All posts by Financial Independence Hub

The Balanced Portfolio journey after a terrible 2022

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

The balanced portfolio had a terrible 2022. In fact, it was just about the worst ever. Stocks were down and bonds had a rough ride delivering negative returns thanks to the rising yield environment. As rates go up, bond prices go down. Inflation was the culprit. Central bankers created a rising rate environment to cool the economy in the attempt to tame inflation. It was almost a year ago that I asked ‘what’s up with balanced portfolios in 2022’. Looking back on that post, things have played out as suggested in the post. And as a recession looks likely in 2023, bonds and the classic 60/40 balanced portfolio might be back in business. It’s the balanced portfolio journey on the Sunday Reads.

Here’s the post from April of 2022 – what’s up with balanced portfolios in 2022. At that point in time …

The stock and bond scorecard for 2022

  • Canadian stocks are up 1.8%
  • U.S. stocks are down 9.9%
  • International developed markets are down 11.4%
  • International emerging markets are down 13.9%

And when we looked at asset allocation ETFs, we saw that the more bond-heavy portfolios (top of that list) were down more than equity-heavy portfolios …

Here’s the year-to-date performance to April 21, 2022.

  • XINC down 8.9%
  • XCNS down 8.5%
  • XBAL down 8%
  • XGRO down 7.4%
  • XEQT down 7.0%

And while this post covering the returns of the core ETF portfolios shows that the balanced portfolio model has worked quite well over the last several years, 2022 was a down year. A typical 60/40 portfolio was down about 11% in 2022.

The all-weather model was performing well, as I wrote …

There was nowhere to hide in the traditional balanced portfolio. That said if one took more of an all-weather portfolio approach the results would be far superior. In fact the portfolios I run for myself and my wife are very near all-time highs. An all-weather portfolio will include dedicated inflation protection by way of commodities, energy and commodity stocks, plus gold.

A key to managing a balanced portfolio is rebalancing on schedule, or rebalance when certain assets perform well as other assets floudner. We move monies from the winners to the losers. In the 2022 post I suggested …

The key with any balanced portfolio approach is to rebalance on schedule. Take your gains and move the assets to the asset that’s stinking the joint out. These days, that may mean taking profits from your inflation-fighters and Canadian stocks and moving them to the underperforming assets. Yes, even moving those profits to your bonds.

In anticipation of a recession, bonds have started to work again from late 2022, with more robust gains in the last 3 months.

Bonds? Well ya!

If you need to manage the portfolio volatility, you need to manage the portfolio volatility. Meaning, your risk tolerance did not change just because bonds are getting hurt. You still need to manage the risks.

During a stock market correction (and/or recession) bonds will be there to do their thing. That is, go up when stocks get crushed. Continue Reading…

Inverted Yield Curves & Recession: How smart are Markets?

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Image Outcome/Creative Commons

By Noah Solomon

Special to Financial Independence Hub

Today’s Special: An Inverted Yield Curve with a Side Order of (Possible) Recession

In our discussions with clients over the past several months, the two frequent topics of conversation have been:

  1. The inversion of the U.S. Treasury curve, and
  2. The possibility of a recession occurring within the next few quarters.

In the following missive, I use a data-based, historical approach to explore the possible investment implications of these concerns.

How Smart is the Yield Curve?

The U.S. Treasury market has an impressive track record in terms of forecasting recessions. Going back to the late 1980s, every time the yield on 10-year U.S. Treasury bonds has remained below that of its two-year counterpart for at least six months, a recession has followed. Such was the case with the recession of the early 1990s, of the early 2000s, and of the global financial crisis.

When it comes to investing (as with many things), timing is critical. Given that yield curves do occasionally invert and that recessions do happen from time to time, it follows that every recession has been preceded by an inverted curve, and vice-versa. What makes the historical prescience of inverted yield curves so impressive is that the recessions which followed them did so within a relatively short period.

United States – Months from Yield Curve Inversion to Onset of Recession: 1989-Present

The table above covers the past three U.S. recessions, excluding the Covid-induced contraction of 2020, which I have omitted since it had nothing to do with macroeconomic factors, monetary policy, etc. As the table demonstrates, the time lag between yield curve inversions and economic contractions has ranged between 12 and 18 months, with an average of 15 months.

However, the yield curve’s impeccable record of predicting recessions has not been matched by its market timing abilities. As summarized in the following table, the S&P 500 Index has produced mixed results following past inversions in the Treasury curve.

S&P 500 Performance Following Yield Curve Inversions: 1989-Present

When the Treasury curve inverted at the beginning of 1989, stocks proceeded to perform well, returning 24.1% over the following two years. Conversely, when the curve became inverted in March 2000, the S&P 500 fared poorly, losing 21.5% over the same timeframe. The index suffered a similarly undesirable fate following the Treasury curve inversion in September 2006, when stocks suffered a two-year decline of 9.1%.

How Smart is the Stock Market?

In the past, the economy and equity markets have not been correlated. Stock prices are forward looking. Historically, equities have started to decline prior to peaks in economic growth and have tended to rebound in advance of economic recoveries.

The trillion-dollar question is not whether the market is smart, but whether it is smart enough. Do prices bake in a sufficient amount of bad news ahead of time so that they avoid further losses following the onset of recessions? Or do they lack sufficient pessimism to avoid this fate? Frustratingly, the answer depends on the recession!

S&P 500 Performance Following Start of Recessions: 1990-Present

Stocks managed to skate through the recession of the early 1990s unscathed. Following the peak of the economy in mid-1990, the S&P 500 Index went on to produce a total return of 27.2% over the next two years. Unfortunately, investors were not so lucky during the recession of the early 2000s, with stocks losing 24.6% in the two years after the recession began. Similarly, the recession of 2008 was no walk in the park for markets, with the S&P 500 falling 20.3% after the economy began contracting at the end of 2007. Continue Reading…

The benefits of Early Retirement

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By Billy and Alaisha Kaderli, RetireEarlyLifestyle.com

Special to Financial Independence Hub

Retirement is something that many people look forward to in their later years, but what if you could leave your career earlier?

The idea of retiring before the typical age of 65 may seem like a pipe dream to some, but it is becoming more and more of a reality for many people whether by choice or through layoffs. There are numerous benefits to this decision, both financially and in terms of lifestyle.

Financial Advantages

One of the main reasons people strive for early retirement is the financial benefits it provides.

To prepare, it’s important to have a solid financial plan in place. This is a great way to learn the skills of creating a budget, tracking your spending, and paying down debt. We learn the value of maximizing retirement contributions and investing in non-IRA accounts. It’s the time to build up retirement savings before beginning to withdraw from them. You can do this on your own, as none of this requires a professional advisor.

Acquiring these tools makes us financially strong and builds our self-confidence which then carries itself forward into other areas of our lives.

Of course there is the need to factor in the potential for unexpected expenses, such as medical bills or family emergencies. Which is why we recommend a few years of cash held in a highly liquid account such as Fidelity® Government Cash Reserves, FDRXX, currently paying over 4%. Access to this cash can also help in market downturns so you are not forced to sell at lower prices in order to live your lifestyle.

Another financial advantage is the ability to minimize taxes.

By retiring early, you may be able to reduce your taxable income and utilize tax-efficient investment strategies. For one thing, you will no longer be paying payroll taxes. Withdrawing money from your retirement accounts in a strategic manner, such as using Rule 72T before you are eligible, can minimize your tax burden in the future and potentially save you a significant amount of money in taxes over time. We did this as a monetary bridge until our Social Security was available. Once we started to receive these payments, we let our IRAs build back up again.

Lifestyle Improvements

Leaving your job or career early also offers a number of lifestyle improvements. For one, you will have more free time to pursue your passions. You could travel more, take up new hobbies, and spend more time with loved ones. We used this opportunity to give end-of=life care to our parents when that time came, something we could not have done while maintaining a full work schedule.

Early retirement can also allow you to lead a healthier lifestyle, with more time to exercise, cook healthier meals, and prioritize your mental health. You could even volunteer and give of your expertise and talents, something you never had time for while working your 9-5.

If you choose to become financially independent outside of your paycheck, you have the ability to avoid burnout. Many people feel overwhelmed by the demands of their jobs, and early retirement can provide a much-needed break while opening up new vistas for you. You are able to take a step back, reflect on your priorities, and perhaps even discover new interests and pursuits.

We did!

Taking advantage of options that seem to just appear

In our case we chose to travel the world, which gave us new perspectives on how to live our own lives. There is no one singular way to do anything, and seeing how other cultures approached community, family, and even the cooking of their food and the learning of a new language, opened up our eyes as well. Continue Reading…

Investing in your financial future: how 4 stages of life align with your journey

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By Brian Shinmar

Special to Financial Independence Hub

If there’s truth to the statement that “change is the only constant in life,” your savings goals, habits and risk tolerance should follow closely. The topic of financial planning can be uncomfortable and intimidating for many people, but it doesn’t have to be that way. Having a sound investment strategy that evolves with your stage of life can set your mind at ease, so let’s break it down into four stages and purposefully account for some general changes you should expect along your financial journey.

Early 20s & 30s: Starting your financial journey

In this stage, many clients are just starting their careers, gaining a sense of financial independence and likely have higher risk tolerance. At this early stage of life, we don’t want clients to just invest it and forget it, we want them to build key (healthy) financial habits. The key habits that I stress are:

1.) Finding a balance between paying off debt and saving for your future: A financial advisor can help young clients establish goals and determine the balance between how much and how often contributions to debts and savings should be made.

2.) Goals with a plan: Setting attainable goals, with a clear plan to help meet them, will keep your bank account growing, and debt lowering.

3.) Saving a portion of your monthly income: A general rule is to save 10-15 per cent of your income each month, but given the higher inflation and interest rates in today’s market, that might not be realistic for everyone. The bottom line is to get into the practice of saving a portion of your monthly income. This helps build your nest egg for long-term goals, like retirement or purchasing a home. Continue Reading…

A volatility play for the US bank sector

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Portfolio Manager explains why US banks have struggled, where opportunities might appear, and how investors can benefit from short-term volatility.

Image from Pixabay: Wendy Soon

By James Learmonth, Senior Portfolio Manager, Harvest ETFs

(Sponsor Content)

The US banking sector is facing uncertainty. In the wake of the collapse of Silicon Valley Bank in March of 2023 — and deposit liquidity issues at other regional banks — the whole US banking sector has suffered some significant stock market setbacks.

In those setbacks, however, investors may see opportunities, especially when we consider the scale and importance of the US banking sector. Of the 30 banks included in the global list of systemically important financial institutions, colloquially referred to as “too big to fail,” eight are based in the United States.

With those titans as ballast, investors may be able to find growth opportunities in US banking, if they understand why the sector is struggling now, where the upside could come from, and find a strategy suited to short-term volatility.

For someone seeking to take advantage of the dislocation we’ve seen in the US banking sector, a diversified approach is absolutely something you may want to look at. Adding a covered call strategy would give the opportunity to monetize the high volatility we’re seeing on the market now. It’s hard to say when the upside might come in US banks given all this uncertainty. But, there’s an argument to be made for someone who wants exposure to these US banks that a covered call strategy could make sense.

Struggles and risks in US banking today

The US banks’ stock market setbacks are due in part to a fear reaction from bank-specific failings at institutions like Silicon Valley Bank, but also reflect some structural headwinds for the sector.

The systemic issue comes down to deposit costs. As market-based interest rates rose sharply in 2022 and into 2023, the rates offered by banks to their depositors remained relatively low. Depositors, especially larger businesses, have begun to demand higher interest rates on their accounts, raising the cost of funding for many banks. Some of those depositors started transitioning some capital into other interest-bearing vehicles, such as money market mutual funds, which offered a higher interest rate as well. The whole banking sector is now facing some challenges to profitability growth due to the rising costs of deposits.

Those deposit costs can be more accurately described as a structural headwind, rather than an existential risk. While deposit costs contributed to the fall of Silicon Valley Bank, it’s notable that a range of company-specific factors played a role: Silicon Valley Bank’s high proportion of business clients, meaning its depositor base was concentrated and held high average account balances. When word spread across social media of venture capitalists sounding alarm bells to their investment companies, withdrawals cascaded. Continue Reading…