All posts by Financial Independence Hub

Thinking about taking a flyer on cannabis stocks or blockchain? Follow these guidelines.

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By Scott Ronalds

Special to the Financial Independence Hub

 
“I’m thinking of taking some money out of my portfolio with you guys to buy some shares in a blockchain-related start-up. Am I crazy?”

 

We were asked a question along these lines recently, and I suspect we’ll hear it again, whether it’s blockchain, bitcoin, cannabis, space tourism or whatever new investment opportunity seems exciting. Our answer might surprise you.

No, you’re not crazy. We don’t necessarily think it’s a bad thing to invest a portion of your portfolio in an unconventional, illiquid, or even highly speculative investment. You can learn a lot from it. We do have a few caveats, however. Most importantly, you need to have a high tolerance for risk and should be mentally prepared to lose everything you invest, because you just might. Below are a few other things to consider.

Limit it to 5% of your portfolio

Five per cent isn’t a magic number, but curbing a risky investment to 5% or less of your total portfolio will limit the damage if things go south. True, it will also limit your potential upside, but it’s a prudent trade-off. You don’t want to put your retirement plans and future standard of living at risk by investing too much of your portfolio in an adventure.

Have a plan

This seems obvious, but we find it’s often overlooked. Let’s use bitcoin as an example. Say you invest in the cryptocurrency when its value is $16,000. What will you do if it falls to $8,000? Or if it rises to $24,000? Do you have a floor and ceiling in mind for how much you’d be willing to lose or gain before making a difficult decision with your investment? Bitcoin is a great example of the hyper volatility that comes with speculative investments. You need to be prepared for it, and you need to have a plan.

Consider how it will change the risk profile of your portfolio

If your target breakdown between stocks and bonds is 60/40 and you want to carve off 5% to invest in a start-up, for example, you should be taking the money from the stock portion of your portfolio so that you don’t inadvertently increase your overall level of risk. If you’re venturing into investments that are higher up the risk spectrum, you shouldn’t fund them by cashing in your safer stuff (e.g. cash and bonds).

Further, if you hit the jackpot on a speculative investment, it will comprise a larger portion of your portfolio, which means you should think about reducing the level of risk in the rest of your accounts to keep your overall balance between growth and safety in check. On the other hand, if your investment tanks, your overall portfolio may have less exposure to growth assets than your plan calls for. In this case, it would be appropriate to increase your exposure to stocks. After a bad experience with a high-risk investment, this can be hard to do.

Read the fine print on fees and redemption clauses

If it’s a product or offering that you’re considering, rather than an individual security, be sure to do your homework on fees. Continue Reading…

5 ways Real Estate boosts Financial Independence

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By Sia Hasan

Special to the Financial Independence Hub

Gaining financial independence is one of the most difficult propositions. Life is expensive, particularly if you live in a metro area, which is where most of the higher paying jobs are located. As a result, most people save only small amounts of their paychecks or none at all. Clearly, this is not the path to financial independence (aka “Findependence.”).

Thankfully, you don’t have to make a massive salary to become financially independent. There are several methods for building wealth, including starting a business, investing in securities, and investing in real estate. Even if you do the first two already, you need to consider these five ways of increasing your financial independence through real estate.

Real estate investment offers the highest returns for the lowest risk when compared to starting a business or investing in stocks. The reason is that real estate offers five surefire ways to grow your money, known by the acronym IDEAL. By setting a long-term plan to benefit from these five methods of making money in real estate, you are on your way to financial independence.

The IDEAL investment

IDEAL stands for income, depreciation, equity growth, appreciation, and leverage. To succeed in making real estate work as an investment, you need to look beyond your principal residence. Though owning your own home provides appreciation and tax benefits, most people can’t produce income from their principal residence, owners of duplexes and people who rent out spare rooms aside.

1.) Income

When you purchase a rental property, you generate income, provided that you collect enough rent to exceed expenses. With a cash purchase, this is easy. If you finance the purchase, you need to analyze the numbers carefully. Provided you finance the right rental property, you earn a much higher rate of return on the financed property than if you purchased it with cash.

2.) Depreciation

To increase your rental income profits, you need to bone up on the IRS depreciation rules. Because the property is a business investment, you get to deduct all depreciation off of your profits. This saves thousands of dollars in income taxes every year. Continue Reading…

Subsidizing China’s Superpower aspirations

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By Jeff Weniger, WisdomTree Investments
Special to the Financial Independence Hub
 
Christine Lagarde, head of the International Monetary Fund (IMF), has warned that China’s Belt and Road Initiative, the potentially multitrillion-dollar network of roads, rails, pipelines and other infrastructure across Eurasia, risks saddling unstable governments with unpayable debt. Because of the IMF’s concerns, it plans to fund the China-IMF Capacity Development Center (CICDC) to train the Chinese to minimize the headaches in this century’s Marshall Plan. If all goes according to plan, the Belt and Road Initiative will connect land- and sea-based trading routes to cement China as the center of global commerce in a decade or two.

While China appears to be ascending into world superpower status sometime in the coming decades, a $100 investment in “global” equities allocates just $3.51 to the country if we track an index like the MSCI All Country World Index (ACWI).1 That’s not far from Canada’s weight, and it seems remarkably low for a country that is going head-to-head with the U.S. on the global stage.

It was only last year that MSCI added Chinese A-shares, companies listed in Shanghai and Shenzhen, to its MSCI Emerging Markets Index. That is late for an economy whose size surpassed the U.S. in 2014, at least on a purchasing power parity (PPP) basis (see figure 1).

Figure 1: China & U.S. Share of Global GDP

China and U.S. Share of Global GDP

Covering China, wherever the listing

While some Chinese companies are available only in Shanghai or Shenzhen, others are listed solely in Hong Kong. Still others have American depositary receipts (ADRs) or are traded in Singapore.

Our TSX-listed exchange-traded fund, WisdomTree ICBCCS S&P China 500 Index ETF (CHNA.B), tracks the ICBCCS S&P China 500 Index, covering stocks in all those bourses. Its index is currently over 50% in local A-shares. MSCI, by contrast, is only starting to add A-shares securities up to a 5% inclusion factor in 2018, a small starting point. It’s high time China has its own S&P 500, especially if President Xi Jinping has anything to say about it.

Going Out

Deng Xiaoping, ruler of China from 1978 to 1989, famously advised his country to “hide your strength, bide your time.” China’s great goal for the last four decades — development, development, development — was to happen quietly, with fingers crossed that the U.S., Japan and Western Europe wouldn’t get too frightened. Continue Reading…

Thinking about retirement? Here are 2 two key income sources to expect

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By Scott Ronalds

Special to the Financial Independence Hub

If you’re at the point where you’re starting to think seriously about retirement, you’re probably wondering how much money you’re going to need to enjoy life after work, and where it’s going to come from.

Everybody’s wants and needs are different, so there’s no magic number as to how much you should have saved by a certain age. Plus, the face of retirement has changed significantly, with many people working part-time into their seventies and eighties, and others hanging it up in their fifties.

That said, by making a few assumptions, we can give you a rough estimate of what you can expect from government sources and your portfolio when you decide to retire.

The basics

To keep it simple, we’ll use a scenario which assumes you’re 65 and plan to fully retire from your job this year. A few other assumptions:

  • You don’t have a pension plan with your employer.
  • You’re eligible for full Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.
  • You have an RSP that you plan to convert to a RIF this year, and you plan to take the minimum required payments (which will start next year) from your account. (Note: you aren’t required to convert your RSP to a RIF until the calendar year you turn 71, but you can convert at any age before 71 if you choose).
  • You don’t have any other investments or sources of income.

First off, let’s look at what you’ll get from the government. You can expect monthly CPP payments of roughly $1,114 ($13,370/year) and OAS payments of about $578 ($6,936/year). In total, you can plan on collecting about $1,690 a month, or just over $20,000 a year. These amounts are indexed to inflation. You can decide to defer taking CPP benefits until you’re older, or take them earlier, in which case your benefits will be increased or decreased, respectively. You can also defer taking OAS to receive a larger monthly benefit.

More than likely, this isn’t going to cover your living expenses or fund the lifestyle you want in retirement. So you’re going to need to rely on your portfolio to cover the shortfall.

RIFing it

Converting your RSP to a RIF means your minimum withdrawal next year will be equivalent to 4.0% of your portfolio’s year-end market value. This figure is based on your age, 65, at the end of the current calendar year. Continue Reading…

The downsizing dilemma: 39% of homeowners skeptical it will save money

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By Joyce Wayne

Special to the Financial Independence Hub

For older Canadians considering selling a home to retire to a smaller living space or a more affordable community, downsizing might sound like a financial bargain, but in a recent Ipsos survey commissioned by HomeEquity Bank, 39 per cent of current homeowners are skeptical that downsizing will actually save them money.

More than a decade ago, I faced the downsizing dilemma and I now wish I’d been as skeptical as these savvy consumers. I put a considerable down payment on a condo in downtown Toronto, purchasing it from builder’s plans. At the time, I wished to retire from my long-time position as a college professor to launch a new career as a writer.  Selling my home, cashing in on the equity I’d accumulated, while moving to smaller digs, made sense to me.

Yet as 27 per cent of downsizers shared with the Ipsos survey, the costs were more than expected. Expenses from downsizing can add up quickly.

Originally I was attracted by the lure of improving my cash flow to support a new career, but downsizing didn’t net out that way after factoring in all the closing costs and moving expenses along with the disruption to my lifestyle.

Moving away felt like starting all over again: this time in my sixties. The weight of condo living took its toll.

After living in my condo for two years, facing unexpected changes to the original building plan, loud nocturnal noise from other condo dwellers, endless fire drills and my terrace furniture burning up with cigarette butts dropped on my balcony from above, I put the unit on the market.  Once again I was faced with real estate and closing costs. When I purchased a home in my former neighbourhood, I was forced to negotiate a mortgage.

According to an earlier Ipsos survey commissioned by HomeEquity Bank in July 2018, half (51 per cent) of those aged 75+ say it’s important to stay in their current home because they want to keep close to family, friends or their community, while four in ten (40 per cent) say emotional attachment and memories are what’s behind the importance of staying put in their current home during retirement.

What I’d do differently if considering downsizing: Continue Reading…

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