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.

Using Collectibles as a Hedge against traditional Market Volatility

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Image by Unsplash: Mick Haupt

By Devin Partida

Special to Financial Independence Hub

Today’s markets are difficult to navigate.

Keeping up with traditional market volatility can be difficult due to constantly changing market indexes and financial trends.

So, how do you stay afloat? To diversify your portfolio with assets that won’t move with the market, invest in collectibles.

What is Considered a Collectable?

Has anything been handed down to you as a generational gift? How about a piece of memorabilia from your favorite band or sports team? If these items are considered valuable due to rarity, historical significance or simple worth, they are considered collectibles.

Collectibles come in all shapes and sizes. From the smallest coins to the biggest cars, they might make valuable investments. Here are typical examples:

Art

One of the most common collectibles, art comes in many different forms. If you have a painting, sculpture or other piece that you think is valuable, you can research your art through museums or online collections.

Coins

Coin collecting is a centuries-old hobby. Coins are small and easy to access, making them an excellent place for beginners to start. Though tiny, they can be highly valuable. The 1943 Lincoln Head Copper Penny was once just a penny but now sells for over $204,000.

Sports Memorabilia

With new stars emerging every year, sports memorabilia will never go out of style. The market for sports collectibles is increasing in value for current sports stars like LeBron James and Steph Curry, alongside Hall of Famers and older sports legends.

Benefits of Investing in Collectibles

Investing in collectibles can bring various benefits — to your wallet and future. Here are four positive impacts:

1. Retain Value during Market Downturns

Volatility occurs when the market experiences dramatic price changes. When stocks change and prices shift, collectibles retain value because they are not solely based on the economy. Collectibles often maintain historical resilience, meaning their historic worth protects them during downturns.

2. Generate Return on Investment (ROI)

Collectibles can yield a great ROI. If you know the value of your collectibles, budget appropriately and care for your items, they could be worth a lot. Most collectibles appreciate around 10% each year, contributing to your financial security.

3. Enjoy a New Hobby

Although collectibles can be used as a financial strategy, they also make a fun hobby. What is something that interests you? Everyone has something that fascinates them, and almost anything can be collected. With collectibles, making smart financial investments can be more exciting.

4. Diversify your Portfolio

Investing in multiple assets is a smart way to protect yourself — and your money. Diversification mitigates unsystematic risks that could occur when the market shifts. Using collectibles along with traditional investments gives you more protection against volatility.

How to make successful Collectible Investments

Collectibles provide many financial benefits, but they also come with risks. Before starting your collection, understand the necessary steps to take and things to watch out for.

Make informed purchases

Do your research first if you want to start a collection or purchase a single item. When investing in online stock, people use investing apps to help them make smart decisions and avoid fraud. In-person investments require the same safety measures. Sellers could trick you into spending money on counterfeit items, so be smart when investing.

Understand Liquidity

Liquidity refers to how quickly an investment can be sold or turned into cash without impacting its price. Although collectibles gain value over time, they are meant to be long-term assets. Unlike stocks and bonds, which can be converted to cash in 1-2 days, collectibles may take years. This doesn’t mean you shouldn’t invest in collectibles — it just means you must be aware of timelines.

Integrate Collectibles into a broader Investment Strategy

Collectibles are a great way to diversify your portfolio as an additional form of investment. You should never rely on one asset, so don’t entirely count on your collectible to secure you financially. Practice safe investing habits by creating a plan and budgeting accordingly. Continue Reading…

Findependence Hub turns 10 years old

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Image by Pexels

Hard to believe but Findependence Hub just turned 10 years old. We launched Financial Independence Hub on Nov. 03, 2014. Here is the very first post.

You’ll note that for a long time, we self-referred with the short-hand “The Hub.” This was of course long before another site was launched a few years back also called The Hub. So we try NOT to refer to ourselves using that short form, as it may be confusing.

However, the slogan still applies: North America’s Gateway to Financial Independence. That’s because both our readers and content providers are in Canada and the United States. Given the population differences, though, we are disproportionately Canadian.

From the start, the aim was to publish at least four blogs a week, and often five. In fact, as of this writing, we had published 2,931 blogs: just shy of 3,000. That’s roughly 300 blogs a year.

As we explained a few weeks ago, generally we don’t schedule Wednesday blogs far in advance, in order to leave that slot open for any late-breaking developments. It also allows us to shuffle the schedule when necessary.

The future

So what of the future? Well, my personal financial life is more or less an open book, between what I write here and what I write every month in my Retired Money column at MoneySense.ca.

As I disclosed earlier this year, I am now 71 and therefore enter the magic land of RRIFs as of the end of this year and into January 2025. At some point, I may retrench blog frequency down to three blogs a week instead of four or five: aiming for Monday/Wednesday/Friday. Happy to hear reader and sponsor feedback on that though. I’m also open to partnering suggestions.

Certainly I would like to thank the registered users who have hung in this far, as well as our advertisers who make it possible to provide this content at no charge to readers. Continue Reading…

Retired Money: Sun Life enters the Decumulation market

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My latest MoneySense Retired Money column looks in-depth at a new “Decumulation” offering from Sun Life, unveiled late in September. You can find the full column by clicking on the highlighted headline: What is Sun Life’s new decumulation product?

As you can see from image below taken from MyRetirement Income’s website, the emphasis is on providing regular income to last to whatever age a retiree specifies. That income is not, however, guranteed as a life annuity would be.

The Globe & Mail’s Rob Carrick first wrote about this shortly after the Sun announcement. My column adds the opinions of such varied Canadian retirement experts as author and finance professor Moshe Milevsky, retired actuary Malcolm Hamilton, Caring for Clients’ Rona Birenbaum and Trident Financial’s Matthew Audrey, as well as Sun Life Senior Vice President, Group Retirement Services, Eric Monteiro.

Some of the more cynical takes are that this is a way for Sun Life to continue to profit from client financial assets gathered during the long accumulation phase, rather than seeing them migrate to other solutions, such as annuities provided by either one of its own life insurance arms or that of rivals.

Aiming for Simplicity and Flexibility

As Sun’s Eric Monteiro told me in a telephone interview, the company’s preliminary research found that rival products that were first on the market (see full MoneySense column) were often perceived as complicated, and as a result uptake of some of these pioneering Decumulation products have been underwhelming. It sought to create a solution that was relatively simple and flexible.

In essence, it is not dissimilar to some Asset Allocation ETFs, such as Vanguard’s VRIF, which is 50% equities and 50% fixed income. But Sun’s product may and probably will have different proportions of the major asset classes. In fact, it lists 16 external global money managers who deploy up to 15 different asset classes, which include Emerging Market Debt, Liquid Real Assets, Direct Infrastructure, Liquid Alternatives and Direct Real Estate. Managers include BlackRock Asset Management, Lazard Asset Management, Phillips, Hager & North, RBC Global Asset Management and its own Sun Life Capital Management. Continue Reading…

Canada’s Great Companies make the HLIF ETF worth consideration

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Image courtesy Harvest ETFs
By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog)

Many Canadians are watching closely as their neighbour to the south prepares to hold a crucial Presidential election in November 2024.

Meanwhile, Canada’s federal election is still more than one year away. Canada continues to contend with economic, social, and political issues that are faced in varying degrees by its partners in the G7. These issues include managing immigration, aging populations, and housing affordability. Its central bank also seeks to strike a balance in monetary policy after raising interest rates to combat inflation.

In this piece, we’ll look at how the Canadian economy has fared over the past year. Moreover, we will look at an exchange-traded fund (ETF) that offers exposure to Canada’s great companies. Let’s jump in.

Where does Canada stand in the fall of 2024?

From an economic standpoint, Canada finds itself in a difficult predicament. The OECD chart below illustrates that Canada has fallen behind many of its peers in the post-COVID-19 pandemic era.

 

Source: Organization of Economic Cooperation and Development (OECD), 2024 Household Dashboard, accessed October 6, 2024.

Canada’s Real GDP per capita ranking compared to its peers, especially stand outs like the United States and Italy, has been abysmal. This is coupled with dismal employment statistics that have shown rising unemployment. Even positive jobs data is skewed by government hiring in some cases.

Indeed, unemployment in Canada has climbed from a low of 5% in 2022 to 6.5% in its latest reading. Royal Bank of Canada Deputy Chief Economist Nathan Janzen recently stated that unemployment would continue to rise to 7% by early 2025. That is nearly a percentage point higher than pre-pandemic levels.

The Bank of Canada (BoC) is in a tough spot as it battles a weak economic environment and a housing supply shortage that has kept prices elevated. Now, the BoC finds itself in a position where it will need to employ further interest rate cuts. However, in doing so, it runs the risk of re-inflating the housing price bubble.

Why should you trust Canadian companies?

Canada has been in a rut economically in recent years. However, the forward price-to-earnings ratio difference between the S&P TSX 60 and the S&P 500 show that publicly traded Canadian companies still offer attractive value at this stage. Continue Reading…

To Hedge FX Risk, or not to Hedge

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To Hedge FX Risk, or Not to Hedge: Currency markets are notoriously difficult to call but can meaningfully impact portfolio returns. ETF Strategist Bipan Rai provides a detailed framework for investing outside the Canadian market.

Image Getty Images courtesy BMO ETFs

By Bipan Rai,  BMO Global Asset Management

(Sponsor Blog)

Admittedly, using a spin on a famous Shakespeare quote to start a note on currency hedging1 is verging on trite. Nevertheless, if Hamlet were running a portfolio of overseas assets, his primary concern would have to be the “slings and arrows” of currency markets — which are notoriously difficult to call but can meaningfully impact portfolio returns.

For Canadian investors, looking abroad provides several benefits. The most important is diversification, whether it’s through access to other regions that are less correlated with Canadian markets or to other products that aren’t available domestically.

However, investing abroad also means taking on foreign exchange risk given that international assets are priced in currencies other than the Canadian dollar (CAD).

For illustrative purposes, consider Chart 1, which shows the total return for the S&P 500 in U.S. dollars (USD) and in CAD terms for Q1 of this year. In USD terms, the index was up 10.6% over that time frame, but since that period also corresponded to weakness in the CAD relative to the USD (or USD/CAD moved higher) the index outperformed in CAD terms (up 13.3%). That means that Canadian investors would have fared much better leaving their USD exposure unhedged ex ante.

Chart 1 – S&P 500 Total Return for Q1 2024

Source: BMO Global Asset Management

Now let’s look at an alternative period in which the CAD strengthened against the USD. Chart 2 shows a comparison of the total return for the S&P 500 from April 2020 to April 2021 (in which USD/CAD was lower by over 11%). During that period, the total return index outperformed in USD terms by close to 20%. In this scenario, an investor who had hedged their FX risk would have been in the optimal position.

Chart 2 – S&P 500 Total Return Between April 2020 – April 2021

Source: BMO Global Asset Management

As these examples show, currency risk is a key consideration for any investor who wants to look beyond Canada for diversification. That risk can cut both ways, which amplifies the importance of hedging decisions. In our minds, the decision to hedge foreign exchange (FX )risk (including the degree to which foreign exposure is hedged) comes down to the following:

  1. An investor’s view of the underlying currency pair
  2. Whether the currency pair is positively or negatively correlated2 with the underlying asset

In this note, we’ll make a brief comment on the first point but focus largely on the second one. as we feel that should be given more weight for hedging decisions.

FX Markets are Tough to Call

Taking a view on the underlying currency pair is easy to do — but difficult to capitalize on.

Indeed, foreign exchange markets are notoriously fickle. One reason why is the relationship between predictive factors and currency pairs is rarely stationary. For instance, a lot of market participants tend to use front-end (2-year) yield spreads as a proxy for central bank divergence in the spot FX market. Chart 3 shows the current correlation between those spreads and the different CAD crosses, and as expected, the relationship isn’t consistent from a cross-sectional perspective.

Chart 3 – Correlation Between Two-Year Spreads and the CAD Crosses

* * Correlation window is 2 years. The CAD is used as a base currency for this analysis. The spread is tabulated by subtracting the foreign 2-year yield from the CAD 2-year yield. Source: Bloomberg, BMO Global Asset Management.

We can also see this by looking closer at the relationship between a factor and a currency pair over time. Chart 4 shows the rolling 100-day correlation between USD/CAD and the price of oil (proxied by the prompt WTI contract3) going back ten years. Note how frequently the strength of the correlation (as well as the sign) changes over time. Continue Reading…