All posts by Financial Independence Hub

What is Asset Allocation really?

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By Tony Porcheron

Special to the Financial Independence Hub

What everyone wants is for their money to grow without any risk. This is of course impossible, especially over a short time period.

Risk is usually measured by volatility, however risk and volatility are not exactly the same.

Risk for most investors is the chance that they lose money or do not meet their long term financial goals.

Volatility is the amount that your investments go up and down over a certain time period.

sigma  is the usual definition of Volatility

Beta  defines how much a return is based on an underlying index or other investment

Alpha   is your return earned above your index and volatility.

This is the holy grail of investing.

What methods do professional investors use so that volatility does not turn into risk? Asset Allocation.

You may have heard the term, “Don’t put all of your eggs in one basket”, this is Asset Allocation.

In most investment research, 80 to 90% of your investment returns are from you asset allocation, not your individual investment picking. Given this fact, this is what you should be paying attention to more than picking your winning investments.

Asset Allocation is deciding on what percentage of your portfolio should go into asset classes. Generally this is broken up by:

  1. Asset Type (Equity, Fixed Income, Alternative)
  2. Size of the underlying company (Large, Mid and Small)
  3. Geographic Region (USA, Canada, Western Europe, Asia, Emerging Markets)

You then make the decision:

  1. Manager type (Index, Active, Hedge)
  2. What are your financial goals? How close are you to them? Are you contributing or withdrawing money?
  3. What is the correlation between the different asset classes (how much do they go up and down together

The chart at the top of this blog shows a correlation analysis.

Strategic and Tactical Asset Allocation

The 2 main types of Asset Allocation are Strategic and Tactical. The adjustments to asset allocation are called rebalancing.

Strategic Asset Allocation is determining your asset allocation based on your long term investment return goals, volatility acceptance based on historical investment returns, volatility and correlation. Continue Reading…

Getting your investments into the green

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By Dale Roberts

Special to the Financial Independence Hub 

I would get this question quite often when I was an adviser with Tangerine.

“Do you have any Green investments?”

Of course, when one offers broad-market index based portfolios the investment is environmentally agnostic. It makes no judgement on how the company operates or how it makes its profits. Company behaviour will be determined by the regulators and shareholders and the company’s board and management. And largely the demand for the products or services will be determined by the consumer: that’s you.

Now I would certainly direct clients to the green investment options in Canada, it’s not up to me to tell you to leave your values or principles at the door, but I would also suggest that one might have a greater chance to effect change by addressing the way they live compared to how they invest. Largely, lifestyle choices trump investment choices when it comes to having a positive impact on the environment. To be consistent and transparent, I still believe that to be true.

That said, there is an investment option that appears to fit the bill for enabling that change. That investment is the CoPower Green Bond.

Greenbond LogoYes, it’s a bond, and that means that an investor is loaning money that is used by developers to fund clean energy infrastructure. For that loan, an investor would be paid 4% annual for a 4-year bond and 5% annual for a 6-year bond. In today’s low-rate environment that’s a very good rate of return.

There are 3 types of projects that your monies (your loan) will fund.

CoPower Green Bond Portfolio Investments Table (Oct 2018)We might consider this a truly green investment because the at the core (geothermal pun intended) we have Canadians who are making a choice to ‘Go Green’, or their version of green. As an investor, you are enabling those projects. Your monies will fund projects that will reduce CO2 emissions, and perhaps reduce polluting particulates that are a by-product of traditional energy generation. You will be an ‘investor agent of change’.

These green projects are very successful and there is great demand from potential partners to start more geothermal, solar and LED bulb replacement projects. The demand is there, the projects simply need more funding. The more Green Bonds that can be issued, the more projects that can be funded. Quite simply, they need your monies, your loans.

If you look into the projects that are funded you’ll discover that they are more grass-roots and small-scale. Individual home geothermal conversion projects don’t attract interest and traditional loans from large financial institutions. These are individual Canadian homeowners who are largely being funded by individual Canadians (that’s you, potentially). What might be appealing to many is the small scale and clear transparency in where your monies are directed and how the effect can be measured.

How do you get your Green Bonds?

You can sign up through the CoPower website, where you would complete an online application. As part of the process you would also have a phone conversation with a CoPower investment representative to ensure suitability and to ensure that you do understand the investment and the associated risks.

You can also obtain the CoPower Green bonds with the discount brokerage Questrade and through Olympia Trust. Keep in mind that when you access the bonds through a third party, those institutions will charge fees. Ensure that your investment is large enough (the returns are large enough) to more than compensate for any fees that are applied. Through those third party options you can invest in RSP and TFSA and RIFF accounts.

How is CoPower different from a bond fund?

A SRI Socially Responsible Investment bond fund will hold dozens to hundreds of individual bonds. As a mutual fund it will change in price every day. There are management fees associated with mutual funds as well. The CoPower bonds are offered directly to you and carry no fees. You receive your interest payments and the effect of compound interest in full.

You will be owning an individual bond and you will be required to hold the bond to maturity. That means that if you purchase a 6-year bond, you will have to wait for 6 years to see that return of your initial investment amount. You may choose to have the bond pay you your interest payments ‘along the way’. Continue Reading…

How decluttering your Home Office can raise your Productivity

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By Melanie Saunders

Special to the Financial Independence Hub

Thinking about boosting your productivity in your home office? Decluttering your office space and creating a tidy working environment might just do the trick. Let’s take a look at some of the benefits of cleaning up your home office.

You won’t get distracted

Working in a clean office means you are less likely to be distracted by different items cluttering up your workspace. It’s quite easy to get distracted by unnecessary objects lying around your desk, so why not remove everything that is not needed and that may distract you from being productive? The truth is that clean offices also make people less stressed simply because mess and clutter can have a bad influence on your focus and make your stress levels jump up to the roof. By making your desks sparklingly clean and moving all the unnecessary stuff to another room, you will definitely see the difference between an organized space and a cluttered work office.

You’ll save time and resourses

If you decide to organize all of your files, you won’t have trouble finding that document you’ve been searching for a week now. Continue Reading…

How the USMCA affects Canadian homebuyers

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By Jordan Lavin, Ratehub.ca

Special to the Financial Independence Hub

Goodbye NAFTA, hello US-Mexico-Canada Agreement (USMCA).

The new trade deal with our neighbours to the south will have wide-reaching effects across all areas of our economy, and housing is no exception. While the agreement is said to be good for our economy overall, it’s not necessarily good news for your ability to afford a home.

What is the USMCA?

Canada recently reached an agreement with the United States and Mexico to replace NAFTA, the decades-old trade agreement that has stood since it was signed by Brian Mulroney, Bill Clinton and Carlos Salinas de Gortari.

The new agreement looks much like the old one, with some changes. Key differences include changes to the way the three countries approach auto manufacturing, fewer restrictions on trade of dairy products, and stronger measures against counterfeiting and media piracy. Like NAFTA, the USMCA makes it possible for the three countries to exchange goods without barriers.

For now, the US, Mexico and Canada will continue trading under the rules of NAFTA. The USMCA will come into effect once it’s ratified by its members, a process that could take months. In the United States, congress won’t vote on ratification until some time next year due to that county’s mid-term elections. Here in Canada, the looming Federal election means that if the USMCA isn’t made official by June, it could be delayed until 2020.

How does this affect Canadian housing?

If you’re wondering how having access to American milk at your local Superstore can possibly affect how much mortgage you can afford, you’re not alone. The implications for home affordability are driven by the market’s reaction to the uncertainty of the negotiation period, the removal of uncertainty brought by a signed agreement, and the actual economic growth that’s expected to occur because of the USMCA once it’s in force.

When the Trump administration demanded to renegotiate “the worst trade deal” ever, the market got spooked. As the trade war intensified, the US threatened to (and did) impose significant tariffs on imports from Canada. With repeated threats from our largest trading partner, there was a real chance that the Canadian economy could be jeopardized. Even though our economy was growing during that time, the Bank of Canada (BoC) was reluctant to raise interest rates, which it would normally do in that situation. Continue Reading…

Bank of Canada: As expected, Poloz still the Number Two hawk

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By Jeff Weniger, WisdomTree Investments

Special to the Financial Independence Hub

There was little surprise in the October 24 decision by the Bank of Canada (BoC ) to raise its overnight interest rate a quarter point to 1.75%. There hadn’t been a sell-side strategist on Bay Street prognosticating anything but that action. BoC governor Stephen Poloz’s stop-start hiking program reinforces what we have been saying for some time: even with this tepid pace of interest rate increases, Canada is still Number Two in the “hawkishness” rankings of developed market central banks.

More important than the actual rate move is Poloz’s signaling, especially given NAFTA’s recent reconfiguration into the U.S.-Mexico-Canada Agreement (USMCA) and October’s generalized stock market malaise.

With the NAFTA overhang quasi-resolved, and the realization out west that shipping LNG to East Asia is not only politically palpable but a matter of national security, Poloz and the Canadian public finally have some good economic news in what has been a tough year for the country.

For an idea of the BoC’s relative position, consider the actions taken (or not taken) by several other major central banks of late. After hiking to 0.75% in August, the Bank of England appears to have its hands tied. It is hard to see how the Brits can make any moves between now and March 2019, the deadline for the to-be-determined “soft” or “hard” Brexit. Even if Brexit goes well, the BoE would seemingly need to take a cautious approach next spring and summer, meaning GBP rates will likely be a full 100 bps or more south of CAD’s throughout 2019.

The European Central Bank is also in no hurry to do much regarding interest rates. Given the VIX’s recent spike to 231amid China slowdown fears and Italian budget risk, any forecasts of a one-off rate hike by the ECB next year must be called into question. That is truer now than at any time in the last year or so, as Italian bonds maturing in 10 years have gapped up to 3.60%, a striking 320 bps spread over 10-year German bunds (0.40%).

The fear in southern Europe is of a “doom loop.” In this scenario, Italian banks, which are heavy owners of Italy’s sovereign debt, see the country’s yields rise, which weakens the banks’ capital base. That, in turn, sends government bond rates higher. A dog chasing its tail.

Of interest to the BoC, the Toronto housing market has somehow managed to pull off the sweet-spot slowdown, at least for now. This has surprised us, given the rarity of asymptotic price surges giving way to post-peak gentle, sideways slopes. The Teranet National Home Price Index for Toronto has managed to curve ever so slightly downward since summer 2017, witnessing total price depreciation of just 3.8% from the peak to September 2018.

If Street consensus is correct, the BoC will bring the policy rate to 2.25% or 2.50% at the end of 2019. There are some observers out there with calls for 2.75% or 2.00% on both sides of the bell curve. In order to have the confidence to hike three or four times, Poloz will want to see GTA home prices continue to click sideways with each of the Toronto Real Estate Board’s monthly reports. And that means no big swoons in activity like in Vancouver, where buyers and sellers are engaged in a staring contest that is becoming disconcerting.

Aggressive BoC rhetoric

In the Monetary Policy Report, the central bank went heavy on USMCA references, opening with the trade deal and then coming back to it again just a couple of paragraphs later. They were keen to make mention of British Columbia’s natural gas pipeline announcement as a one-two punch for justifying a confident onslaught of 2% on the overnight rate.

We are focusing less on the BoC’s forecast of around 2% CPI inflation from now to 2020 and more on the bank’s assertion that the economy is operating “at capacity.” This is critical. The U.S. still has some room to challenge its capacity utilization precedent, set just short of 80 on the eve of the 2015–2016 China scare. But for all intents and purposes, American capacity utilization at 78 is a rounding error compared to its limit (the 80 area).

If Poloz believes Canada is “at capacity,” and it looks to us like the U.S. is there too, then this is the stuff of inflation scares. Of the forecasting outliers (those penciling in 2.0% or 2.75% for year-end 2019), we think the latter camp has a better chance of being proven correct, on account of our thesis that the global trade war concept is overblown and “priced in.”

Items to watch, next 6 to 12 months

While we would be foolish to not focus on “classic” central banking metrics such as inflation and employment a few other idiosyncratic issues are also critical:
Continue Reading…