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.
My latest MoneySense Retired Money column revisits the topic of Core & Explore. You can find the whole column by clicking on the highlighted headline here: Rethinking Core & Explore.
If the image on the left looks familiar, it’s because we used it last week to illustrate a republished blog on Explore by Michael J. Wiener, the blogger behind the popular Michael James on Money blog.
Go back to a couple of my Retired Money columns the last year and you’ll see I touch on the topic of speculation for retirees more than once, usually couched in the context of Core & Explore.
“Core” is the prudent long-term strategy inherent in the MoneySense ETF All-Stars: low cost, diversified across geographies and asset class. Fully takes advantage of the “only free lunch:” that of broad diversification.
“Explore” on the other hand, is the polar opposite. The theory is that if you’ve taken care of 80 or 90% of your “Core” or Serious Money, you can go crazy with the other 10 or 20%, by “scratching the itch” of taking flyers on all those crazy things we’ve seen lately, like SPACs, cryptocurrencies etc., nicely surveyed by CFA Steve Lowrie in this recent blog: SPACS, NFTs and another Tech-inspired Silly Season.
Of course, as long as markets keep soaring, it’s hard not to love assets like Bitcoin or Ethereum, which may have tripled or quadrupled in a matter of months. Anyone who bought Tesla a year or two ago, or the ARK ETFs that were roughly 10% in Tesla and many comparable high flyers, was looking like an investing savant by the end of 2020, including Yours Truly. Continue Reading…
Prospect Theory is a concept that explains how people react when faced with gains and losses in the markets. The early research that went into it was done by Amos Tversky and Daniel Kahneman, two prominent social scientists. The latter went on to win the 2002 Nobel Prize in Economics and write the runaway international bestseller ‘Thinking Fast and Slow,’ which deals with human quirks in behaviour and decision-making. The broad subject is referred to as Behavioural Economics (BE).
I find it fascinating that many people who give financial advice are unaware of the BE research or, if they are aware, do nothing to incorporate it into the advice they give. The implications of the old saying that those who ignore the lessons of history are condemned to repeat them are enormous.
Investors are feeling cocky
That’s especially true with Prospect Theory, which is vitally important in the summer of 2021 because markets have been on an absolute tear. The result is that investors are feeling confident and cocky. One might even say that many have let their guard down. When things go up with so few meaningful interruptions and no specific, readily identifiable storm clouds on the horizon, a dangerous kind of comfortable complacency might set in.
Many people I speak with these days seem unconcerned by the recent run-ups. Despite a series of potential danger signals such as inflation, deflation, the Delta Variant, and implications of climate change, they seem unperturbed.
Kahneman and Tversky showed that, for mostly emotional reasons, people put more weight on perceived gains over perceived losses and that, when presented with a choice offering equal probability of outcome (i. e., a gain of $1,000 vs. a loss of $1,000), most will choose the potential gains.
Advisors as Behavioural Coaches
For that reason, Prospect Theory is also known as the loss-aversion theory, and it offers a simple example of the risk associated with Optimism Bias. Simply put, people like to focus on positive outcomes: often to the minimization or exclusion of other possible ends. Continue Reading…
Adrian Mastracci, “fiduciary” portfolio manager at Lycos Asset Management touches on applying Olympian wisdom to your retirement portfolio.
Let’s reflect on the Olympians who recently competed at Tokyo. They deserve praise for braving years of preparation, training, commitments and pandemics.
Striving and competing to be best in their chosen pursuits. Regardless of outcomes.
I especially appreciate long distance events like cycling, running, swimming and rowing. They demand a wealth of endurance and perseverance, much like retirement portfolios.
Athletes often have to reach down deeper to muster more bursts of adrenalin. Just when it seems there is little, if anything, left in the tanks.
My top takeaways
Investors can draw some parallels from hard working Olympians. Wisdom from the Olympiad is relevant and applicable, particularly to long-term investing.
I summarize my top takeaways. Successful athletes require:
• Much dreaming and sketching out of personal goals.
• Setting specific, well thought out strategies.
• Disciplined game plans that realize on their dreams.
• Patience for the roller coaster of setbacks and achievements. Periodic tweaking of their action plans.
• Time horizons to learn and master their quests.
Olympians make wonderful ambassadors for the investing profession. I encourage investors to take a few moments and apply Olympian wisdom to the precious nest egg.
Athletes make choices and sacrifices along the way in their quest for Olympic goals. Investors balance choices between spending for the moment and saving for the long haul.
Risk is an inevitable part of the Olympics, as it is in long term investing. Athletes try different training plans, much like investors try a variety of strategies.
Investors can improve their long term portfolios with these four pearls of wisdom:
Pay attention to issues that you can control: risks, diversification, asset mix and investment quality.
Ensure that no investment can cause serious portfolio damage: losses are typically your biggest destroyers of wealth.
Buy and sell methodically over time – timing the markets is a low percentage strategy.
Always expect the unexpected – a positive mindset is best for making portfolio decisions. Stick to simpler game plans. Skip the fancy moves.
All the very best to the athletes. May they treasure the accomplishments and cherish the memories.
Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA started in the advisory profession in 1972. He is portfolio manager with Vancouver-based Lycos Asset Management Inc.
By Mel Bucher, Co-Head of Global Distribution, Martin Currie, Edinburgh, UK
(Sponsor Content)
The investment choices we make can have a profound effect on the world around us. Investing according to sustainable principles allows investors to align their environmental, social and governance (ESG) goals with their investing choices.
Also, we believe sustainability can be a driver of long-term portfolio performance. As global equity markets recover from the COVID-19 pandemic, more Canadians want to invest in opportunities available within a wider sustainable context.
One new option is the sustainability investment expertise that Martin Currie brings to Canada.
Martin Currie may be a new name for many Canadian retail investors. Our firm is a Specialty Investment Manager of Franklin Templeton, based in Edinburgh, UK, and we focus on actively managing portfolios of the listed public equities of companies that generate long-term value from sustainable ESG polices. Our ESG framework helps to identify any material ESG issues related to a company’s cash flow, balance sheet and profit/loss account over time and whether these ESG issues could affect value creation. Having ESG analysis fully embedded in the research process enables our investment teams to uncover material issues.
Martin Currie’s leadership in ESG was recognized with the UN’s Principles for Responsible Investment A+ rating for 2017, 2018, 2019 and 2020.
This article considers our sustainable investing strategies in global equities and emerging markets equities, both of which are now available to Canadians.
A global equity strategy in a global recovery
We expect the strong comeback of the global equity market to be sustained under fairly benign inflation conditions and with asset prices supported by monetary policy. Our global equity strategy is well positioned in this environment.
The Franklin Martin Currie Global Equity strategy invests in companies with exposure to three established growth megatrends:
2. Resource scarcity (e.g., electric vehicles, alternative energy, infrastructure)
3. The future of technology (e.g., outsourcing, cloud computing, security).
We believe these themes will drive long-term structural growth in the global economy. The portfolio seeks diversified holdings with exposures to the megatrends to capture growth.
Global equities for growth, at the right price
The portfolio holds 20-40 stocks of sustainable, well-managed growth companies that dominate their respective industries and have high barriers to entry. They hold pricing power and face a low risk of disruption. These firms have potential for long-term structural growth and value creation. Companies undergo a systematic assessment of their industry, company, portfolio and governance/sustainability risks.
These equities may not be cheap, so the portfolio managers are highly selective about acquiring companies at the right valuations. The goal is to find equities that combine strong industry, financial and governance attributes at the right price.
Ever since the start of COVID, the real estate market has been on fire. To help deal with the record level of activity in the real estate market and also keep things balanced, a new mortgage stress test was introduced June 1st. In this article we’ll look at the new mortgage stress test and how it affects you.
What’s the Stress Test?
The stress test is a measure that anyone buying a home, refinancing their mortgage or switching mortgage lenders must pass. Pretty much the only time you don’t have to pass the stress test is when you’re renewing your mortgage with your existing lender. Whether you’re buying a home with less or more than 20 per cent, it doesn’t matter. You’re affected by the stress test.
The stress test was introduced several years back to help protect homebuyers from becoming overleveraged and taking on too much mortgage debt. Prior to the stress test, you only had to prove that you could afford mortgage payments based on the mortgage rate when you first sign up for your mortgage. However, with Canadians spending more and more on homes and the threat of higher interest rates looming, the Canadian government decided to introduce the stress test in early 2018 out of precaution.
To pass the stress test, you need to show that you can qualify at the greater of your mortgage rate plus two per cent and the stress test rate (currently at 5.25 per cent). With mortgage rates currently somewhere in between the mid one percent’s and the mid two per cent’s for both fixed and variable rate mortgages, you’ll almost always have to qualify at 5.25 per cent as things stand today.
How has the Stress Test changed?
The new stress test rules came into effect June 1st. Prior to the introduction of the new stress test rules, the mortgage stress test rate was 4.79 per cent. That’s because it was based on the average of the big banks’ posted mortgage rates. However, the government decided to change how the stress test was calculated. Continue Reading…
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