We review books that deal with everything from financial independence topics to politics, and anything in between. We may sometimes stray into films and music if there is a “Findependence” angle.
While stocks are viewed by most of the financial industry as the main ingredient for creating wealth, it’s well known that the price for higher expected returns is higher risk. The paradox is that in order to increase the odds of creating greater wealth, you have to be willing to lose some wealth at least in the short term.
All of which makes Robert S. Cable’s newly published book (his second) of more than theoretical interest. Inevitable Wealth bears the subtitle Two low-risk strategies that combine to create extraordinary wealth.
We have touched on this book and its belief in the long-term power of equities in a recent review I did at the Financial Post, where I compared Inevitable Wealth to David Trahair’s Enough Bull. You can also find guest blogs by both authors here at the Hub, where the pair make the cases for mostly stocks in the first case, and mostly fixed income (i.e. GICs) in the second.
I had read both books earlier in the summer, well before the extreme market volatility of late August. Ironically, both books would have helped you preserve capital, depending on how you implemented the suggestions: Continue Reading…
Panicky stock markets in China are spreading to Asia and the rest of the world today. Over the weekend my Twitter feed provided links to various stories arguing the case against panic but clearly there’s extreme anxiety in the air and investors are going to do what they’re going to do.
Deep breaths, relaxing? Sounds a bit like meditation. And that might be as valuable a thing to try right now than a belated attempt to lock the stock market barn after the horse has already escaped.
Here’s a review I did for the FP four years ago of the book illustrated to the left: The Mindful Investor, Maria Gonzalez. The advice then was that the next time the markets crash, try to calm your mind with meditation. For a video interview I conducted with the author then, click on Mindfulness over Market Matters.
On page 152, the book specifically mentions how to deal with a stock market correction through a relaxation technique. “Once you feel calmer and more stable, you’ll be be better able to listen and make good decisions, ones that aren’t based on panic and fear.”
Of course, the more you watch the carnage through the media and web, the harder this is going to be. You might want to reread Steve Lowrie’s Hub post: Stop reacting to market noise.
As was announced here recently, Motley Fool co-founder David Gardner has launched a new weekly financial podcast called Rule Breaker Investing.
I’ve long been a fan of Chris Hill’s weekly Motley Fool Money podcast, which generally runs close to 40 minutes and makes a nice weekend catchup on the financial week just past. He also spearheads a shorter podcast called Market Foolery, which runs Monday to Thursday. (Full disclosure, I once appeared on that podcast and also write for Motley Fool Canada).
As The Economist reported this week, assets of exchange-traded funds (ETFs) have now surpassed those of hedge funds. In one of its “Leaders,” the British weekly described hedge funds as a “fatal distraction” for pension funds. It also ran a longer piece on the same story, saying ETFs are roaring ahead of hedge funds.
Back in 1999, ETFs had only 10% of the assets under management enjoyed by hedge funds. Today, according to research firm ETFGI LP of London, UK, assets in the global ETF industry were US$2.971 trillion (that’s Trillion with a T!), compared to US$2.969 trillion for hedge funds. But of the $36 trillion (US$) invested in pension funds worldwide, only $3 trillion are in hedge funds. It noted that CalPERS, a huge US pension fund, has “concluded putting money in hedge funds is not worth the bother.”
I talked to ETFGI managing partner Deborah Fuhr (who left BlackRock four years ago) after the Economist article came out this week. She said the ETF industry likely became bigger than hedge funds back in May of 2015, when ETF assets reached US$3 trillion but as Hedge Fund Research only provides quarterly data rather than monthly, it could not be confirmed until now.
It’s a big milestone for ETFs but there’s still a long way to go before ETFs catch mutual funds. Fuhr says global ETFs have just 8.4% of the assets claimed by the mutual fund industry.
Stocks versus Bonds
Here at the Hub the past week we had a study in contrasts, with two financial expert/authors running guest blogs with quite disparate views on asset allocation. Continue Reading…
Here at the Hub we like to present all points of view. On Tuesday, we ran a guest blog by author and chartered accountant David Trahair about the new second edition of his book, Enough Bull, which explained why he is 100% in fixed-income vehicles like GICs. Today, we do the same thing with a guest blog by Scotia McLeod’s Robert S. Cable, who argues almost the polar opposite in his new book, Inevitable Wealth. We’ll review both books formally in the coming weeks. Meanwhile, over to Bob! – – JC
Stocks beat bonds, hands down
Robert Cable
By Robert S. Cable
Special to the Financial Independence Hub
All of the research I’ve carried out since I began doing this in 1980 and every piece of research I’ve seen comparing stocks to bonds– every single time comes to the same conclusion — that is that stock returns don’t just beat the returns of bonds, stocks clobber bonds. It’s absolutely no contest.
In my book, Inevitable Wealth, I compare 40 years of returns, from 1975 through 2014. I show $100,000 invested in Government of Canada five-year bonds, with money reinvested every five years, to the same $100,000 invested in stocks by way of the TSX Composite Index.
In 1975, those bonds yielded 7.25% so your annual income started out at $7,250. Stocks paid somewhat less, $5,360. Advantage bonds—initially. However just four years later, the dividends paid on stocks had moved higher to the point where the dividends paid on stocks was greater than the bond’s income.
But check out these numbers. In 2014, your bonds paid an annual income of just $2,770, down from $7,250, 40 years earlier. Talk about taking a pay cut! Meanwhile in 2014, stocks paid dividends of $49,560. Your stock income was more than 17 times what bonds paid.
What’s really interesting though is this: while stocks paid a much superior and growing income, they really aren’t income investments. The dividend income paid is simply a by-product of these companies sharing their profits with shareholders.
But as they say, that’s only half the story. We’ve looked at the income stocks and bonds produced. But what about the value of each of these investments over those 40 years?
Stocks beat bonds by 17 to 1 over 40 years
Well, that $100,000 you invested in bonds back in 1975 is still worth right around the same $100,000. If you took inflation into account, your $100,000 would actually be worth more like $15,000. The $100,000 invested in stocks? Well, not including the dividends, at the end of 2014 your stocks would be worth a bit more, $1,732,060. Continue Reading…
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While stocks are viewed by most of the financial industry as the main ingredient for creating wealth, it’s well known that the price for higher expected returns is higher risk. The paradox is that in order to increase the odds of creating greater wealth, you have to be willing to lose some wealth at least in the short term.
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