All posts by Financial Independence Hub

How to keep your business solvent

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Image courtesy BDO Canada

By Matthew Marchand

Special to Financial Independence Hub

More Canadian businesses are failing this year.

In the second quarter of 2023, the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) noted that there were 1,090 business insolvencies — an increase of 36.9% compared to the same period in last year. It was also the highest volume since 2014.

There are two main reasons why this is occurring.

First, the combination of rising interest rates and high debt levels has resulted in slower consumer demand and increased debt servicing costs for both businesses and consumers. The prime rate has risen 475 basis points since early 2022 and now sits at 7.2%.

Second, the loss of government financial aid plus the need to repay a portion of the aid received — along with tightening credit conditions — are making it more challenging to obtain new financing or to refinance existing debt.

During the height of the COVID-19 pandemic, government financial aid helped limit insolvencies during those challenging times. What we’re seeing now is a normalization after an abnormal period.

It should also be noted that many businesses were beginning to experience financial difficulties prior to the pandemic and the financial aid acted as a buoy to some degree. We’ve seen many instances of businesses being unprofitable prior to the pandemic that became profitable during the pandemic, with much or all the profits being derived from government financial aid.

Now that the financial aid is no longer available and may need to be repaid in the future (depending on the support received), businesses are feeling the challenges of this economic reality.

Ways businesses can survive

Many businesses may think a wind-down of operations is the only option, but that’s not the case. In fact, there are other options:

  • A restructuring or compromise of debt (payments to creditors accepted as a settlement of the debts)
  • Turnaround initiatives, such as lease disclaimers, labour force reductions or the sale of non-core assets

For businesses that are facing financial challenges now, they should expect interest rates will remain elevated for the foreseeable future. While the Bank of Canada left the overnight rate unchanged at 5% in September, it says it “remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed.”

Your organization should update its business plans and financial projections accordingly. If your business doesn’t have a detailed cash flow projection, make one.

You should also conduct a stress test on your financial projections to determine potential financial scenarios and what proactive efforts may need to be taken to avoid worst case outcomes. For example, if sales fall 10% or 15%, how will it affect the financial performance of the business? Will the business be able to meet its debt servicing obligations and other critical payments as they become due, and if so, for how long? Continue Reading…

Tawcan: 10 lessons I’ve learned along the FIRE journey

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By Bob Lai, Tawcan
Special to the Financial Independence Hub
Although I grew up in a household where my dad retired in his early 40s and a couple of my cousins reached financial independence and/or retired early in their 40s, I had never really put much thought or energy on financial independence retire early (FIRE) in my 20s. While I was living frugally, I wasn’t investing my money efficiently and I lacked a core investment strategy.

This changed just before I turned 30. Someone gave my wife and me a book called Secrets of the Millionaire Mind and our lives were forever changed. We aspired to make changes in our financial plans and how we manage our money. We knew FIRE was a possibility and we started investing in dividend-paying stocks with the plan to live off dividends by 2025 or earlier.

Ten years into our FIRE journey, we’ve made great progress on our goal of becoming financially independent. We are appreciative of this journey and how it has transformed our lives and made us more rounded people. We also have learned many lessons that we wouldn’t have learned if we weren’t on this journey.

I’d like to share with you the ten lessons I’ve learned so far on our FIRE journey.

1. FIRE is not the finish line, it’s a journey

Many see reaching FIRE as the finish line. For them, it means an escape from the rat race. However, I believe we can’t see FIRE as an escape route, the happy ending, a finish line, or the solution to everything. Reaching FIRE certainly doesn’t mean you will magically become happy and live happily ever after.

If you don’t work on yourself during the FIRE journey and improve yourself, you will continue to face the same challenges over and over.

Look at FIRE like a journey. It is very important to enjoy the journey and work on yourself while on this multi-year journey. So take the time to learn new skills, take self-improvement courses, gain new hobbies, make new friends, provide a helping hand in your community, etc.

2. Have a core investment strategy

In my 20s, although I was investing in the stock market, I was trading in and out of stocks frequently. I also invested heavily in high-MER mutual funds and low-interest-rate GICs. In other words, I didn’t have a core investment strategy and my money wasn’t working very hard for me.

Since starting our FIRE journey, I learned to get in line and stay in line. I learned the importance of having a core investment strategy.

For us, it means investing in both dividend-paying stocks and index ETFs. This hybrid investment strategy allows us to have a predictable dividend income every month while staying geographically and asset diversified. By getting rid of high-fee mutual funds and so-called “high interest” GICs, on top of investing in the stock market for the long term, our money is working much harder for us.

Having a core investment strategy also means that we stay focused. We aren’t constantly switching back and forth between different investing strategies and losing momentum. If we want to test out a different investment strategy, we can still do that, but we use a small percentage of our portfolio.

For example, less than 5% of our overall portfolio is invested in growth and more speculative stocks.

3. Ignore doubts and noises around you

The FIRE movement has gained popularity in recent years but it is still a niche movement. The niche nature of the movement means that many of your friends and family do not know about it and will cast doubts when they learn what you’re working on. Unintentionally, they may also try to sabotage your plans.

It is important to ignore doubts and noises around you. Believe in yourself, connect with like-minded people, find support from the FIRE community, and stay focused while on this FIRE journey.

4. Understand your whys

Many people start their FIRE journey because they hate their jobs and because they are not happy with their lives. But FIRE isn’t the magic pill, it will not make you happy all of a sudden.

It is important to dig deep, cut through the BS, and really understand why you want to become financially independent and one day retire early.

Perhaps it’s because you want to have more time to spend with your kids. Perhaps it’s because you want to have the ability to go skiing on a Tuesday morning. Perhaps it’s because you want to be able to volunteer at the local soup kitchen without having to worry about money.

Find your reasons.

5. Stop comparing

Becoming financially independent in less than five years doesn’t make you more successful and taking 20 plus years to reach financial independence doesn’t make you a failure either.

Because we are all different individuals, our FIRE journey will never be alike. Therefore, we need to stop comparing our journeys with each other. Instead, support each other and help each other along the way.

And remember, financial independence retire early does not define success in life.  Continue Reading…

Strategies for Selling your Business Quickly

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Looking to get out of your business as soon as possible? Our tips will help you sell your business quickly while still getting a fair deal.

Adobe Image by Robert Kneschke

By Dan Coconate

Special to Financial Independence Hub

Are you a small business owner ready to start the next phase of your life? If you’re looking to sell your business quickly and move on, read on.

We have some helpful strategies for attracting serious buyers and closing deals below.

Get your House in Order

The first thing you should do before putting the “For Sale” sign on your business’s front lawn is to get your organization and financial records in order. One of the first things that any potential buyer will want to look at is the accounts and books of the business to gauge its financial health.

If the documents and accounts are a disorganized mess that only you can decipher, your business won’t be very appealing to a buyer. Ensure your financial documents are organized and straightforward, including critical documents like the complete list of all assets, copies of patents and licenses, and profit and loss statements.

Hire a Business Broker

As you prepare for a sale, hiring an independent business broker is one of the best strategies for selling your business quickly. A broker will take a commission from the sale, but their experience and skills are invaluable when selling a private practice or business.

They’ll connect you with more potential targets and get the word out that you’re looking to sell and vet buyers for you. They’ll also represent you in negotiations and offer valuable insight to attain the best deal as quickly as possible.

Sell to a Competitor

While it may sting the pride of some to sell their business to the competition, it’s often the fastest and easiest option for small business owners. After all, what competitor wouldn’t be interested in expanding and bringing their competition under their umbrella? Continue Reading…

Lessons learned in diversification: Reducing Canadian home country bias

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Image by Pexels: Mihail Nilov

By Mark Seed, myownadvisor

Special to Financial Independence Hub

Many financial advisors, analysts and investing gurus alike tout the merits of portfolio diversification. In this updated posted, you can read on about my recent lessons learned in diversification, including reducing my Canadian home bias since becoming a DIY investor well over a decade ago.

Theme #1 – how many stocks are enough?

This answer depends on who you ask but there are some experts who claim owning about 30-40 individual stocks, in various industry sectors, will provide modest diversification to mitigate portfolio risk. Here are some examples:

Lowell Miller author of The Single Best Investment:

“In our portfolios for individuals and institutions we tend to carry thirty to forty stocks.”

“The more stocks you have, the more your group will behave like an index.”

“If you don’t want to hold the thirty to forty stocks that satisfy my personal comfort level, you can reduce the number – bearing in mind that each reduction increases the risk that a single bad apple in your bushel will have an excessive impact on results.”

Gary Kaminsky author of Smarter Than The Street:

“Holding 100 stocks is yet another myth of the great Wall Street marketing machine.”

“If you’re going to do your own work/research, you should feel comfortable that with 25 to 30 names, you have enough diversification and you have enough skin in the game.”

Gail Bebee author of No Hype – The Straight Goods on Investing Your Money:

“A popular rule of thumb asserts than an individual stock should represent no more than 5% of a portfolio.  This would mean owning at least 20 stocks.”

“Some studies of past stock market performance have concluded that owning about 15 to 20 stocks provides the best return for the least risk.”

Stephen Jarislowsky, Canadian billionaire and author of The Investment Zoo:

“Out of the many thousands of stocks I can choose from worldwide, I therefore really only need to look at 50 at most.”

Those estimates seem about right to me as a practising DIY investor.

When it comes to individual stocks though, dedicated readers of this site will know I’m a fan of portfolio diversification myself and practice the following personal rules of thumb to avoid individual stock risk:

  • I strive to keep no more than 5% value in any one individual stock, and
  • I’m working on increasing my weighting in low-cost ETFs over time to avoid my bias to Canadian dividend payers in my portfolio while generating total returns. Read on…

You can always review some of my current stock holdings on this standing page here.

Theme #2 – why diversification?

Portfolio diversification aims to lower the volatility of my portfolio because not all asset categories, industries, nor individual stocks will move together perfectly in sync. By owning a large number of equity investments in different industries and companies, and countries, those assets may and do rise and fall in price differently; smoothing out the returns of my portfolio as a whole.

“There is a close logical connection between the concept of a safety margin and the principle of diversification.” – Benjamin Graham

While I/we continue to hold no bonds in our portfolio at this time, as I contemplate semi-retirement in the coming years, I am seriously considering ramping up our cash on hand to counter any bearish equity markets when we’re not working full-time.

Theme #3 – how can I reduce my Canadian home bias with ease?

During the pandemic, I decided to make a few portfolio changes to simplify my portfolio more as semi-retirement planning continued. These were my decisions related to asset location and further diversification. Continue Reading…

Why Retirees own cash, bonds & GICs

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By Dale Roberts

Special to Financial Independence Hub

Imagine retiring, and then you have to head back to work, or you cancel your planned trips and greatly curtail your lifestyle. That’s what happened to too many who retired at or near the recesssions created by the dot com crash and the financial crisis. Risk in retirement is perhaps the flipside of risk in the accumulation stage. In the accumulation stage, lower stock prices can be very good. Lower prices in retirement can impair retirement. The equity risk in retirement is called sequence of returns risk. Poor stock market returns early in retirement can create a situation where the portfolio value has decreased, and selling more shares at lower prices might be hazardous to your retirement health. That’s why retirees own bonds, cash and GICs.

I will start off with a few charts that demonstrate the path of a retiree’s portfolio who retired at the start of the dot com crash (late 90s) and the financial crisis (2007-2009).

Here’s the drawdown history in recessions using the U.S. market as an example.

Yes, two of the most recent major corrections were epic and extraordinary. In the dot com crash and the financial crisis, stock markets were down 50%. In the early 2000s U.S. stock markets were down 3 years in a row.

The “average” decline in a recession is close to 25%. But as we know, average rarely happens when it comes to investing and stock markets.

The dot com crash retirement scenario

In the following scenario the retiree has a  C$1,000,000 portfolio and spends 4.2% of the portfolio value in year one. The $1,000,000 creates $42,000 of income. The spending rate then increases, adjusted for inflation. If inflation is 3%, the retiree gets a 3% raise.

The portfolio is 50% U.S. stocks and 50% global.

Portfolio Visualizer

We can see that it was “over” quickly for the equity portfolio in this scenario. Even the strong market returns from 2003 to 2008 could not bring the portfolio back to health. In late 2007 the portfolio value was $870,000 but the spend rate would have been considerable. We have a portfolio value much lower than $1,000,000 and the amount taken out of the portfolio has increased at the rate of inflation. It is a dead portfolio walking, even in 2007. The financial crisis essentially finished it off, and was limping through the 2010s. 2024 would be its final year.

Unfortunate start date

The retiree was a victim of bad luck. They strolled into a very unfortunate start date – at the beginning of a recession and a severe stock market correction.

Let’s head back two years to see what happens to a retiree who retired in 1998.

What a difference two years makes. That said, I would suggest that the portfolio was impaired in 2003 and 2008. It was outrageous stock market gains that brought the portfolio back to the land of the living. There is no guarantee that after 40% and 50% portfolio declines that 30% and 20% annual stock market gains will ride to the rescue.

It’s also likely that a retiree who has watched 30% to 40% of their portfolio value disappear is not comfortable keeping up the spend rate. They have cancelled trips, dinners, gifting and more. They might have self-imposed retirement withdrawal.

Risk is different and feels different in retirement.

That self-imposed retirement withdrawal may have occurred during the financial crisis as well.

Who is going to keep the spend rate when the portfolio is down over 50%? I’d suggest no one. And I’d count that as a retirement failure, having to change your retirement plans.

Are you feeling lucky?

Now, let’s give the retiree a very fortunate start date. 1991.

The portfolio never sees new lows. And obvioulsy, the retiree could have treated themself to a much higher spend rate of 4.2% inflation-adjusted. That’s called a variable withdrawal strategy. You spend more when times are very good. And you spend less during recessions. More on that later. Continue Reading…