case in point. The country has become a leading indicator of events that can follow the outbreak if dealt with correctly. What many may not recognize is that China’s response has been the most aggressive in the world (even praised by the World Health Organization). The containment strategy is now a success. The number of infected people is now falling sharply. Continue Reading…

RRSP or TFSA: What’s the best option when saving for the future?

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By Jenny Diplock

Special to the Financial Independence Hub

Personal savings are just that: personal. How much, why and how you save your money should be tailored to you and your personal goals and financial circumstances.

However, many Canadians feel uncertain when it comes to how to invest their money. In fact, a new survey from TD finds many Canadians have mixed views when it comes to the choosing the best method to save for the future. While over half of Canadians surveyed (59 per cent) agree that TFSAs and RRSPs are a crucial part of their savings strategy, one in four (27 per cent) admit they don’t know the differences between the two – whether that’s the contribution limits, withdrawal considerations or impact on taxable income.

If you’re thinking of starting to save – or want to improve your current savings plan – you may want to consider an RRSP, a TFSA, or a combination of the two. Both are great tools for saving that can be used separately or together. But how you use them depends on why you’re saving money, and when and how you want to access it.

For example, if your goal is short-term, like a new vehicle or a home renovation, a TFSA will allow you to grow your money tax-free and you can access it at anytime without penalty. If your goals are long-term, like retirement, an RRSP may be the way to go. People often think that they need to pick one over the other, but that’s not the case. Most people have both short- and long-term goals, so a mix of both TFSAs and RRSPs is often the best choice.

Whether you’re planning for long-term retirement or for a goal in the near term, the important thing is to save your money where it’s going to work best for you. Financial planning doesn’t have to be intimidating and there’s no one size fits all approach when it comes to saving for your future. A financial advisor can work with you to develop a personalized plan that aligns with your time horizon, risk tolerance and personal goals, and will help you feel confident that you’re choosing the best option for your future.

Background info: Survey findings are based on an Ipsos poll conducted between December 17 and 19, 2019, on behalf of TD. A representative sample of 1,500 Canadians aged 18 and over were interviewed online. The poll is accurate to within ±2.9 percentage points.

Jennifer Diplock is Associate Vice-president, Personal Savings and Investing, TD Bank Group, based in Toronto.

 

 

How bad advice on Defined Benefit plans could cost you your retirement

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The following is a guest post by financial planner, author and pension expert Alexandra Macqueen, which originally ran on Dale Roberts’ Cutthecrapinvesting blog on Feb. 26, 2020. Because they both consider it such an important subject, they have given us permission to re-publish on the Hub. While an overview, it can serve as the ultimate guide to defined benefit pension planning. And mostly, Alexandra outlines the pitfalls and the importance of finding a true and qualified pension expert.

By Alexandra Macqueen, CFP

Special to the Financial Independence Hub

If you’re a Canadian facing a decision about staying in or leaving your defined-benefit pension plan, it might be one of the highest-stakes choices you’ll ever make: the amounts you’re considering can be high – worth as much as your house, or even more – the timeline short, the tax consequences significant, the details complex, and the outcome irreversible.

Over the course of my financial planning career, I’ve encountered, unfortunately, more than one pension decision gone wrong. Just how many ways can a pension decision go off the rails? Here are five “pension pitfalls,” drawn from real-live cases that have crossed my desk in the last year or so, along with the lessons Canadians who are facing this decision can glean.

Pitfall Number 1: Unbalanced advice

It is widely understood that defined-benefit pension plans cover what’s called, in the financial planning world, “longevity risk” – or the chance of living longer, even much longer, than you expect. Defined-benefit pension plans protect against the risk of living very long by providing lifetime income.

In exchange for covering off this risk, however, if you die sooner than expected, the pension payments may stop (depending on whether you have a surviving spouse or other beneficiary, and whether your plan provides guaranteed payments for a specified term).

Image by Gerd Altmann from Pixabay

One of the most misleading financial plans I ever encountered – it was just one page, and written in Comic Sans font – outlined the “pros and cons” of staying in a defined-benefit plan. Under “cons,” the planner had listed “mortality risk,” which they defined as the risk of dying relatively shortly after starting to receive monthly pension income.

Here’s what they meant by “mortality risk:” Let’s say you’re facing a pension decision between, say, receiving a lump sum of $750,000 if you “commuted” your entitlement under the plan today, versus $3,500 per month for as long as you’re alive – and you’re wondering about what happens if you die a few years after starting the pension. (“Commuting” your pension entitlement means taking the assets out of the plan as a lump sum today, typically to manage on your own.)

In this situation, and with “mortality risk” presented by the advisor in this way – as equally balanced with the probability of living a long time – it can be very tempting to think that the best option is to “take your money and run.” Maybe you’ll die “early,” you might think – and if you do, you’ll leave an estate!

However, this “financial plan” simply listed “pros and cons” of staying in the defined-benefit plan, without considering the probability of either outcome. If we use the projection assumptions provided for Certified Financial Planners® to reference in preparing financial plans, we can see that a woman aged 65 today has a 50% chance of living to age 91, and a 25% chance of living to age 97, while a man aged 65 today has a 50% chance of living to age 89, and a 25% chance of living to age 91 (see page 13 of the linked document).

Longevity risk vs mortality risk.

Instead of this guidance, however, in this plan the chance of “living” (longevity risk) and “dying” (mortality risk, although you won’t be able find anyone else using this term in the way this advisor did) were presented as equally-weighted possibilities, with no discussion of the likelihood of living to an advanced age.

While a discussion of the impact of dying “early” on pension outcomes is appropriate, this probability should be contextualized – not simply listed as a “con” of staying in a defined-benefit plan, and implicitly characterized as “just as likely” as living to an advanced age.

Pitfall Number 2: Inexpert advice

In this case, a member of a “gold-plated” pension plan (think large sponsoring organization and top-of-the-line pension plan features, such as inflation protection) was going through a divorce, and needed to find a way to equalize assets with a soon-to-be-ex-spouse.

As is not unusual for members of defined-benefit pension plans, the member didn’t have significant other assets. In order to meet his financial obligations, and guided by a financial advisor, he decided to commute his plan entitlement and use the freed-up cash to make an “equalization payment” to his ex.

Unfortunately, neither he nor the advisor really understood the tax consequences of this choice. Because of the size of the plan’s commuted value, the client was unable to shelter much of the paid-out lump sum from immediate taxation, meaning he had a very significant tax bill when tax time rolled around. (That’s because the amount of the commuted value was well in excess of the Maximum Transfer Value set by the Income Tax Act, which specifies how much of that commuted value can be sheltered from immediate taxation.) Continue Reading…