Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

The Fed: “March”ing out like a Lamb

Posted By Financial Independence Hub | April 15, 2019

By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

The transformation of Federal Reserve (Fed) policy continues. What was viewed as a hawkish Federal Open Market Committee (FOMC) outcome at the December meeting has now morphed into a more dovish outlook. In fact, one could conclude the Fed is leaving March by “going out like a lamb.”

So far in 2019, Fed policy decisions have graduated to be less about an actual rate move to the question of what the blue dots are saying instead. Remember, these blue dots represent the policy makers’ own projections for the future Federal Funds Target Rate over a period of time. So, not moving the rate at an official FOMC meeting during the first half of this year is not necessarily of paramount importance, nor expected, for that matter. Instead, it has become all about their policy statement and Fed Funds forecasts.

With that in mind, the results of the March FOMC gathering were being anxiously awaited. Interestingly, fixed-income investors had become accustomed throughout 2017 and 2018 to the Fed essentially guiding the markets as to when a potential rate hike would be coming. While Fed-speak had led to expectations for no action at this latest policy gathering (the actual result on the Fed Funds Rates front), the uncertainty quotient was dialed up because investors were not as certain about the Fed’s blue dot path.

Overall, the voting members do envision some slowing in U.S. growth this year, but, to quote Chairman Powell, they still feel the economy is “in a good place.” This outlook was essentially confirmed in the March policy statement. In addition, the lack of inflation places no urgency on the Fed to contemplate a rate hike anytime soon, even though core measures are straddling the 2% threshold. Continue Reading…

How Baby Boomers can be frugal, yet still live it up

Posted By Financial Independence Hub | April 11, 2019

By Gloria Martinez

Special to the Financial Independence Hub

Baby Boomers have reached the point in life where they have either retired or are quickly approaching it, and that last paycheck is causing many to become more frugal. Being financially responsible is never a bad thing, but it shouldn’t take over your life. According to Forbes, being excessively frugal can “be a bigger problem for [a Baby Boomer’s] social life, family, and friends, not to mention physical health.” It is important that you find the right balance between saving and preparing for the future while also living in the moment.

Fulfill important responsibilities first

Before you can focus on having fun, take care of your health and well-being first so that it doesn’t become a constant worry. Some of the problems Baby Boomers face include declining rates of health due to obesity, diabetes, and various other health issues. Healthcare costs are continuing to rise as well, feeding into that constant need to save.

Your health is what will carry you through your Golden Years, but it comes at a cost. Now is the time to start exploring your healthcare options, including signing up for Medicare. Research Medicare Advantage plans, such as those offered by Humana, as they offer important health benefits and coverage, including dental, vision, and hearing, along with original Medicare benefits. While on the topic of your health and well-being, go ahead and make sure you have your end-of-life documents in order, including a living will, power of attorney, life insurance, etc. This might also including pre-paying funeral expenses or looking into long-term care insurance.

Explore ways to have frugal fun

Catch the Travel bug with a Road Trip

Traveling is a common activity for retirees, but when you add up airfare, travel insurance, and the cost of luxury destinations and cruises, travel becomes a huge expense. To save and make getting to your destination part of the fun, opt for a road trip. A road trip gives you the flexibility to travel anywhere, any time, with a personalized travel plan for a day trip, weekend getaway, week-long excursion, or a cross-country trek. Go at your own pace, and pack in the sights and experiences youwant to see.

Give that Hobby a try

Careers, families, and various other obligations don’t leave you with much free time, but retirement does. Maybe now you can finally find a hobby that you enjoy. Some of the most common Boomer hobbies are cooking, DIY projects, sports, and volunteering, but the possibilities truly are endless. You might even find a hobby that you can use to make a little extra cash. For example, you can sell produce from your garden at the farmers market, sell handmade furniture with your knack for woodworking, or make jewelry to sell at local boutiques and fairs. Continue Reading…

The importance of diversification

Posted By Financial Independence Hub | April 10, 2019

By Noah Solomon

Special to the Financial Independence Hub

Harry Markowitz, recipient of both the 1990 Nobel Memorial Prize in Economic Sciences and the 1989 John von Neumann Theory Prize, referred to diversification as “the only free lunch in finance.”

As most investors are aware, diversification is an essential element of any well-constructed portfolio. Diversification across different markets and individual securities can lower volatility, mitigate losses in declining markets and produce higher risk-adjusted returns over the long-term.

Easier said than done: the temptation to chase returns

Of course, during times when one asset class or country outperforms for an extended period, this can lead to feelings of regret. Looking in their rear-view mirrors, investors often wish that they had been less diversified and had an overweight position in the outperforming asset class. This regret can result in FOMO (fear of missing out), whereby investors pour capital into those areas of the markets which have been outperforming.

The U.S. stands alone

Since the post-financial crisis market bottom of March 2009, the U.S. stock market has dwarfed those of other markets in terms of performance. U.S. stocks have produced almost double the return of emerging markets stocks, which have been the second-best performer.

Country	Annualized Return	Cumulative Return
U.S.	15.1%	381%
Emerging Markets	7.5%	199%
Europe	6.9%	189%
U.K.	6.1%	176%
Japan	5.7%	170%
Canada	4.9%	157%

Sources: MSCI, Factset Research Systems

Unsurprisingly, the outperformance of U.S. stocks, reflected in the table below, indicates that the U.S. market currently stands as the most richly valued market as measured by its cyclically-adjusted Price/Earnings Ratio (CAPE).

Country	Cyclically Adjusted P/E (CAPE)
U.S.	32.1
Japan	27.2
Canada	22.0
Europe	19.4
U.K.	16.9
Emerging Markets	16.4

Source: www.starcapital.de

Punished for doing the right thing

The spectacular outperformance of the U.S. stock market means that portfolios that have been heavily concentrated in U.S. stocks have generated considerably higher returns than their more diversified counterparts. In other words, investors who have sacrificed diversification in favour of being overweight U.S. stocks have been handsomely rewarded. Continue Reading…

Using arithmetic to crush closet indexers and fee scalpers

Posted By Financial Independence Hub | April 9, 2019

by Jeff Weniger, CFA, WisdomTree Investments

Special to the Financial Independence Hub

What is the profile of a fund that has the odds stacked against it?

For starters, “beta” index trackers that cover market capitalization-weighted indexes such as the S&P 500 may often lag their underlying index because of their fees, even though most of their expense ratios are tiny. Nevertheless, such funds may offer a better prospect than many active managers, who can’t get out of the way of their operating costs.

Another fund manager who is against the wall is the “closet indexer”: the career risk manager. These strategists claim to be coming up with great investments, but when you look under the hood, their holdings look just like their competitors’ funds. Then there is the manager who actually has a lot of unique holdings but high fees.

There is a fourth kind of manager who is not a market capitalization-weighted index strategist, a closet indexer or an expensive active manager. They have truly different holdings at digestible fees and higher active share.

To put this in context, a cap-weighted strategy would target an active share figure of 0% because it is trying to be exactly like the S&P 500, MSCI EAFE or some other major index. A closet indexing strategy may clock in at 30% or 40%. One that is totally different, with no holdings in common with its asset class, would have 100% active share.

Now, put active share in the context of fees: Using simple arithmetic, we can calculate the “hurdle rate” — popularized by Martijn Cremers at Notre Dame — which quantifies how well the active selections need to perform to cover their expense ratios. This really matters in picking a fund or ETF.

Path 1 is the worst. Sadly, trillions still sit in closet index funds that have low active share and high fees. Avoid these: Their existence is only justified if they somehow get past High hurdle rates.

Path 2 isn’t much better. These money managers at least have high active share, so they have the courage of their convictions, but they trip over their high fees. Their hurdle rates are Average.

Path 3 is a different breed, but just as bad as Path 2. These managers have low fees because they got the memo that the jig is up on huge expense ratios. But they are still closet indexing, hoping investors won’t notice their low active share. Their hurdle rates are Average.

Path 4 is hard to find. These are strategies that have both high active share and low fees. Their hurdle rates are Low: the sweet spot. Chances are good that a Path 4 fund is an ETF.

I put this in visual form in figure 1.

Figure 1: Visualizing the Four Paths

Find the Low Hurdle

Figure 2 puts numbers to this concept, with hypothetical Path 1, 2 and 3 managers.

Start with the Path 1 closet indexer. It has 35% active share, meaning the other 65% of its holdings are found in the cap-weighted benchmark. It charges 0.80%, so the unique holdings need to outperform by 229 basis points (bps) to match the market’s performance. That figure is found by dividing the expense ratio by the active share. It’s a big hurdle rate. Continue Reading…

Smart ways to divvy up your tax refund

Posted By Adrian Mastracci | April 8, 2019

Situation: The income tax refund is a welcome sight for many taxpayers.

My View: Park it temporarily to reflect on its best use before allocating it.

Solution: Evaluate family needs and options that provide lasting benefits.

Income tax filing season is under way once again. Accordingly, I examine some smart ways to apply your tax refund. First, a little trivia:

For what year did Canadians last file a 1-page Federal income tax return?
It was the 1949 tax year.

I think of allocating the income tax refund loosely within these categories. For example, you can spend it, save it, invest it, reduce debt and help others.

Start by parking the refund into a saving account to resist impulse, say for 30 to 60 days. That provides you sufficient time to reflect and evaluate your needs and best options that apply.

Try your utmost to arrange lasting usefulness from this source of cash. Many of the allocations you will make are not reversible.

Everyone can reap benefits from these simple best practices. I summarize some sensible ideas in dealing with tax refunds:

Reduce debt