All posts by Financial Independence Hub

Challenging conventional investment wisdom

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By Noah Solomon

Special to the Financial Independence Hub

Many investment professionals tell their clients:

  • That markets tend to rise over the long-term.
  • To “hang in there” and “sit tight” during bear markets because they will eventually recover their losses.

While we agree with the first assertion, we wholeheartedly disagree that investors should sit idly through bear markets based on the notion that they will eventually live to see a better day. Rather, we strongly believe that a dynamic approach that adjusts to changing markets can provide superior long-term results.

The table below illustrates this by showing what happens to $1M invested in two different portfolios:

Portfolio A Portfolio B
Year 1 -30% -5%
Year 2 +30% +5%
Year 3 -30% -5%
Year 4 +30% +5%
Sum of returns 0% 0%
Value at end of year 4 $828,100 $995,006

 

Since the returns over four years add up to 0% for both portfolios, many people assume that the final value of each portfolio at the end of year 4 should be $1 million. However, as the last line in the table indicates, this is far from true.

Portfolio A, which is more volatile, declines in value by $171,900, while portfolio B, which is less volatile, suffers a decline of only $4,994.

The observation that two portfolios can have the same sum of returns over 4 years yet have significantly different values at the end of the period can be explained by the mechanics of compounding. After experiencing a 30% loss, a $1 million portfolio is worth only $700,000. Unfortunately, a subsequent 30% gain will only bring the value of the portfolio back to $910,000, which is still $90,000 less that its starting value. However, when a $1 million portfolio experiences a 5% loss, its value is $950,000, and a subsequent gain of 5% will bring its value up to $997,500, which is only $2,500 less than its starting point. Continue Reading…

An Investor’s playbook for Bitcoin’s resurgence

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By Mauricio Di Bartolomeo

Special to the Financial Independence Hub

Bitcoin’s price has more than doubled over the last four months: from approximately USD $3,400 in February to a current price of USD $10,700 at the time of writing. While it is unreasonable to attribute the recent price increase to any particular news or headline, there are growing narratives and investment thesis that support making an investment in Bitcoin as a digital and apolitical store of value.

As some of us in the industry have come to expect, the runup in price has unsurprisingly led to renewed media coverage which, in turn, leads to thousands of new people looking to learn about Bitcoin and a desire to participate in the market.

For those currently invested in Bitcoin, or those interested in getting involved, here are five tips on navigating the “Bitcoin craze” with ease:

1.) Know where to buy your Bitcoin

When making your first Bitcoin purchase, make sure you use a trusted and compliant exchange. Avoid using exchanges registered in foreign jurisdictions or exchanges that don’t comply with your local jurisdiction. Bitcoin prices can differ between exchanges, they can also have different fee structures. Exchanges like Bull Bitcoin provide simple and fast platforms to buy Bitcoin. They are a non-custodial exchange so you will need to have your own wallet or a savings account to send the bitcoins to once you make the purchase. The next tip will guide you on how to get one.

2.) Know how to store your Bitcoin

In the past, some exchanges have been the target of hack and theft due to the need to keep Bitcoin ‘online’ for trading purposes.  After purchasing your Bitcoin, make sure you know how to keep it safe. You can use a hardware device such as a Ledger or Trezor that you can manage yourself: be sure to read the instructions carefully when setting up your device. If you want a simpler approach to keeping your bitcoin safe, you can use a third party custodian like BitGo that keeps your bitcoin safe through insured custody, or deposit your bitcoins in a savings account to earn interest. More on that below.

3.) Do more with your Bitcoin

The best way to make more out of your Bitcoin is to use a Bitcoin Savings account that pays interest on your Bitcoin deposits. Earning interest helps you grow your bitcoin position:  which can appreciate in dollar terms over time. There are only a few compliant companies worldwide offering this type of service: when searching for options, look for the compliant companies offering these services in your jurisdiction. Continue Reading…

Banking shouldn’t be complicated

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By Rick Lunny, Manulife Bank

Special to the Financial Independence Hub

 As a father of five with two 20-something daughters who recently moved out, I often hear how the sheer amount of information in this digital age overwhelms those who are entering the workforce and starting their adult lives. Somehow by default, I have become an unofficial mentor for both my kids, and their broad circle of friends, as they regularly seek my advice when facing important financial and career decisions that will shape their future.

They frequently comment how there’s always new, conflicting advice on how best to live life. Especially when it comes to money and how to make the most of it: save more, live for the moment, pay down debt, and yes, even plan for retirement at age 24.

It’s a struggle to find time to break through the noise and choose the best financial options that truly fits their needs.

And it’s not just the younger generation who struggle to make decisions and take control of their finances.

As the head of Manulife Bank, a subsidiary of Manulife which serves seven million Canadians, I know customers of all ages are looking to develop better financial habits and improve their financial wellbeing.

Canadians are looking for clarity, simplicity and value from their bank. This applies equally to technology interfaces. They expect – and deserve – from initial application to ongoing experience, products that have a human-centric design, with intuitive and easy to use interfaces.

That’s what I love about Manulife Bank. I joined five years ago because it was different from other Canadian banks. It had an entrepreneurial reputation for going beyond the status quo with innovative banking products designed in the best interest of Canadians.   Continue Reading…

Retirees can sell most of their stocks as they approach Retirement

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By Dale Roberts, for Boomer & Echo

Special to the Financial Independence Hub

Retirement can be a scary time for retirees who have considerable and even modest portfolios. We want to protect those assets. And certainly the risk tolerance level for most retirees will drop considerably. And that risk tolerance level will often drive the bus with respect to your allocation to bonds and cash and other risk management techniques you might put to work.

While the order of returns does not matter considerably in the accumulation stage, when we enter retirement we face that sequence-of-returns risk. Years of poor stock market returns early in the retirement funding stage can permanently impair your portfolio and your retirement. And in fact the risk to retirees begins well before that retirement start date. On Cut The Crap Investing I wrote on that with You Should Protect Your Retirement Portfolio Long Before Your Retirement Start Date. [This also ran subsequently here on the Hub.] Have a read of that article and you’ll see that the Retirement Risk Zone is typically qualified as 5 years before retirement and your first 5 years in retirement. We have to be careful as we approach retirement and in those first few years.

Can a near retiree almost completely de-risk the portfolio and sell a large percentage of their stocks? Sure, it may be emotionally pleasing, but with less stocks in hand it may slightly compromise late accumulation stage portfolio growth. That said, the most important part of it all might be that comfort level and that stress reduction event that comes with greatly lessening that stock component. And let’s face it, some near retirees who’ve planned well and who are lucky enough to have a generous defined pension plan might not need much or any inflation-beating portfolio growth. We’re all snowflakes when it comes to retirement funding, we are all entirely unique in our needs and our situation.

But let’s look at a scenario where a retiree does need their personal portfolio to work very hard; they are counting on that portfolio to deliver a generous component of their ongoing retirement funding needs. It’s time for those hard-earned monies to work for them. On the ‘rule of thumb’ spend rate for portfolios see my Boomer and Echo guest post:  The 4% Rule: Is There A New Normal for Retirees?You’ll read that historically a retiree with a sensible mix of stocks and bonds can spend at the rate 4%-4.5% of the portfolio value each year, with an adjustment or increase each year to compensate for inflation.

Given that we want some growth in the later stages of accumulation and we need that growth component to potentially earn returns above that 5% range, we do not want to abandon that Balanced Portfolio model, we still need those stocks.

To manage the risks, we want to keep that nice mix of Canadian, US and perhaps International stocks to work in concert with that bond component. And the most conservative range that we might move to is 80% to 70% fixed income. That’s a very conservative mix of course.

The returns might be muted but you might be able to eek out 3% income from your fixed income component (a mix of bonds and GICs) and perhaps if stock markets continue to deliver 9-10% annual you must see a returns breakdown such as this:

  • 70% of portfolio @ 3% = 2.1%
  • 30% of portfolio  @ 10% = 3%

That might give you a return in the 5% annual range if the stock market ‘rally’ continues and the bond market does not come under pressure.

Now it’s time to dollar cost average back into stocks

OK, so you’ve largely de-risked but you want and need your portfolio to work as hard as possible. When you hit that retirement date you can begin to increase your stock exposure over time. You might become a retiree stock ‘dollar cost averager’. Yup, you’ll employ the tried and true technique that many of us employ in the accumulation stage: you’re going to add to your stocks on a regular schedule.

You’ve de-risked and then you begin and continue to add risk. They call this an equity glide path. And this has been described and studied in detail by retirement funding rockstars Wade Pfau and Michael Kitces. Here’s their White Paper on the strategy. Continue Reading…

Q&A: Understanding Liquid Alternatives

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By Brooks Ritchey

(Sponsor Content)

Alternative investment funds are an exciting new strategy class that were previously unavailable to retail investors in Canada. Since they are new to the scene, many advisors and investors are interested, but don’t quite know where to begin. Since I have worked in the alternative investment space for years, I thought I could help explain how investors could benefit from these hedging strategies.

Demystifying Liquid Alternatives for investors

Some advisors feel that these strategies are too volatile or complicated to explain to their clients. We spend a lot of our time trying to explain that these are not complicated mysterious investments. The irony is that many alternative investments, liquid alternatives, especially with regulatory oversight, are about the same risk level as fixed-income products.

Others also worry about the fees on hedge funds, but they have come down a lot. Since I’ve been involved in the hedge fund industry, fees have come down from 2% management and 20% performance fees to 75 basis points management fees and no performance fees for some products.

How would you explain Liquid Alternatives to investors?

It’s an investment that has different characteristics than traditional equity and fixed income. Equity markets depend on the trend in economic growth and bonds depend on a different set of macroeconomic factors, but they’re both dependent on a trend. If you’re trying to find a strategy that’s looking for winners in the equity or in the bond market when the trends aren’t positive, you want to consider liquid alternatives. Continue Reading…