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.

Fixed Income: Down but not Out

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Franklin Templeton Investments: Licensed from GettyImages

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While many equity markets have performed well year to date, the last few months have not been as kind to fixed income investors. Last quarter, fixed income markets recorded some of the worst returns in 40 years as central banks and governments worldwide continued to rack up a mountain of debt in ongoing support of the global economy and consumers during the COVID-19 pandemic. But don’t despair; as Franklin Bissett fixed income portfolio manager Darcy Briggs points out in this Q&A, the market still offers value — if you know where to look.

 

Q: How would you describe the current environment for Canadian fixed income?

After seeing significant returns in Canadian fixed income last year, we expect more subdued performance in 2021. Given the year’s starting point of very low interest rates and tight credit spreads, we see corporate credit as offering the best risk-adjusted return opportunities in the current environment. As active, total return managers focused on generating income and capital gains, we know bond selection will remain important this year. Small interest rate moves can lead to significantly different outcomes for different fixed income sectors. Uncertainties remain high, and we are seeing a wide range of forecasts on how the balance of 2021 will unfold. Although interest rates have been up as much as 100 basis points so far this year, we think they may have overshot, as happens from time to time. We would not be surprised if they drifted lower later in the year. Realistically, we expect the path ahead to be a little messy.

Source: FactSet, Franklin Templeton

How so?

This recession/quasi-depression was prompted by a dramatic health crisis and the resulting government-mandated shutdown; it was not caused by normal business cycle dynamics. While fiscal and monetary policy have prevented a full-blown financial crisis, those tools have limited ability to solve the current recession. We believe it will end once the pandemic subsides and the economy fully opens, functioning in a more familiar pre-pandemic way. Vaccines are key to the pace of progress. Continue Reading…

Retired Money: How Bond ETF investors can minimize risk of rising rates

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My latest MoneySense Retired Money column has just been published: click on the highlighted text to retrieve the full column: Should investors even bother with Bonds any more?

In a nutshell, once again pundits are fretting that interest rates have been so low for so long, that they inevitably must soon begin to rise. And if and when they do, because of the inverse relationship between bond prices and interest rates, any rise in rates may result in  capital losses in the value of the underlying bonds.

In practice, this means choosing (or switching) to bond ETFs with shorter maturities: the risk rises with funds with a lot of bonds maturing five years or more into the future, although of course as long as rates stay as they are or fall, that can be a good thing.

As the column shows, typical aggregate bond ETFs (like ETF All-Star VAB) and equivalents from iShares have suffered losses in the first quarter of 2021. Shorter-term bond ETFs that hold mostly bonds maturing in under five years have been hit less hard. This is one reason why in the US Vanguard Group just unveiled a new Ultra Short Bond ETF that focuses on bonds maturing mostly in two years or less.

The short-term actively managed bond ETF is called the Vanguard Ultra Short Bond ETF. It sports the ticker symbol VUSB, and invests primarily in bonds maturing in zero to two years. It’s considered low-risk, with an MER of 0.10%.

Of course, if you do that (and bear the currency risk involved, at least until Vanguard Canada unveils a C$ version), you may find it less stressful to keep your short-term cash reserves in actual cash, or daily interest savings account, or 1-year or 2-year GICs. None of these pay much but at least they don’t generate red ink, at least in nominal terms. Continue Reading…

Book Review of Beyond Brochures: an insider’s guide to the Travel Business

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By Ruth Snowden

Special to the Financial Independence Hub

Hopefully by summer’s end, travel will start to return.

In this little gem of a Traveller’s guide readers will find dozens of precious nuggets, gleaned from the experience of a ‘well-seasoned’ Traveller, written with a light touch, a definite opinion and a good sprinkling of humour.

A bit skeptical at first, I wasn’t sure how anyone could write a book targeted to two different readers, the Traveller and the Travel Advisor, as announced in the introduction.  Within a few pages, though, it was evident that Picken honestly believes that although Travellers and Travel Advisors are on different sides of the same transaction, mutual understanding is a good thing and ‘the more people travel intelligently the better the world should be.’

He then proceeds to draw his readers into the joy of travelling, in 98 chapters: each a succinct one or two pages, divided into three distinct parts: Travellers, Travel Advisors, Travelling.  In every section are valuable hints and suggestions to help Travel Advisors make their customers’ experiences favourable and unforgettable, in a good way.

Building trust is not easy, especially in this world of virtual engagement and digital communication. In Beyond Brochures Picken provides readers with such solid insights that the Traveller reader naturally trusts him and Travel Advisors who follow his advice will be better able to create trust with their customers.

I am another seasoned traveller, having logged thousands of miles on business and leisure travel over many decades, much of which I’ve booked myself and some for which we needed a Travel Advisor.  For both the neophyte Traveller and for someone who has been there and done that, Section A is chock-a-block with important information: government websites; the regulatory environment and jurisdictions governing air travel; demystifying how airlines price seats; and agreeing that in many cases it is easy to book your own hotel room, without the assistance of a Travel Advisor.

Even when booking your own hotel rooms, the author shares great tips on how to use the ubiquitous on-line booking engines and suggests additional actions you can take to save money. Beyond Brochures will make me a better customer of a Travel Advisor and will make my self-directed and self-booked travel more enjoyable.

The philosophy behind why we travel

Early in this section he looks at what we look for in travel that is interesting and enjoyable to us: the philosophy behind why we travel. Continue Reading…

The Dividend Aristocrats fight back

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

The Dividend Aristocrats are S&P 500 companies that have increased their dividends each year, for at least 25 years running. That is an exclusive group. Companies that have increased their dividends for 50 years or more are dividend royalty – they are dividend kings. The Aristocrats have underperformed over the last year and more. You won’t find an Apple, or Amazon or Alphabet (Google) or Tesla in that index. That made it more than difficult to keep up with the market. But those high quality Aristocrats are fighting back as value takes over from growth in 2021. With few dramatic high flyers, that might be its greatest strength in 2021 and beyond.

There is a US listed ETF for the dividend aristocrats ProShares NOBL. Here’s an overview from their landing page.

Here’s my previous post on the US and Canadian Dividend Aristocrats.

Rising dividends and equal weight magic

The Dividend Aristocrats offer a very simple one-two punch. We have that meaningful dividend growth history and the equal weighting of the index constituents. That compensates for a few of the key weaknesses of the S&P 500 cap weighted index. That is the most replicated index on earth, of course. A cap weighted index will follow the momentum of the market as more investors flow into the most popular stocks.

That can create a bubble based on enthusiasm over fundamentals.

Yes, you’ll find those cap weighted ETFs at work in the ETF Portfolio page. The methodology can work wonderfully until it doesn’t, such as in the dot-com crash of the early 2000’s. US stock markets and Canadian stock markets were crushed thanks largely to the over concentration in very popular tech stocks. Most of the US tech stocks had no earnings or very poor earnings. Of course, Canada went over the ledge thanks to Nortel. You can throw in the odd JDS Uniphase and a few other names as well.

You have a choice

None of the those tech stocks would have qualified as a dividend aristocrat in the year 1999 or 2000. The index side stepped much of the carnage. The dividend aristocrats greatly outperformed the S&P 500 through the dot-com crash and well beyond. It is an investment approach that beats the market with less volatility.

The first column is year, then Aristocrats, S&P 500, and then differential.

Incredibly, we see the Aristocrats offer positive returns in 2000 and 2001 while the cap weighted S&P 500 is two years into its three year venture of delivering negative returns. That began the lost decade for US stocks.

Are we about to enter another lost decade?

Many or most market commentators will offer that US stocks are in a bubble, again. The PE ratios, CAPE ratio and Buffett indicator all place today’s US stock market in dot-com crash territory. Continue Reading…

Fine Wine: The Alternative Asset for today’s challenges 

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By Atul Tiwari

Special to the Financial Independence Hub

The current market backdrop is making the case for alternative assets, such as fine wine, even stronger. Traditional financial asset classes have grown expensive and concentrated, and initiating or increasing an exposure to fine wine can provide important diversification and enhance potential returns.  

It is no secret that equity valuations are stretched. The massive levels of fiscal and monetary stimulus globally have propped up asset prices despite ongoing disruption from the COVID-19 pandemic. The S&P 500 price/earnings ratio exceeded 30 in mid-April, its highest level since the 1990s dotcom bubble, which did not end well for investors. With a potential economic recovery following vaccine rollouts largely priced in, prices appear to leave limited upside in the near term. 

Investors will also struggle to find attractive returns in the bond market. Even before the pandemic, yields globally were low, or even negative. Again, the downside appears to outweigh the upside as the recent selloffs in government bonds indicate.  Both fixed income and equity markets remain susceptible to a shift in the economic outlook or macro policy, which should prompt investors to consider alternative ways to diversify their portfolios.  

The increasing concentration of equity markets forms another reason why alternative assets make sense in the current backdrop. The sky-high equity returns of the past year have come overwhelmingly from the tech sector with the FAANG stocks — Facebook, Amazon, Apple, Netflix and Google (Alphabet) — significantly outperforming the wider market. Consequently, ETFs and other index-linked investments may not be as diverse as they might appear.  

This is where fine wine can help. As a real asset, fine wine prices are primarily driven by their own market dynamics, meaning they have low correlation to traditional asset classes and can help de-link an investment portfolio from swings in the wider markets.  

Fine wine’s limited and decreasing supply over time (as wine is consumed) alongside demand that goes beyond wine’s immediate benefit as a financial instrument can support wine prices regardless of the wider macro environment. Indeed, prior to the recent tech stock surge, fine wine often delivered better performance with significantly lower volatility over a range of backdrops going back to before the financial crisis.  

Healthy returns with low volatility  

Comparison of volatility and annualised return across financial assets 

 

Source: S&P, Bloomberg, Liv-ex & ishares. Data as of 31 Mar 2021  Continue Reading…