Victory Lap

Once you achieve Financial Independence, you may choose to leave salaried employment but with decades of vibrant life ahead, it’s too soon to do nothing. The new stage of life between traditional employment and Full Retirement we call Victory Lap, or Victory Lap Retirement (also the title of a new book to be published in August 2016. You can pre-order now at VictoryLapRetirement.com). You may choose to start a business, go back to school or launch an Encore Act or Legacy Career. Perhaps you become a free agent, consultant, freelance writer or to change careers and re-enter the corporate world or government.

Lack a DB pension? Pros and Cons of the Purpose Longevity Fund

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By Mark and Joe

Special to the Financial Independence Hub

Hello readers of the Financial Independence Hub! We are the founders of CashflowsandPortfolios.com,  a free resource dedicated to helping DIY investors in getting started with their portfolio right up to planning efficient withdrawal strategies during retirement.

We are honoured to have been invited by Jon Chevreau to contribute a piece on a new income product for retirees: the Purpose Investments Longevity Fund.

If you are close to retiring or already a retiree, you’ve likely thought a lot about the following questions:

  1. Did I save enough for retirement?
  2. How will I generate sufficient income for my retirement?
  3. How long will my money last?

If you are lucky enough to have worked for a Government entity for 25-30 years, then you are probably not too worried about funding your retirement.  However, for the rest (most) of us, we need to save and invest on our own over the long-term. If that’s not enough, we then need to figure out ways to decumulate our savings as efficiently as possible.

For DIY investors, there is not much in the form of “forever” payments until death, except of course Canada Pension Plan (CPP) and Old Age Security (OAS). We consider these as one of the three pillars of retirement income for Canadians.

Another common source of “forever” income that acts like a government defined benefit (DB) pension are annuities: which are guaranteed by insurance companies. With annuities, investors are trading their capital for a steady income stream, which is essentially a DB pension.

Why aren’t annuities more popular? For DIY investors, it’s likely because of the fact that you are giving up your capital for a yield (currently around 4-5%) that can be obtained by your own DIY portfolio (see below for an example).

So what if there was a product out there that would provide:

  1. Income for life
  2. A yield higher than annuities
  3. An option to “sell” the product to regain some of your invested capital if needed?

That’s the opportunity and challenge that Purpose Investments has taken on with the creation of their latest mutual fund: The Longevity Pension Fund.

There has been a lot of buzz about the Purpose Investments Longevity Pension Fund and for good reason:  it solves a number of big problems that retirees face.

What is the Longevity Pension Fund and what are the pros and cons of owning such a fund?

Pros and Cons of the Longevity Pension Fund

At a high level, the Longevity Pension Fund is a cross between a balanced index mutual fund (47% equities/38% fixed income/15% alternatives), an annuity, and a defined benefit pension. While the fund does offer income for investors, a solid yield, and an option to “sell” the product if needed, these potential benefits must be considered with some drawbacks. As always with financial products, the devil is in the details.

With the basics out of the way, what are the PROS and CONS of the fund?

PRO – Reduces longevity risk (i.e., outliving your money) by offering income for life, but without the guarantees

As mentioned, the Longevity Purpose Fund is a mutual fund that any investor will be able to buy. Once purchased, and the investor is 65 or older, the fund will pay a distribution for life (at least that is the plan). Purpose Investments has stated that the 6.15% yield may sound high, but to maintain that yield they would only need to achieve an annual return of 3.5% net, which is well below historical returns for a common 60/40 stock/bond balanced portfolio.

Combined with mortality credits (investors who die sooner than expected, leaving their money invested in the fund for other investors), Purpose Investments has stated that 6.15% is conservative and can possibly go higher in the future.

PRO – You can get some of your investment back

With annuities and defined benefit pensions, you don’t typically get your contributions back. With this Longevity Fund, if you sell the fund you will get your initial investment minus any income payments. For example, if you have invested $100k into the fund, and have been paid out $10k, then you get back $90k if you sell. At a yield of 6.15%, essentially you can get some capital back up to 16 years of being invested in the fund. After that point, co

nsider yourself invested for life.

PRO – The taxation of the distributions will be tax efficient

While the fund is available for all kinds of accounts — including tax-free savings accounts (TFSAs) and registered retirement income funds (RRIFs) — potentially the best home for this fund could be in a taxable account. That is because monthly income distributions in the first year are expected to be roughly half a return of capital (RoC) with the remainder from capital gains, dividends and interest. This means that in a taxable investment account, the distributions will be tax-efficient (much more so than a defined benefit pension payment).

PRO – No Binding Contract

A key feature of this Longevity Pension Fund is a script from the annuity playbook: mortality credits. Similar to an annuity, you are participating in a pool of credits: those that die. When you die, your estate gets your initial contribution minus the total amount of income payments. The investment gains generated by your investments over the years stay in the fund and are used to top up monthly payments for everyone else.

Unlike an annuity though, you can get out of the fund: it’s not a one-way binding contract.

From Purpose:

“Unlike many traditional annuities or other lifetime income products, the Longevity Pension Fund is not meant to feel like a binding contract. You can change your mind and access the lesser of your unpaid capital** (i.e., your invested capital less the distributions you’ve received) or current NAV. Your beneficiaries are entitled to the same amount if you pass away. Once your cumulative distributions surpass your invested capital, there will no longer be any redeemable value left. Please speak to your advisor or see the prospectus for further details.”

The fund is also designed similar to many pension plan funds or funds of funds:  a balanced mix of stocks, bonds and other investments that should* meet their income obligations to unitholders.

*Target income is just that. This fund does not offer an income guarantee.

CONS – The fund does not pass onto heirs

As mentioned above, the mortality credits are how this fund will sustain its yield into the future, which also means that the fund and its payout do not pass onto your spouse/heirs. For investors with a spouse/heirs, this is one of the largest drawbacks of the Longevity Pension Fund.

CONS – The distributions are not guaranteed

The monthly payments seem juicy right now but the Longevity Pension Fund is not like an annuity whereby income is guaranteed for life; the 6% or more income target is just that: a target. Continue Reading…

Trust no one: Zero Trust Architecture and the next generation of Data Protection

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Zero Trust Architecture (ZTA) is fast becoming the security model of choice as businesses worldwide recognize the need to better protect their networks and assets in light of today’s growing remote workforce.

By Anthony DeCristofaro

Special to the Financial Independence Hub

For many organizations, remote work began as a pandemic-induced novelty. More than a year later, however, it has become the new normal. Even when the world officially reopens, a large number of employees who have experienced the perks of working from home will no doubt be requesting the flexibility to continue doing so – that is, if their employers actually plan on transitioning back to a physical workplace.

Remote work presents new data security challenges: even for top-notch VPN

Granted, a reliable VPN will substantially lower your chances of being hacked. However, as the past year has shown us, even the most highly rated VPNs are far from foolproof. While they’ve always had their fair share of vulnerabilities (thus the need for constant updating), VPNs have been under constant assault since the pandemic began.

For example, one extremely sophisticated attack compromised more than 900 Pulse Secure enterprise VPN servers enabling the attackers to gain access, steal account credentials, and exfiltrate other sensitive data belonging to victim organizations.

The more employees using your VPN, the greater your network’s vulnerability

Pre-COVID, you had maybe 10% of employees using your VPN one or two days a week. Now, you likely have 90% of employees or more using your VPN five days a week. Each one of these employees creates a new point of vulnerability.

Your VPN can’t protect remote workers from malicious cyber activity. If just one compromised employee uses your VPN, you could soon have yourself an intruder. It’s a company’s worst nightmare and an attacker’s dream come true.

Zero Trust Architecture (ZTA) is the way forward

According to Gartner IT Research, “by 2022, 80% of new digital business applications opened up to ecosystem partners will be accessed through zero trust network access,” and 60% of enterprises will transition most of their remote access VPN solutions to ZTNA by 2023.

Unlike VPNs, platforms that operate with Zero Trust Architecture (ZTA) assume that security breaches happen – and rightly so. Take the recent Colonial Pipeline incident.

In May 2021, the fuel operator responsible for carrying 2.5 million barrels of fuel per day was temporarily shut down after being held for ransom by cybercriminals. This, combined with similar cyberattacks on SolarWinds, Microsoft Exchange, and others, prompted The White House to issue an Executive Order in support of a zero trust approach to security. Continue Reading…

Misguided thinking about Dividend Investing

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I’ve received an uptick in emails and comments from investors about dividends and so I thought I’d address some common misconceptions around dividend investing.

One reader in particular wanted to know if he should take the commuted value of his pension ($750,000) and put it all in Enbridge stock because it was yielding around 6.5%. That reminds me of the reader who, several years ago, asked if he should borrow money at 4% to buy Canadian Oil Sands stock that was paying an 8% dividend yield.

Related: How did that leveraged investment work out?

I shouldn’t have to tell you why it’s not sensible to put your entire retirement savings into one stock – dividend payer or not.

Most comments were much more sensible and reflected what I perceive to be some misguided thinking about dividend investing.

Dividends + Price Growth = Magic?

Some companies pay a dividend to shareholders. Some do not. Investors shouldn’t have a preference either way.

Amazon doesn’t pay a dividend, focusing instead on reinvesting their profits back into their business for more growth opportunities.

Apple, on the other hand, is awash in cash thanks to the tremendous success of the iPhone and decided to start paying a dividend in 2012. It likely cannot reinvest or grow fast enough to keep up with its cash flow and so it returns some of that cash to shareholders.

Investors shouldn’t prefer Apple to Amazon just because of Apple’s dividend policy.

But what happens when a dividend is paid? The value of the company decreases by the amount of the dividend. That must be true, since the dividend didn’t just appear out of thin air – it came from the company’s earnings.

Company A and Company B are worth $10 each. Company A pays out a $1 dividend, while Company B does not.

Company A is now worth $9, and its shareholders received $1. Company B is still worth $10 and its shareholders received $0.

But some investors do seem to think the dividend comes from thin air and that it does not reduce the value of the dividend paying company.

Consider this example: Let’s say expected stock returns are 8% per year. The average dividend yield from all stocks (both non-dividend payers and dividend payers) is around 2%. That leaves 6% to come from the increase in share prices or capital gains.

Shopify doesn’t pay a dividend. You could consider its expected annual return to be 8% (ignoring the extreme dispersion of possible outcomes for a single stock), but all 8% would come from increases to its share price.

Enbridge has a dividend yield of 6.5%. Should we expect its price to also increase by 8%? Of course not. It would be more reasonable to expect price growth of 1.5% (again, ignoring the extreme dispersion of possible outcomes).

Here’s a more diversified example featuring Vanguard’s VCN (Canadian equities, represented by the yellow line) versus iShares’ CDZ (Canadian dividend aristocrats, in blue):

VCN vs CDZ

11 books Small Business owners should read this summer

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What one book would you recommend for small business owners to put on their summer reading list?

Being a business owner requires hard work and dedication. But other skills entrepreneurs need are more subtle and can be the difference between a thriving or struggling company. So if you have felt like your bank of knowledge is missing a key element to reach your next business goal, this curated booklist might hold an answer.

To help your small business succeed, we asked business professionals and CEOs for their best book recommendations. From books that will propel your leadership to the next level to tomes that offer advice on conflicts of all kinds, there are several innovative ideas presented in these volumes that may help you grow your business and win at life in the long run.

Here are 11 books for small business owners to add to their summer reading list:

  • The 24-Hour Family
  • Mindset: The New Psychology of Success
  • Citizen: An American Lyric
  • They Can’t Kill Us Until They Kill Us
  • Think Big, Act Small
  • Deep Work
  • The Elements of Style
  • Primal Leadership
  • The Seven Habits of Highly Effective People
  • Measure What Matters
  • The Hard Thing About Hard Things

The 24-Hour Family

For those small business owners who are also parents, I would highly recommend The 24-Hour Family by Polly Ghazi! This is perhaps one of the best guides to work-life balance for parents. It does a great job at breaking down how you can balance the ever-growing demands of your work and your family. — Jeanne Kolpek, Cadence Education

Mindset: The New Psychology of Success

One book to put on your summer reading list is Mindset: The New Psychology of Success by Dr. Carol S. Dweck.  Dweck’s work breaks down the way we view our abilities and skill sets as based on the way we carry ourselves. Some people are content with where they’re at, or think that after a certain point they can’t improve on a skill. This is known as a fixed mindset. Others continue that hunger for knowledge and want to improve. This is known as a growth mindset. This book emphasizes the importance of a growth mindset and how it can help anyone in all facets of life, from school to business, and even personal relationships. I highly recommend putting this on your summer reading list if you want a kick to get in gear. — Chris Abrams, Marcan Insurance

Citizen: An American Lyric

While this book is not strictly business-related, it definitely does something I think people in the business world need to become apt at: understanding a variety of experiences outside of their own. Claudia Rankine’s Citizen: An American Lyric subverts narrative structures to put the reader into the driver’s seat of each page as she tells us about the varied experiences of Black people in America. Rankine doesn’t tell us, readers, how to feel. She is simply asking us to feel, to open ourselves to a world beyond our own. — Hunter Blackwell, Markitors

They Can’t Kill Us Until They Kill Us

Small business owners should add They Can’t Kill Us Until They Kill Us by Hanif Abdurragqib to their summer reading list. This book is a collection of personal essays illustrating the theme of empathy. These essays make the reader stop to consider what makes the world meaningful. Apply this principle when deciding how your business will fit into customers’ lives, and your small business can become a force for change. — Alex Czarnecki, Cottage

Think Big, Act Small

Think Big, Act Small: How America’s Best Performing Companies Keep the Start-up Spirit Alive by Jason Jennings is a best-selling book that every small business owner needs on their summer reading list. Jennings dives in deep to explore the unique concept of operating on the level of a big organization yet incorporating the spirit and drive of a start-up into the core values of the business. The book provides insider interviews, extensive research, and in-depth analysis on the topic. It is a must-read for any business owner looking for long-term, steady, and consistent growth. — Kelli Lane, Genexa

Deep Work

If you read anything this summer, read Deep Work: Rules for Focused Success in a Distracted World by Carl Newport. This book will probably strike many people as counterintuitive because it flies in the face of a lot of the conventional wisdom surrounding maximizing productivity and what it means to be productive, but by learning to harness short bursts of productivity, interspersed with downtime, you actually get far more out of a workday. If you want to learn how to do more work in less time, this book provides the template. — Markus Albert, EatFirst

The Elements of Style

It might seem ancillary to running a small business, but The Elements of Style by William Strunk Jr. helped me dramatically improve my written communication, and I am certain that it has meant better relationships with my vendors, clients, and employees. Continue Reading…

Embracing Uncertainty: Do Nothing and hope Nothing Happens but don’t make me Think

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By Noah Solomon

Special to the Financial Independence Hub

One of my favourite quotes is attributable to the late, great economist John Maynard Keynes. During a high-profile government hearing, when a critic accused him of being inconsistent, Keynes responded, “When the facts change, I change my mind. What do you do, sir?”

Being uncertain of what to do and/or scared of being wrong can cause investors to cling to their existing strategies and portfolios regardless of changes in the economic backdrop or market environment.

Another cause of investor inertia lies with the wealth management industry, which generally espouses a “do nothing and hope nothing happens” approach to investing whereby clients are encouraged to adopt a static, buy-and-hold approach and refrain from making any significant changes to their portfolios, regardless of changes in the investment environment.

The behavioral explanation behind the abdication of action in favor of passivity is nicely summarized by the following quote:

“You see, Dr. Stadler, people don’t want to think. And the deeper they get into trouble, the less they want to think. But by some sort of instinct, they feel that they ought to and it makes them feel guilty. So they’ll bless and follow anyone who gives them a justification for not thinking.”

– Ayn Rand, Atlas Shrugged

Despite this tendency to cling to the status quo, the fact remains that refusing to change your portfolio in response to changing conditions has historically been one of the costliest mistakes in investing.

Sometimes It’s OK to Do Nothing (But it’s really hard to know when)

When asked what went through his mind when he listened to his own music, jazz legend Miles Davis responded, “I always listen for what I can leave out.” Davis meant that there are times when less is more: restraint can be more effective than action. As is the case with music, there are investment climates in which it’s best to do nothing.

The value of sound risk management varies depending on the market environment. The ability to manage risk has little value when conditions are favourable.  During a bull market that occurs against a backdrop of attractive valuations, low leverage, and a favourbale economic climate, risks are minimal and any move to take profits and reduce risk will likely make you worse off: just sit back and enjoy the proverbial ride. Conversely, there have been (and inevitably will be) times when risk management and flexibility can prevent a great deal of financial (not to mention emotional) pain.

So far so good: swing for the fences and make huge returns in favourable markets and apply the brakes to avoid losses when conditions turn hostile. But wait! To pull this off, you need to do the impossible and successfully predict exactly when markets will turn from favourable to hostile and vice-versa. In other words, you need to be consistently right … or do you?

It’s not just about Being Right. It’s also about What you Do when you’re Wrong

People put too much emphasis on being right. One explanation for this is that people get psychic income from being right:  taking profits on winning positions makes them feel good. Conversely, accepting a loss forces us to admit we were wrong, which can be psychologically challenging even for professional investors. The net result of these opposing reactions is that investors often strive to maximize their percentage of winning vs. losing positions. While this strategy seems like a good idea, it can lead to highly sub optimal results. Continue Reading…