All posts by Financial Independence Hub

Can you Invest solely in ETFs?

Posted By |

 Special to the Financial Independence Hub

As regular readers of MillionDollarJourney know, we are big fans of Exchange Traded Funds (ETFs) which are one of the fastest growing products in the market.

Were it not for the fact that financial firms and advisors have less incentives to sell ETFs than other investments such as mutual funds (that provide them with annual fees), the growth would probably be even more spectacular.

Having said that, ETFs don’t always have the best performance, and are sometimes outperformed significantly by other investment options. This also means that over years, the standard composition of most ETFs has shifted – with fixed income, commodities and FX now representing a much larger piece of the pie.

For most investors, ETFs represent the easiest and cheapest way to gain exposure in a variety of different sectors or asset classes. Investing in currencies or commodities was done by pension funds or hedge funds only a few years ago but it is now just as easy to do so for individual investors.

It might not be 100%, but a very large majority of individuals and professionals believe that portfolio diversification represents an important way to gain the same return but with lower risk. 20 years ago that meant buying bonds, private investments, etc. The major problem with that strategy is illiquid investments are often very expensive if you are not pouring a major amount of capital.

A prime example is looking at the prices of a bond when you are buying $50,000 worth. It is understandable of course that sellers will give better prices to buyers of millions of dollars as it is an easier trade for them. Take a few percentage points here and there and you will see just how much of an impact it can have over a life of savings and investing.

Investing in ETFs – Pros and Cons

So, should you invest mostly (or only) in ETFs? Here are some of the common pros and cons to help you decide:

ETF Investing Advantages

  • Most diversified
  • More tax efficient (read our article on capital gains in Canada)
  • Easiest and quickest way to invest

ETF Investing Disadvantges

  • Costs can be high, depending on the broker you use
  • Still has some investing risks

Should Canadians invest only in ETFs?

In many ways, ETFs provide a viable alternative as they offer the opportunity to get broad (corporate bonds) or specific (1-3 year treasuries) positions that will not cost you much in terms of commission.  Furthermore, ETFs will get you much better pricing and potentially much improved returns over the long term. Continue Reading…

How to navigate a coming Worldwide recession

Posted By |
Source: myownadvisor and https://www.thecanadianencyclopedia.ca/en/article/recession

By Mark Seed, myownadvisor

Special to Financial Independence Hub

According to the largest asset manager firm in the world (BlackRock), policymakers will no longer be able to support markets as much as they did during past recessions – so we have been warned – a team of BlackRock strategists led by vice chairman Philipp Hildebrand wrote in a report titled 2023 Global Outlook.

“Recession is foretold as central banks race to try to tame inflation. It’s the opposite of past recessions,” they said. “Central bankers won’t ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect. Equity valuations don’t yet reflect the damage ahead.”

The report went on to say “The old playbook of simply ‘buying the dip’ doesn’t apply in this regime of sharper trade-offs and greater macro volatility. We don’t see a return to conditions that will sustain a joint bull market in stocks and bonds of the kind we experienced in the prior decade.”

I reflected on this report recently. How is an investor to cope?

Well, I think the “old playbook” is actually something I’ve already started to think about for the “new playbook” and maybe you have as well …

  1. Directionally, i.e., longer-term than one year or so, stay with equities. Lots of them. In fact, to be specific, consider infrastructure stocks in particular. BlackRock: “We see some opportunities in infrastructure. From roads to airports and energy infrastructure, these assets are essential to industry and households alike. Infrastructure has the potential to benefit from increased demand for capital over the long term, powered by structural trends such as the energy crunch and digitalization.”
  2. Tactically, i.e., within the next year, if you need that money balance, consider bonds. Yes, consider fixed income again. According to BlackRock: “In fixed income, the return of income and carry has boosted the allure of certain bonds, especially short term. We don’t think leaning into broad indexes or asset allocation blocks is the correct approach. We stay underweight long-term nominal bonds as we see term premium returning due to persistent inflation, high debt loads and thinning market liquidity.” Meaning, if you are going to own some bonds, stay short and own short-duration bonds.

I come back to Ben Carlson’s thesis (that I agree with) after reading this recent BlackRock global outlook report when it comes to bonds. There are absolutely good reasons to own bonds, but it’s more for the near-term variety:

  1. Bonds can help your investing behaviour – helping you ride out stock market volatility – including being strategic to buy more stocks soon.
  2. Bonds can be used to rebalance your portfolio – helping you keep your portfolio aligned to your investing risk tolerance and therefore asset allocation (mix of stocks and bonds).
  3. Bonds can be used for spending purposes – where some fixed income is “king” for major, upcoming, near-term spending.

The main reason I would keep any bonds (and I still don’t have any right now) is if I was saving for a major purchase in a few years (e.g., secondary residence?). Then, I would like rely on some form of fixed income between now and then to help secure that purchase. Otherwise, an interest savings account in the short-term will do that and/or some 1 or 2-year GICs are a great consideration as well as part of any bucket strategy.

Personally, I believe the main role of fixed income in your portfolio is essentially safety – not the investment returns and not the cash flow needs. In other words, if all else fails per se, if/when stocks crash, then bonds should historically speaking offer a flight to safety for preserving principal.

So, they are there for diversification purposes.

As Andrew Hallam, a Millionaire Teacher has so kindly put it over the years: when stocks fall hard, bonds act like parachutes for your portfolio. Bonds might not always rise when the equity markets drop. But broad bond market indexes don’t crash like stocks do.

Is that enough to own bonds in your portfolio? Maybe.

For now, I’m going to continue living with stocks: a mix of dividend-paying stocks (including infrastructure stocks that BlackRock likes for the year or so ahead) AND owning low-cost equity ETFs for growth.

I will also grow my cash wedge to my desired safety net by the end of 2023 too. That’s one year’s worth of spending/expenses held in cash that will form Bucket 1 below. That first bucket is an insulator from my dividend and growth equities.

Your mileage may vary. Continue Reading…

Building the big Dividend Retirement Portfolio with defensive Canadian ETFs

Posted By |

 

By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

There are a few reasons to play defense. A retiree or near retiree can benefit from less volatility and a lesser drawdown in a bear market. If your portfolio goes down less than market, and there is a greater underlying yield, that lessens the sequence of returns risk. You have the need to sell fewer shares to create income. For those in the accumulation stage it may be easier to stay the course and manage your portfolio if it is less volatile. You can build your portfolio around defensive Canadian ETFs.

For a defensive core, investors can build around utilities (including the modern utilities of telcos and pipelines), plus consumer staples and healthcare stocks. My research and posts have shown that defensive sectors and stocks are 35% or more “better” than market for retirement funding.

I outlined that approach in – building the retirement stock portfolio.

We can use certain types of stocks to help build the all-weather portfolio. That means we are better prepared for a change in economic conditions, as we are experiencing in 2022.

Building around high-dividend Canadian ETFs

While I am a total return guy at heart, I will also acknowledge the benefit of the Canadian high-dividend space. These big dividend payers outperform to a very large degree thanks to the wide moats and profitability. Those wide moats create that defensive stance or defensive wall to be more graphic. And of course, you’re offered very generous dividends for your risk tolerance level troubles.

Canadian investors love their banks, telcos, utilities and pipelines. The ETF that does a very good job of covering that high-dividend space is Vanguard’s High Dividend ETF – VDY. The ‘problem’ with that ETF is that it is heavily concentrated in financials – banks and insurance companies.

Vanguard VDY ETF as of November 2022.

Sector Fund Benchmark +/- Weight
Financials 55.4% 55.4% 0.0%
Energy 26.3% 26.2% 0.1%
Telecommunications 9.0% 9.0% 0.0%
Utilities 6.2% 6.2% 0.0%
Consumer Discretionary 1.9% 1.9% 0.0%
Basic Materials 0.6% 0.6% 0.0%
Industrials 0.4% 0.4% 0.0%
Real Estate 0.2% 0.2% 0.0%
Total 100.0% 100.0%

VDY is light on the defensive utilities and telcos. The fund also has a sizable allocation to energy that is split between oil and gas producers and pipelines. The oil and gas producers will also be more sensitive to economic conditions and recessions.

Greater volatility can go along for the ride in VDY as it is financial-heavy. And those are largely cyclical. They do well or better in positive economic conditions. But they can struggle during time of economic softness or recessions. Hence, we build up more of a defensive wall.

Building a wall around VDY

We can add more of the defensive sectors with one click of that buy button. Investors might look to Hamilton’s Enhanced Utility ETF – HUTS. The ETF offers …

█  Pipelines 26.8%

█  Telecommunication Services 23.5%

█  Utilities 49.6%

The current yield is a generous 6.5%. Keep in mind that the ETF does use a modest amount of leverage. Here are the stocks in HUTS – aka the usual suspects in the space.

BMO also offers an equal weight utilities ETF – ZUT .

And here’s the combined asset allocation if you were to use 50% Vanguard VDY and 50% Hamilton HUTS.

  • Financials 26.7%
  • Utilities 24.9%
  • Energy 26.5%
  • Telecom 16.2%

Energy includes pipelines and oil and gas producers. And while the energy producers can certainly offer more price volatility, there is no greater source of free cashflow and hence dividend growth (in 2021 and 2022). In a recent Making Sense of the Markets for MoneySense Kyle offered … Continue Reading…

Preparing your Portfolio for Retirement? Income Is so Yesterday

Posted By |

 

By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub 

When preparing for retirement, designing your portfolio for income is over-rated. Oh, it feels good bragging about how much money you make each year, but then you also quiver about the taxes you owe each April.

What’s the point?

To make it – then give it back – makes no sense.

In today’s interest rate environment people are being forced to adjust their thinking.

Our approach 3 decades ago

When we retired over 32 years ago, having annual income was not on our minds. Knowing we had decades of life-sans-job ahead of us, we wanted to grow our nest egg to outpace inflation and our spending habits as they changed too. Therefore, we invested fully in the S&P 500 Index.

500 solid, well-managed companies

The S&P Index are 500 of the best-managed companies in the United States.

Our financial plan was based on the idea that these solid companies would survive calamities of all sorts and their values would be expressed in higher future stock prices outpacing inflation. After all, these companies are not going to sell their products at losses. Instead they would raise their prices as needed to cover the expenses of both rising resources and wages, thereby producing profits for their shareholders.

How long has Coca-Cola been around? Well over 100 years and the company went public in 1919 when a bottle of Coke cost five cents.

Inflation cannot take credit for all of their stock price growth as they created markets globally and expanded their product line.

This is just one example of the creativity involved in building the American Dream. The people running Coke had a vision and have executed it through the years. Yes, “New Coke” was a flop as well as others, but the point is that they didn’t stop trying to grow because of a setback.

Coca-Cola is just one illustration of thousands of companies adapting to current trends and expanding with a forward vision.

Look at Elon Musk. He has dreams larger than most of us can imagine.

Sell as needed

Another benefit we have in designing our portfolio in this manner, is that when we sell shares for “income,” they are taxed at a more favorable rate as a long-term capital gain. Dividend output is low, our tax liability is minimal, yet our net worth has grown.

We are in control of our income stream.

Our suggestion is not to base your retirement income on income-producing investments but rather to go for growth. You can always sell a few shares to cover your living expenses.

Money Never Sleeps

Just because you retire, your money doesn’t have to.

In the words of Gordon Gecko from the 1987 movie Wall Street, “money never sleeps.” And your money definitely won’t once you leave your job.

Reading financial articles about what if retirees run out of money, we get the impression that the authors do not understand that once retired, your money can – and should – continue to work for you.

Working smart not hard

Once you walk out of the 9-5 for the last time, that doesn’t mean your investments are frozen at that point. The stock market is still functioning and now your “job” is to become your own personal financial manager. Actually, you should have been doing this all along, but if not, start now.

You need to get control of your expenses by tracking your spending daily, as well as annually. This is so easy – only taking minutes a day – and this will open your eyes as to where your money is going. Not only that, but it will give you great confidence to manage your financial future. Every business tracks expenses and you need to do the same. You are the Chief Financial Officer of your retirement.

The day we retired the S&P 500 index closed at 312.49. This equates to a better than 10% annual return including dividends. We know that we have stated this before, but it’s important.

Chart of S&P Market Returns January, 1991 to September 2022

That’s pretty good for sitting on the beach working on my tan.

Making 10% on our portfolio annually while spending less than 4% of our net worth has allowed our finances to grow, while we continue to run around the globe searching for unique and unusual places.

But what if you’re fifty?

You need to take stock of your assets and determine what your net worth is, with and without the equity in your home. Selling the house and downsizing may be a windfall for you, again utilizing the tax code to your benefit. Continue Reading…

Another take on 5 Important factors to consider in deciding to Retire

Posted By |
Image from myownadvisor

By Mark Seed, myownadvisor

Special to the Financial Independence Hub

As I consider some form of semi-retirement in the coming years, I’m learning there is a host of factors to consider in the decision to semi-retire or retire.

For today’s post, I’m going to take a recent quiz of sorts published on Financial Independence Hub with Fritz Gilbert, the founder and mastermind of a popular U.S. blog: The Retirement Manifesto.

After 30+ years in Corporate America, Fritz retired (as planned) in June 2018 at Age 55.

In running a respected U.S. personal finance blog, Fritz has written about pretty much everything on his site, including on retirement, and still does. A few years ago, as he was working through his own decision to retire, he admits some obsession about the transition. After doing his homework and analysis, he successfully made the leap and hasn’t looked back since.

As Fritz puts it when it comes to transitioning to retirement: some folks do well, and some don’t.

I hope to be in the former camp (!) and I hope this post (and answers to Fritz’s quiz factors) helps you too!

Here are 5 important factors to consider in your decision to retire including what Fritz wants to share about the transition process …

5 Important Factors to Consider In Your Decision to Retire

Fritz factor #1: Do you have enough money?

I hope so!?

Fritz comments in his article that having enough is “a necessary factor, but far from sufficient.”

I agree witih Fritz that retirement or even semi-retirement starts with a math problem to solve.

To understand how much you need, you need a process, a formula to outline as many unknowns as possible before you pull the trigger. One of the biggest unknowns in any retirement plan is your potential retirement spending.

You need to consider what you will spend to determine your “enough number.”

After that, you need to consider how to build your retirement paycheque per se to fund that lifestyle.

I’m intending to use a modified bucket strategy to deliver my income in semi-retirement.

Your mileage may vary. 

My Own Advisor Bucket Strategy - December 2022

Bucket 1 is cash savings. It’s simply a large emergency fund we don’t have to use but it’s there if we need it.

Bucket 2 is earning income from dividend-paying stocks. Income will be earned inside some key accounts (such as our non-registered account(s), TFSA(s), and RRSPs) to pay for living expenses.

Bucket 3 is earning income from equity ETFs. This income will come from mainly our RRSPs, as we intend to “live off dividends and distributions” and withdraw capital from our RRSPs/RRIFs over time as we work part-time.

The purpose of having buckets is simple but effective: this retirement bucket strategy is an investment approach that segregates your sources of cash or income into three buckets. Each of these buckets has a defined purpose based on what or when the money is for: now, (short-term), intermediate (near-term) or long-term (multi-year or decade).

My bucket approach, while maybe not perfect, helps for a few reasons:

  • It can help ensure I stay within a reasonable withdrawal plan, starting off retirement or semi-retirement with a low withdrawal rate of 3% or 4%.
  • It can help avoid sequence of returns risk (especially in the early years of retirement)* *Review these graphs below from BlackRock for an example.
  • It can help “smooth out taxation” over time by liquidating accounts, slowly and methodically.
  • It can help offset longevity risk, thanks to preserving capital early in retirement and letting assets compound away.

This is our more detailed bucket approach to earning retirement income. 

*On sequence of returns risk

Exhibit A – pre-retirement:

BlackRock - Sequence-of-returns-one-pager-va-us - December 2022 Page 1.pdf

BlackRock - Sequence-of-returns-one-pager-va-us - December 2022 Page 2.pdf

Fritz factor #2: Are you mentally prepared for retirement?

Yes, getting there, but it’s more semi-retirement for me/us.

As Fritz puts it in his post on Jon’s site:

“Almost everyone thinks about money when they’re making the decision to retire, but far too few consider the non-financial factors.  If I were to choose one point to make from all the things I’ve learned in the 7 years of writing this blog, it’s that the non-financial factors are the most important for putting yourself on track for a great retirement. Important enough that I wrote an entire book on the topic.”

Instead of just focusing on the financial-side of things, I’m really ramping up my mental-game.

I’ve given quite a bit of thought about what semi-retirement might look like, including answering many of these Frtiz-factor questions and more:

How much do you want to travel? (A bit, not all the time.)

Where do you want to live? (In Ottawa, as a home base.)

Are you going to downsize? (Already done!)

Are you going to do more entertainment with that increased free time? (Yes, but also more volunteer work.)

So, to Fritz’s points and recommendations: we dream a bit, we talk a lot, and we keep our mind open to new opportunites. I think everyone should consider the same.

Fritz factor #3: Have you made a realistic spending estimate?

You bet!

As we enter semi-retirement, we essentially intend to “live off dividends.”

Meaning, we will live off dividends from our non-registered accounts as we make some slow, methodical withdrawals from our RRSPs, while working part-time. We won’t touch TFSA assets at all and we’ll be far too young to tap any government benefits.

In a few years, we will be at this Crossover Point [also shown at the top of this version of the blog]:

Including some cash buffer, we figure that’s a good starting point for semi-retirement to begin. Continue Reading…