All posts by Financial Independence Hub

Stocks: The Undisputed Champion (by A Country Mile)

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By Noah Solomon

Special to the Financial Independence Hub

In Stocks for the Long Run, Wharton Professor Jeremy Siegel states “over long periods of time, the returns on equities not only surpassed those of all other financial assets but were far safer and more predictable than bond returns when inflation was taken into account.”

As the following table demonstrates, not only have stocks outperformed bonds, but have also trounced other major asset classes. The effect of this outperformance cannot be understated in terms of its contribution to cumulative returns over the long-term. Over extended holding periods, any diversification away from stocks has resulted in vastly inferior performance.

Real Returns: Stocks, Bonds, Bills, Gold, and the U.S. Dollar: 1802-2012

The All-Stock Portfolio: Better in Theory than in Practice

Notwithstanding that past performance is not a guarantee of future returns, the preceding table begs the question why investors don’t simply just close their eyes and hold all-stock portfolios. In reality, however, there are valid reasons, both psychological and financial, that render such a strategy less than ideal for many people.

The buy and hold, 100% stock portfolio is a double-edged sword. If you can (1) stick with it through stomach-churning bear market losses, (2) have a (very) long-term horizon, and (3) don’t need to sell assets for any reason, then strapping yourself into the roller-coaster of a 100% stock portfolio may indeed be the optimal solution. Conversely, it would be difficult to identify a worse alternative for those who do not meet these criteria.

With respect to the emotional fortitude required to stand pat through bear markets, there is considerable evidence that many investors are simply incapable of doing this. Perhaps one of the best illustrations of this fact is Fidelity Investments’ flagship Magellan Fund under the stewardship of legendary investor Peter Lynch. From May 1977 to May 1990, Lynch managed to achieve an annualized return of 29.06% as compared to 15.52% for the S&P 500 Index. However, the average investor in the fund actually lost money during this period.

Many Magellan investors hopped on board when the fund was soaring and then jumped ship during difficult periods. This all-too-common misfortune is well-depicted by the following graph, which demonstrates how emotionally charged decisions can have a devastating effect on long-term performance.

Even if you have the emotional fortitude to stay the course through bear markets, there may be other reasons that compel investors to liquidate stocks, whether it be to fund living expenses, help their children buy homes, or invest in other opportunities. Unfortunately, the markets pay no heed to the convenience of mortals. If you are lucky, the need for cash will materialize at market peaks. Conversely, if you need liquidity near market troughs, then the effect is similar to that detailed in the graph above.

Bonds: the Good News & the Bad News

Historically, investors have used bonds to diversify their stock portfolios and reduce volatility. Investors typically set aside enough in bonds to weather periodic stock market downturns. Over the past several decades, the diversification value from holding bonds has been neutral to overall portfolio returns. During the bull market in bonds of the past 30 years, bond returns have just about kept pace with those of stocks. However, as indicated by the table at the beginning of this missive, this has not typically been the case. Continue Reading…

Building the All-Stock Retirement portfolio

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

How do you build a suitable retirement portfolio, made of stocks? I gave that a go recently on Seeking Alpha. That may lead to a greater debate about ‘can you really build a suitable retirement stock portfolio?’ I’d say that yes you can, but we have to cover off all of the bases (economic conditions). And we have to have a portfolio that takes a defensive stance. Also, the Canadian investor might be in a very fortunate position thanks to defensive wide-moat stocks that pay generous dividends. They can work as bond replacements. We’re building the retirement stock portfolio.

I will give you the juicy bits, but if you are able to access Seeking Alpha here is the original retirement post on Seeking Alpha.

The concept of the retirement all-stock portfolio is to take an all-weather portfolio approach. But instead of using bonds, cash, gold and commodities, we’re going to put stocks in the right place. And we’re going to use the appropriate amount of stocks to cover off the risks.

A good starting point for the all-weather portfolio is the venerable Permanent Portfolio. That model includes only one asset for each economic quadrant.

Stocks. Bonds. Cash. Gold.

Here is an outline of a study from Man Institute that details the types of stocks and sectors that worked in various economic conditions. Keep in mind that REITs have worked for inflation and stagflation from the 1970s. I’ve given REITs a pass for inflation.

Defense wins championships

At its core, the retirement stock portfolio is quite defensive. Certain types of stocks will do the job of bonds. They will help in times of bear markets and recessions. They can also deliver ample income: much more than bonds these days.

The Canadian retirement stock portfolio will take full advantage of the wide moat stocks.

I’ll cut to the chase. Here are the assets to cover off the economic quadrants:

Defensive bond substitute stocks – 60%

Utilities / Pipelines / Telecom / Consumer Staples / Healthcare / Canadian banks

Growth assets – 20%

Consumer discretionary, retailers, technology, healthcare, financials, industrials and energy stocks

Inflation protectors – 20%

REITs 10%

Oil and gas stocks 10%

Not listed in this inflation-protection section is consumer staples, healthcare, utilities and pipeline stocks. Those stocks can do double duty. They work during times of market stress (corrections/recessions) and they can often deliver modest inflation protection as well.

Maybe consider gold and commodities?

While you may opt for a stock/cash portfolio, it may be wise to consider gold and commodities, even if in very modest amounts.

Nothing is as reliable and explosive for inflation as commodities. The most optimal balanced portfolios do include gold.

A 5% allocation to each of gold and commodities may go a long way to protecting your wealth.

An inflation bucket might then look like:

  • Gold 5%
  • Commodities 5%
  • Energy stocks 5%
  • REITs 5%

A cash wedge is not a bad idea

Cash helps your cause during stock market declines, stagflation and deflation. Mark Seed at My Own Advisor plans to use a stock and cash approach for retirement funding.

Given all of the above considerations, a retiree might go off the stock-only-script modestly with 5% weighting to each: gold, commodities and cash. It’s quite likely that the 15% allocation will come in very handy one day. Continue Reading…

A rare haven: Fine Wine In a volatile market

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By Atul Tiwari

Special to the Financial Independence Hub

So far, the fine wine market remains one of the few bastions of stability in an increasingly volatile investment environment.  The Liv-ex 1000, the broadest measure of the global fine wine market, has returned 25.45% this year (as of 30 June).

These gains stand in stark contrast to most of the financial markets, where selloffs have hit a wide range of industry sectors, asset classes and geographies. The initial shock from the war in Ukraine has led to surging commodity and food prices, triggering the highest inflation in decades in several major economies including Canada which now stands at 8.1%.

LONG TERM RETURNS

Fine wine boasts a track record of strong growth that has resulted in positive real returns over the long-term.

Index Month YTD 12-month 5-year 10-year 5 year volatility*
Liv-ex 1000 0.76%  11.12% 25.45% 50.26% 92.14% 1.12%
S&P 500 -8.39% -20.58%  -11.92% 56.20% 177.90% 4.89%
FTSE 100 -5.76%   -2.92%   1.87%   -1.96% 28.69% 3.92%
Nasdaq -9.00% -29.51% -20.96% 103.72% 339.79% 5.72%
MSCI AC Asia Pacific  -6.78% -18.18% -24.02%  2.21% 34.80% 4.19%
Gold in ($/oz) -1.64%   0.58%   -0.37% 42.38% 12.00% 3.72%
Bitcoin -37.32% -56.89% -43.11% 703.30% 297311.94% 25.18%
Bloomberg Commodity   -10.88%  18.03%  23.81%   41.70% -13.57% 4.39%

Source: Investing.com, Liv-ex as of June 30, 2022. Past performance is not indicative of future returns. *Volatility = 5 year standard deviation of monthly returns.

 Stable

Fine wine’s year-to-date relative strength does not come as a surprise. During previous periods of volatility, such as the COVID-19 outbreak, fine wine prices experienced shorter and less severe downturns compared to equities and faster bounce backs compared to other haven assets, such as bonds.

Figure 2 – Weathering the storm

Fine wine’s relative performance during market downturns

Source: Liv-ex, investing.com. Past performance is not a guarantee of future returns.

This track record may be contributing to fine wine’s recent performance as more buyers, whether collectors or investors, realise fine wine’s ability to form a stable store of value.

Additionally, low fine wine supply levels are also supporting prices. Low harvest yields in 2021 and 2022 have dented production levels for leading fine wine regions, including Bordeaux, Burgundy, Champagne and California, creating fierce competition for top wines. Continue Reading…

Looking to start Investing? 5 tips for Beginners

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By Charles Qi, CFA

Special to the Financial Independence Hub

Many of us are familiar with the benefits of investing. Whether you’re looking to save for retirement, earn money in the stock market, or achieve some other financial goal, investing — when done well — can help you build your financial future. But if you’re not professionally trained in the stock market, starting out can be daunting.

Whatever the reason someone has for dipping their toes in the investing waters, starting out can be daunting. There’s a lot of math involved, tricky rules, and an entire lexicon of investing terms to remember. Those who are not scared away may be wondering where to start.

Despite these fears and uncertainties, though, leaping off the investing cliff can help build a foundation toward financial freedom. Here are five tips for new investors looking to get started in the stock market.

1. Set an Investment Budget

It can help to make investment contributions part of a normal household budget. By setting aside a predetermined amount of funds to funnel into investment accounts each month or pay period, one can rest assured that their accounts are being regularly funded, even as the market rises and falls. A good investment goal is typically between 10% to 15% of your income. If one is enrolled in an employer sponsored retirement plan, their match counts towards that percentage goal.

2. Start Investing as Early as Possible

Finances can be tight when someone is just beginning to invest, even with a job that pays their bills. However, once you’re able to allocate a portion of your monthly income to investing in the stock market, it’s beneficial to start investing as soon as possible.

The earlier one begins to invest, the longer they can allow compound interest to accumulate. Compound interest is how your investments grow. For example, if you have an account that pays 1% interest per year and you deposit $1,000 into that account, you would earn $10 on that money in one year. Average rates of return can fluctuate year by year, so make sure that you check out the rate of return on any stock or money market account you may be interested in.

3. Learn Basic Investing Terminology

While those just beginning to invest don’t need to know everything off the bat, there are a few terms they will need to familiarize themselves with to help them make smart investment decisions. For example, what is a money market account, anyway? How about an IRA? Continue Reading…

An Income Strategy for Adjusting to Uncertain Markets

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Franklin Templeton/Adobe Stock image

By Franklin Templeton Canada

(Sponsor Content)

Canadians face a lot of headwinds in this volatile investing year, including high inflation, rising interest rates, slower economic activity and geopolitical shocks. In this turbulent environment, an actively managed income strategy can help steer the way through uncertainty. Volatile markets call for a strategy that can adjust client portfolios in a timely, tactical way as market conditions shift.

Active investment management can play a key role in offering a compelling risk-reward option for investors who are looking for income, growth and overall portfolio diversification. The strategy that underlies the Franklin U.S. Monthly Income Fund is an example of an approach to seeks to give investors stability amid volatility.

“The fund has a portfolio that can make adjustments in a timely manner on your behalf,” said Rob Rocoff, Vice President, Regional Sales with Franklin Templeton Canada in Toronto. “It’s a fund that uses a flexible, balanced strategy that is capital structure agnostic and has a track record in the U.S. of over 70 years of being able to tactically adjust to volatile market conditions.”

The Franklin U.S. Monthly Income strategy aims to generate income by investing in stocks, bonds and hybrid securities, such as equity-linked notes (hybrid securities have characteristics of both stocks and bonds). The strategy’s flexible asset allocation allows it to adjust across different market cycles, including moments of high pressure, to find the most attractive investment opportunities.

The Franklin U.S. Monthly Income strategy looks throughout the capital structure for securities that offer attractive income and long-term growth potential. Top-down insights inform the investment team’s view on asset allocation, while the security selection process is driven by rigorous bottom-up fundamental research. The team focuses on investment opportunities where their fundamental views may differ from the market consensus, especially with investments in large companies.

Seeking Yield from multiple sources

As a result, the fund’s portfolio includes equities (common or preferred stocks), fixed income assets (e.g., investment grade bonds, Treasuries) or hybrids (e.g., equity-linked notes and convertibles). This mix seeks yield from multiple sources and allows for dynamic asset allocation, depending on market conditions. Continue Reading…