All posts by Financial Independence Hub

Bestselling Beat the Bank celebrates its 5th anniversary

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By Larry Bates

Special to Financial Independence Hub

 

My book, Beat the ​Bank: The Canadian Guide to Simply Successful Investing, was published in September 2018. Five years later it continues to be a best seller among Canadian business/investing books.

The book, along with my website and various articles I’ve written have helped many Canadians learn to invest smarter and build (and maintain) larger retirement nest eggs.

Most Canadians continue to be directed by their banks and other advisors to invest through mutual funds. The vast majority of these mutual funds extract annual​ fees ranging from 1.5% to 2.5% from the value of the investment.

Not only are most Canadians unaware of these fees​, very few investors understand the compound damage these fees do over time. Over a lifetime of investing, these fees can reduce retirement nest eggs by 50% or more.

At the same time, the investment industry, including the same banks that sell high-cost mutual funds, offer very low cost, very efficient investment funds (ETFs) that track market indexes​. (There are many other types of ETFs as well. In my view most investors would be well served by sticking to simple index tracking ETFs).

Smarter investing means getting out of high-cost mutual funds and getting into low-cost investment products and services like index ETFs through do-it-yourself investing, using robo-advisors or finding lower cost traditional advisors.

A lot has happened in the world since​ Beat the ​Bank was published five years ago​. Covid-19 did a lot of damage and led to a great deal of unanticipated change. Inflation spiked dramatically causing central banks to raise interest rates. The full impact of higher rates is yet to be fully felt, especially by homeowners whose mortgages will be renewing in the next year or two.

The good news for investors is that bonds and GICs are finally offering decent returns although we will have to wait and see whether earning 5% interest will outpace inflation. And, despite all the uncertainty and chaos over the past five years, the total return of S&P 500 was a pleasing 70% while the total return of the S&P/TSX was 42%.

What hasn’t changed?

  • Markets continue to be uncertain​ (this never changes!)
  • The majority of “advisors” are under no legal obligation to act in their client’s best interest
  • The majority of “advisors” put millions of Canadians into high-cost mutual funds
  • Many prominent mutual funds have not reduced their fees (Why would they lower fees when investors are unaware of the impact of fees?)
  • Mutual funds continue to underperform simple index ETFs
  • Regulators have made some progress but many critical investor protection measures have yet to be implemented

​The ​Beat the ​Bank project, which was sparked​ 7 years ago by my sister’s experience with mutual funds, has been a ​gratifying experience​. I have received hundreds of messages from readers over the past five years, the great majority with positive feedback.

You can get a sense of reader response by checking out Amazon reviews. I certainly have had negative reaction from some advisors and industry people generally, but most professionals recognize the shortcomings of the industry and want to see investors achieve better outcomes with simpler, more efficient investment products and services.

DIY investing not for everyone

Do-it-yourself investing it’s not for everyone. But if you are considering switching to DIY investing, whether you check out my book​ or other independent ​sources​ (books, blogs, podcasts, etc.), I strongly encourage you to take some time to learn investment basics.

Here are just a few tips from Beat the Bank readers for those considering making the move:

“I have found that ETF equity investing is better for me than buying individual stocks.” Continue Reading…

Playing Defence on the Gaza conflict with the All-Weather Portfolio

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By Dale Roberts

Special to Financial Independence Hub

There is no avoiding the crisis and tragedy of the Israel-Hamas war. While nothing can begin to match the humanitarian concerns, we will address the financial, economic and global risks. Preparing for war is preparing for risk and uncertainty whether that be a humanitarian crisis or a financial calamity. The risks and events can commingle and merge together as well. In the past this blog has looked at the global war on COVID-19, the invasion of and ongoing war in Ukraine and now the war in the Middle East. To no surprise the risk management answers are quite similar.

It was a week Saturday that we woke up to the tragedy in Israel. A declaration of war soon followed. The potential of escalation and economic shocks is real. Of course we pray for the most peaceful outcome as is possible. As of this writing, that peace appears to be a distant hope.

While stock markets mostly took the events in stride, risk-off assets certainly did respond. Gold, bonds and energy moved higher.

The memory of oil shocks

A headline on Seeking Alpha offered that – Oil prices rise as investors fear a wider war with Israel’s advance into Gaza. From that post …

Energy stocks enjoyed their best week since June, with the S&P 500 Energy Index +4.5%, as oil prices surged ahead of Israel’s imminent advance into Gaza that could cause violence to spill over into other parts of the Middle East, potentially causing disruptions to oil production and shipments.

And this is surprising, from that same Seeking Alpha post …

A less publicized factor also affected oil prices: The Biden administration for the first time began enforcing Russian oil sanctions announced last year, penalizing two tankers for carrying Russian crude oil above the West’s $60/bbl price cap.

Oil is up over 7%, while gold is up 5.5% over the last several days. Don’t forget to rebalance when risk-off assets move in violent fashion. We can see how gold moved up considerably in 2020 with the invasion of Ukraine. It then settled into a range as the world ‘got used’ to the ongoing conflict. Gold price …

Of course, no one knows how events in the Middle East will evolve, and how far the conflict might spread around the globe. Let’s not forget that it was the oil shock that ignited the stagflation period of the 1970’s.

The Purpose Real Asset ETF PRA/TSX was up 2.5% over the week ended October 13.

Even bonds caught a bid as a defensive asset with the Canadian bond market (XBB/TSX) up 1.6% and longer term U.S. treasuries up 2.5%.

Defense stocks for defense

And it should be no surprise that defense stocks are on the move as the world powers militarize to face the mounting threats in the Middle East, Europe and Asia. Northrop Grumman Corporation (NOC/NYSE) is up over 14% over the last several days and Raytheon (RTX/NYSE) is up over 6%. We hold Raytheon in one account. It was a spin-off from United Technologies. Continue Reading…

5 Ways to Increase the Value of your Business before Selling

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If you want to pass along your highly valuable company to a new owner, here are five ways to increase the value of your business before selling.

Image Adobe/PeopleImages.com

By Dan Coconate

Special to Financial Independence Hub

As retirement looms on the horizon, you are probably thinking about taking the next steps in your journey. If you are a business owner, one of these steps may include selling your business. When placing your business on the market, it is important to protect your financial well-being by getting the highest sale price possible. Here are five ways to increase the value of your business before selling.

Strengthen your Financial Records

Your financial records are the heart of your business. Potential buyers will scrutinize them to gauge the health and potential of your enterprise. To increase the value of your business before selling, ensure your financial statements are in order, transparent, and show consistent growth. Sound financial statements will build trust and make your business a lucrative investment.

Build a Strong Management Team

A strong and cohesive management team is the backbone of any successful business, and a significant selling point for many potential buyers. These buyers often assess the depth and breadth of leadership skills present within the team. They need confidence that the business will continue to thrive and adapt in a dynamic market environment, especially if the original owner is no longer at the helm. Continue Reading…

Invest in the Index, not in individual stocks

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By Alain Guillot

Special to Financial Independence Hub

Every day, there are many companies experiencing significant price drops. There is a section on Yahoo Finance called “Day Losers” where the biggest losers of the day are highlighted.

Are those good buying opportunities?

Maybe.

All of our favorite Blue Chip stocks have been part of this list. Some of those stocks have recovered, while others continued their downward slide. The truth is that we never know for sure which stock will recover and which one will just disappear. Remember Nortel, Nokia, Kodak, BlackBerry, Blockbuster, RadioShack, Toys R Us? These were stock market leaders that never recovered.

On the other hand, for those investors who have bought the U.S. or Canadian index, they have always seen their money coming back after any major drop.

Instead of discussing the pros and cons of buying any individual stock, I think we should look at the big picture and talk about the difference between buying a basket of individual stocks when they are down versus buying the index.

The main difference between buying any individual stock and buying the index when they both go down is that, up until now, the index has always bounced back, while some of the blue-chip stocks that we have learned to love/trust might never recuperate. Kodak, Blockbuster and Nokia never recuperated. They slowly declined into the graveyard of market history.

On the other hand, the S&P 500, which came into existence in 1957, has seen many deep declines and it has always recovered:

  • Black Monday: Oct. 19, 1987
  • Dotcom bubble crash: 2000-2002
  • Global financial crisis: 2008-2009
  • COVID-19 pandemic: 2020

Why? Because, unlike individual stocks, the S&P 500 is always changing.

S&P 500 from 1927 to 2023 from 20 to 4,090; a 17,620% gain.

Looking at this graph, you might think that you could have invested $20 in the most popular stocks of 1927 and just waited to get rich. But it doesn’t work out that way. The companies that represented U.S. stocks in 1927 are very different from the companies that represent U.S. stocks in 2023. Most of the original companies composing the S&P 500 no longer exist, but the S&P is still going strong.

Regardless of how quickly companies are moving in and out of the index, you can see that owning an index is fundamentally different from owning a basket of individual stocks. While your basket of individual stocks might remain the same over time, the index will not.

There are many benefits provided to index investors.

We get the highest returns and pay the lowest fees. Hundreds of analysts go on a hunt for the best stocks; they spend their time, money, and energy crunching numbers, buying the stocks that are going up and selling the stocks that are going down, and we get to reap the rewards.

According to the SPIVA Report, the S&P 500 index has outperformed 92% of money manager professional over the past 15 years, and the cost to us is usually 0.05%/year. There is no better deal in town.

Alain Guillot is a part time event photographer, part time Salsa teacher, and part time personal finance blogger. He came to Quebec as an immigrant from Colombia. Due to his mediocre French he was never able to find a suitable job, so he opened a Salsa/Tango dance school and started his entrepreneurship journey. Entrepreneurship got him started into personal finance and eventually into blogging. Now he lives a Lean FIRE lifestyle and shares his thoughts in his blog AlainGuillot.com. This blog originally appeared on his blog on Oct. 9, 2023 and is republished here with permission. 

Risk, Return & the Essence of Adding Value

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Image courtesy Outcome/Shutterstock

By Noah Solomon

Special to Financial Independence Hub

This month, I explore how the relationship between risk and return forms the bedrock of sound (or poor) investment results. I will also demonstrate why the management of these two elements constitutes the essence of adding or destroying value for investors. Lastly, (reader beware), I include a rant about investor complacency and the detrimental effects it can have on one’s wealth.

Good is Not the Enemy of Great: It is Great

David VanBenschoten was the head of the General Mills pension fund. In each of his 14 years in this role, the fund’s return had never ranked above the 27th percentile or below the 47th percentile.

Using simple math, one might assume that over the entire period the fund would have stood in the 37th percentile, which is the midpoint of its lowest and highest ranks. However, despite never knocking the lights out in any given year, VanBenschoten managed to achieve top-tier results over the entire period. By consistently attaining 2nd quartile performance in each and every year, over the 14-year period the fund achieved an enviable 4th percentile ranking.

The Hippocratic Oath and Investing

The seemingly irreconcilable difference between the average of VanBenschoten’s rankings and his overall rank over the whole 14-year period stems as much from the performance of other funds as from his own results.

To achieve outstanding performance, one must deviate from the crowd. However, doing so is a proverbial double-edged sword, as it can lead to vastly superior or inferior results. The preceding rankings indicate that most of the managers who were at the top of the pack in some years also had a commensurate tendency to be near the bottom in others, thereby tarnishing their overall rankings over the entire period.

In contrast, the General Mills pension fund, by being consistently warm rather than intermittently hot or cold, managed to outperform most of its peers. Managers who aim for top decile performance often end up shooting themselves in the foot. The moral of the story is that when it comes to producing superior results over the long term, consistently avoiding underperformance tends to be more important than occasionally achieving outperformance. In this vein, managers should take the physicians’ Hippocratic Oath and pledge to “first do no harm.”

Robbing Peter to Pay Paul: The Bright and Dark Sides of Asymmetry

The Latin term Sine Que Non describes an action that is essential and indispensable. In the world of investing, the ability to produce asymmetrical results meets this definition. It is the ultimate determinant of skill.

A manager who delivers twice the returns of their benchmark but has also experienced twice the volatility neither creates nor destroys value. They have simply robbed Peter (higher volatility) to pay Paul (commensurately higher returns). Since markets tend to go up over time, clients may marvel at the manager’s superior long-term returns. However, this does not change the fact that no value has been created – clients have merely paid in full for higher returns in the form of higher volatility.

If this same manager delivered 1.5 times the benchmark returns while experiencing twice the volatility, not only would they have failed to add value but would have destroyed it – they would have simply robbed Peter by exposing him to higher volatility while paying Paul less in the form of excess returns. In contrast, if the manager had produced twice the returns of the benchmark while experiencing only 1.5 times its volatility, then they deserve a firm pat on the back. They would have achieved asymmetrically positive results by paying Paul far more in outperformance than what they stole from Peter in higher volatility.

The Efficient Market Hypothesis: Why bother?

The efficient-market hypothesis (EMH) states that asset prices reflect all available information, causing securities to always be priced correctly and making markets efficient. By extension, the EMH asserts that you cannot achieve higher returns without assuming a commensurate amount of incremental risk, nor can you reduce risk without sacrificing a commensurate amount of return. It argues that it is impossible to consistently “beat the market” on a risk-adjusted basis. When applied to the decision to hire an active manager rather than a passive index fund, the EMH can be neatly summarized as “why bother?”

Continue Reading…