All posts by Financial Independence Hub

Checking in on our U.S. stocks

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

Eight years ago, I bought 15 U.S. dividend growth stocks as a real-life portfolio demonstration. More than a demonstration, it was the total value of our U.S. holdings in our retirement accounts. The strategy was to create a more defensive and retirement-ready portfolio. The portfolio slants to quality, profitability and business moats. The 15 stocks were added to three companies that were already held – we’ll call those stock picks. The portfolio mix beat the S&P 500 by 3.2% annual while delivering better risk-adjusted returns.

Here’s the link to my recent Seeking Alpha article – the dividend growth portfolio 8 years later. You might be able to get one of three free reads for that post on Seeking Alpha. But just in case you can’t I will share a few of the key details.

And keep in mind the post and stocks that I mention is not advice. Do your own research, and know why you do what you do.

The U.S. dividend growth, plus picks portfolio

I sold my VIG, and purchased 15 individual holdings from the top 20-25 of the index. The 15 companies that I added are 3M (MMM), Pepsi (PEP), CVS Health Corporation (CVS), Walmart (WMT), Johnson & Johnson (JNJ), Qualcomm (QCOM), United Technologies (UTX), Lowe’s (LOW), Walgreens Boots Alliance (WBA), Medtronic (MDT), Nike (NKE), Abbott Labs (ABT), Colgate-Palmolive (CL), Texas Instruments (TXN) and Microsoft (MSFT).

I also have 3 U.S. stock picks by way of Apple (AAPL), Berkshire Hathaway (BRK.B), and BlackRock (BLK). For the record, these stocks are held in my wife’s accounts and my own accounts.

United Technologies merged with Raytheon (RTX) and then spun off Carrier Global Corporation (CARR) and Otis Worldwide (OTIS). We continue to hold all three and they have been wonderful additions to the portfolio. In fact, from the time of the spin-off, the 3 stocks have greatly outperformed the market (IVV) and the dividend achievers. Given that the United Technology stocks are not available for evaluation from 2015, I have run the performance update with the remaining 14 dividend achievers. Continue Reading…

Timeless Financial Tips #4: How to Manage your Financial Behavioural Biases

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By Steve Lowrie, CFA

Special to Financial Independence Hub

There are countless external forces influencing your investment outcomes: taxes, market mood swings, breaking news, etc., etc.

Today, let’s look inward, to an equally important influence: your own financial behavioural biases.

The Dark Side of Financial Behavioural Bias

Having evolved over millennia to secure our survival, our deep-seated behavioural biases precondition us to frequently depend more on “gut feel” than rational reflection. Sometimes, our instincts are life-saving, like when a car brakes hard right in front of you. Chemical reactions in the lower brain’s amygdala trigger you to brake too, even as your higher brain is still enjoying the scenery.

Unfortunately, these same rapid-fire triggers often hurt us as investors. When we make snap financial decisions that “feel” right but are rationally wrong, we tend to sabotage our own best interests. By recognizing these reactions as they occur, you’re more likely to stop them from ruining your financial resolve, which in turn improves your odds for better outcomes. Let’s explore some behavioural finance examples that you’ll want to prepare for…

Behavioural Finance Example #1: Fear and FOMO

The point of investing is to buy low and sell high. So, why do so many investors so often do the opposite? You can blame fear, as well as Fear of Missing Out (FOMO investing). Time after time, crisis after crisis, bubble after bubble, investors rush to buy high by chasing hot holdings. They hurry to sell low, fleeing falling prices. They’re letting their behavioural biases overcome their rational resolve.

Behavioural Finance Example #2: Choice Overload and Decision Fatigue

Our brains also don’t deal well with too much information. When we experience information overload, we may stop even trying to be thoughtful, and surrender to our biases. We’ll end up favouring whatever’s most familiar, most recently outperforming, or least scary right now. When choosing from an oversized restaurant menu, that’s okay. But your life savings deserve better than that.

Behavioural Finance Example #3: Popular Demand and Survival of the Fittest

Inherently tribal by nature, we humans are susceptible to herd mentality. When everyone else gets excited and starts chasing fads, whether it is cryptocurrencies, alternative investments, or the other financial exotica-du-jour, we want to pile in too. When the herd turns tail, we want to rush after them. It’s like that old joke about escaping a bear: you don’t need to run faster than the bear; you just need to run faster than the guy next to you. In bear markets, this causes investors to flee otherwise sound positions, selling low, and paying dearly for “safer” holdings, rather than holding their well-planned ground.

Behavioural Finance Example #4: Anchor Points and Other Financial Regrets

Successful investors look past their occasional setbacks and remain focused on capturing the market’s long-term expected returns. But that’s hard to do, as we are often trapped by financial decisions regret. For example, loss aversion causes the average investor to regret losing money approximately twice as much as they appreciate gaining it. Similarly, anchor bias causes us to cling to depreciated holdings long after they no longer make sense in our portfolio, hoping against hope they’ll eventually recover to some arbitrary, past price. Ironically, you’re less likely to achieve your personal financial goals if you’re driven more by your financial regrets than your willpower.

Taking Charge of Your Financial Behavioural Biases

We’ve now looked at some of the damage done by behavioural biases. Once you know they’re there, you can at least minimize your exposure to them. Better yet, by using what behavioral psychologists call “nudges,” you can even harness your biases as forces for financial good. Following are two examples. Continue Reading…

A Failure to understand Rebalancing

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By Michael J. Wiener

Special to the Financial Independence Hub

Recently, the Stingy Investor pointed to an article whose title caught my eye: The Academic Failure to Understand Rebalancing, written by mathematician and economist Michael Edesess.  He claims that academics get portfolio rebalancing all wrong, and that there’s more money to be made by not rebalancing.  Fortunately, his arguments are clear enough that it’s easy to see where his reasoning goes wrong.

 

Edesess’ argument

Edesess makes his case against portfolio rebalancing based on a simple hypothetical investment: either your money doubles or gets cut in half based on a coin flip.  If you let a dollar ride through 20 iterations of this investment, it could get cut in half as many as 20 times, or it could double as many as 20 times.  If you get exactly 10 heads and 10 tails, the doublings and halvings cancel and you’ll be left with just your original dollar.

The optimum way to use this investment based on the mathematics behind rebalancing and the Kelly criterion is to wager 50 cents and hold back the other 50 cents.  So, after a single coin flip, you’ll either gain 50 cents or lose 25 cents.  After 20 flips of wagering half your money each time, if you get 10 heads and 10 tails, you’ll be left with $3.25.  This is a big improvement over just getting back your original dollar when you bet the whole amount on each flip in this 10 heads and 10 tails scenario.  This is the advantage rebalancing gives you.

However, Edesess digs further.  If you wager everything each flip and get 11 good flips and 9 bad flips, you’ll have $4, and with the reverse outcome you’ll have 25 cents.  Either you gain $3 or lose only 75 cents.  At 12 good flips vs. 12 bad flips, the difference grows further to gaining $15 or losing 94 cents.  We see that the upside is substantially larger than the downside.

Let’s refer to one set of 20 flips starting with one dollar as a “game.”  We could think of playing this game multiple times, each time starting by wagering a single dollar.  Edesess calculates that “if you were to play the game 1,001 times, you would end up with $87,000 with the 100% buy-and-hold strategy,”  “but only $11,000 with the rebalancing strategy.”

The problem with this reasoning

Edesess’ calculations are correct.  If you play this game thousands of times, you’re virtually certain to come out far ahead by letting your money ride instead of risking only half on each flip.  However, this is only true if you start each game with a fresh dollar. Continue Reading…

How cent-sible mothers can give their children financial independence

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Image by Unsplash

By Anna Smith

Special to Financial Independence Hub

As a mother, I know the importance of raising my daughter to be independent and confident. One of the most significant ways I can do this is by instilling in her the value of financial literacy. By teaching her to be financially independent, I am setting her up for a future where she can make sound decisions with money and have the freedom to achieve her dreams. I feel every mother should share this responsibility and nurture the financial skills of their children, especially when we consider the uncertainties of the current global economic climate.

Growing up and learning to manage money through lived experiences, I discovered that some of those life lessons can be painful. My immigrant parents were so focused on working hard to provide the basics for the family, financial literacy lessons weren’t really a priority for my sister and me. All we were taught was to save and keep on saving. In fact, my sister and I would sometimes skip lunch at school just to save the allowance our parents gave us. I learned the hard way that while saving is part of being financially literate, it can’t just stop there; a significant next step is to find safe, reliable methods to growing your wealth.

Not knowing better, when I was 18, one of the earliest financial mistakes I made was getting multiple credit cards, which eventually resulted in a lot of debt (because which teenage girl doesn’t like shopping?). I had to work hard to pay it off and it was a tough lesson to learn, but it was valuable because it made me realize the importance of being smart about money from a young age.

After that, I started seeking support to become more financially literate from any source I could get my hands on. The internet was my best friend and I got into the habit of listening to podcasts about investing and best financial practices. When I started working, I was lucky enough to find a trusted mentor who taught me that putting 75 per cent of my paycheque toward smart investments was smarter than spending the money on any big-ticket item immediately.

As I became better with money, I went from only knowing how to save money to growing my wealth through investing in stocks (ETFs) and real estate and having a diverse portfolio. When it comes to investments, I now know it’s important to maintain both passive and aggressive investments. Having said that, choosing between good investments and bad ones can be daunting and that’s where financial advisors come in. Engaging a trusted advisor who is experienced in investing in different asset classes can make all the difference in the world because they often have access to wealth management tools and data that make investment proposals more reliable and easier to understand.

Teaching children about saving and investing — and the mindset behind both

Although I eventually found my financial footing, others are not so lucky and many have never been able to recover once they get into debt, which can be crippling. Now that I have a family of my own, one of my top priorities is to make sure my daughter has a strong foundation in financial literacy, with all the tools she needs to make better decisions when managing money.

One of the things that we’ve started working on together is to get her to save regularly, like I did as a child. But more than teaching my daughter good saving habits, I believe what’s important is to show her the difference between the money-going-out and money-going-in concept. Very often, children are no strangers to the former because they see us making purchases daily and this makes it easy for them to learn spending (or worse, impulse spending). The latter, however, is more difficult to emulate because they rarely witness the act of saving. This is especially true now that we live in a world where most financial transactions are digital. Though this speaks to the convenience of innovation, how do we curb impulse spending in our children beyond merely saying “no” (and parents, I’m sure you’ll agree that saying “no” doesn’t always elicit the best response from children)? Continue Reading…

Parenthood is unpredictable, but financial planning can eliminate some of the guesswork

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Image: Pixabay

By Christine Van Cauwenberghe

Special to Financial Independence Hub

May marks the arrival of Mother’s Day, a time to recognize the influence and sacrifice that comes in tandem with motherhood. While the old adage of “parenting isn’t easy” rings true, the financial planning component doesn’t have to be hard. Childhood is a series of stages woven together: each brings a new opportunity for parents to maximize key fiscal benefits and underpin good financial habits for the next generation.

Pre-Baby

Before your baby is born, there are pre-emptive financial strategies that you can implement to get your affairs in order. Firstly, you want to arm yourself with knowledge. Get informed about the benefits provided by the government and your employer to determine what your expected income will be while on parental leave. Take time to research childcare costs and calculate whether you have adequate life and critical insurance.

Most importantly, make sure you have a will in place that designates a guardian to care for your minor child, a trustee to manage the money for your child and an executor who will run the administration of your estate. Finally, review your financial plan with your advisor to account for the addition of a new family member.

Infants and Toddlers (0-5 years)

There are a series of government benefits available for parents with young children. In most provinces, you can automatically apply for a Social Insurance Number and the Canada Child Benefit (CCB) when you register your child’s birth. The CCB is a tax-free monthly payment made to eligible families to help with the cost of raising children under 18 years of age.

You should also consider opening a Registered Education Savings Plan (RESP) to help save for your child’s education. To this same point, you may be eligible for a Canada Education Savings Grant, which provides a 20 per cent grant to be paid on yearly contributions up to an annual limit of $500 and a lifetime limit of $7,200. Your family may qualify to receive the Canada Learning Bond based on your family income and other benefits under a provincial education savings program. You may also be able to claim childcare expenses if you (or your spouse or partner) paid someone to look after an eligible child so that one or both of you could work or attend school. Talk to your financial advisor about the options available to you.

Middle Childhood (6-11 years)

While they may not have a wealth of knowledge yet, children at this age can understand basic money concepts and can start developing good habits. Consider opening a savings account for your child and encourage them to make deposits from allowance, holiday or birthday present money.

Teenagers and Adolescents (12-19 years)

At this stage, the Mirror-Window Effect is at its peak. Mirrors offer reflections, while windows open up new views. By practicing wise money management, you can be the mirror your child needs to develop early but strong financial habits. Continue Reading…