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.

Tawcan: My 5 highest-conviction stock holdings

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By Bob Lai, Tawcan

Special to Financial Independence Hub

My five highest conviction positions
Image from Unsplash courtesy of Tawcan.com

Long-time readers will know that we hold both individual dividend stocks and index ETFs in our dividend portfolio. We are doing a hybrid investing strategy to capture the best of both worlds: holding individual stocks allows us to dictate which companies we want to hold (usually because we like the long term outlook) and holding index ETFs allows us to geographical and sector diversification. At the end of the day, we care about ‘total return.”

Holding individual dividend stocks requires more research and knowledge, but that’s part of the fun of being a DIY investor.

It’s always good to understand the financial numbers of a company that you plan to invest in. One can read through all the annual and quarterly reports, compare the different financial metrics, and even do technical analysis to determine whether it makes sense to invest your money or not.

However, if you start getting into the very nitty and gritty details, it’s easy to get stuck in the ‘analysis-paralysis’ loop.

Therefore, I believe it’s always important to step back and look at the big picture. Some questions I like to ask include the following:

  • Is the company producing products that you or other consumers rely on daily? And will it continue to do so in the future?
  • Is it difficult to replace these products with cheaper equivalents?
  • Does the company have fundamental advantages over its competitors?
  • Do I believe the company can continue to excuse its core strategy for the next 10 years or more?
  • Am I comfortable with holding this stock for at least a decade or more?
While getting into a stock at a good price is important, sometimes investors arbitrarily create a target price without any valid reasons, wouldn’t move from this target, and completely miss investing in a solid company because the share price never hit the target price.

For example, imagine in March 2021 you wanted to initiate a position in National Bank because you missed the opportunity during the COVID-19 pandemic downturn. Due to the historical price during the downturn, you arbitrarily set a target price of $80 and an absolute ceiling price of $85.

You then convinced yourself that no matter what, you wouldn’t buy a single National Bank share unless the price was at $80 or below.

During 2021, National Bank’s share price never fell within your price target so you completely missed the boat on a solid Canadian bank.

Let’s say you continued with the desire to initiate a position in National Bank and kept your $80 price target and $85 ceiling price. Again, the share price never fell below $80. It got close a few times during 2022 (~$83), but because you were so set on your target price and refused to pay $3 over your target price, you didn’t initiate a position.

National Bank 5yrs

Fast forward to 2024, and you are still waiting on the sidelines because the share price never hit below $80 and the share price has climbed to above $110 since.

A missed opportunity because of this arbitrarily set price target?

Yup, I think so.

Again, this is why I think it’s more important for us DYI investors to step back and look at the big picture. Sometimes you may need to ignore the price target. If a company is solid with a great future outlook, you may need to ignore a few dollars of share price difference during your initial entry. After all, you can always dollar cost average in the future.

With that in mind, I thought it’d be interesting to list my five highest-conviction positions in our dividend portfolio. 

My five highest conviction positions

Please note that everything in this post is purely my personal opinion and is not buying and selling recommendations. Please always make buying and selling decisions on your own after doing your own research..

#1.) Apple

I have written a lot about Apple in the past and I continue to like Apple long term. If you look at Apple’s history, it’s easy to point out that the company went through some identity crisis in the ‘90s and early 2000s. But things have changed since the launch of the iPad and the company has completely transformed around the launch of the iPhone.

Apple is one of the most recognizable brands in the world. Years ago Apple used to be seen as a pure hardware company but it has transformed itself into a services company and perhaps can now be considered as a consumer staples company. The beauty of Apple is the strong ecosystem that Apple has built around its different products. Once you’re in the ecosystem, it gets increasingly difficult to get out of it.

For example, many people I know started their Apple journey with an iPhone. AirPods were next on the shopping list to pair with their phones. They then purchased an Apple Watch for ease of accessibility and AirTags to track their devices.  It wouldn’t come as a surprise for these users to have multiple iPads and MacBook laptops too. Before they know it, they are tightly integrated within the Apple ecosystem.

Although we own an iMac at home, we are probably the outliers as the typical Apple users because we don’t own any other Apple products. I do see the attraction for owning iPhones and other Apple products for the tightly integrated ecosystems though (for example, I see the attraction for AirTags but they don’t make sense for Android users).

Apple has never been a company that comes out with a first-to-market product. It always takes its time to study the market and launch with a high-quality product that’s been perfected. Although some people argue that Vision Pro is a very niche product that not many consumers will purchase, I think it has some unique usage cases and I can see future Vision Pros gaining popularity, just as what happened to Apple Watch.

Therefore, I’m convinced that Apple will continue to do well in the future and have no concern with adding more Apple shares to our portfolio.

#2.) Visa 

Visa is yet another well-recognized global brand that facilitates electronic fund transfers throughout the world, most commonly through Visa-branded credit cards, debit cards, and prepaid cards.

As one of the largest payment processors in the world, Visa has a nearly impenetrable moat. Yes, Visa does have competitors like MasterCard, AmericanExpress, and even lesser ones like Paypal and new Fintech companies, but Visa is in a well-established position to fend off these competitors.

Because of the wide moat, it is well-positioned for future growth in developing countries. In addition, Visa is a company that doesn’t have to worry about inflation because people will continue to use Visa-branded products regardless of the inflation rate. This is also true whether there’s a recession or a bull market (yes consumers can cut back on their spending but Visa can combat this by increasing transaction fees on merchants).

  1. When a transaction is completed using a Visa card, the merchant is required to pay an interchange fee
  2. To access Visa’s electronic payment network, merchants and financial institutions need to pay Visa service fees
  3. When transactions are processed, Visa charges processing fees.
  4. When there are international transactions, which is common nowadays, Visa charges international transaction fees
Visa Income Statement visualized

As you can see from the visualized Visa income statement above, we’re talking about billions of dollars from each of these income streams. Visa also enjoys a very high profit margin.

I don’t see Visa going away anytime soon. If anything, I strongly believe the cashless interactions will only increase moving forward and Visa is in a strong position to capture any future growth.

#3.)  Royal Bank

I can’t have a high-conviction-position post without mentioning one of the Canadian banks. Royal Bank is the largest bank in Canada by market capitalization serving over 20 million clients with more than 100,000 employees worldwide. Recently Royal Bank completed the acquisition of HSBC Canada to expand its Canadian client base further.

Although many see Royal Bank as a Canadian bank, over the years, the company has been expanding outside of Canada, with operations in over 30 countries.

If we disregard all the financial metrics and analyze Royal Bank from a 30,000 foot view, Royal Bank’s large client base is extremely attractive.

Why? Continue Reading…

How to Prepare for Retirement as a Midwife

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Midwives play a rather important role in maternal healthcare. They provide crucial support to expectant mothers before, during, and after childbirth. While the focus of midwifery is on delivering excellent care to patients, it’s equally important for midwives to have a financial plan in place for themselves. Here’s a look at how midwives can prepare.

Adobe Stock Image courtesy logicalposition.com

By Dan Coconate

Special to Financial Independence Hub

Retirement planning is a critical step in ensuring Financial Independence and peace of mind after years of dedication to a meaningful career.

For midwives, who are often focused on caring for others, planning for their own future can sometimes take a backseat. This guide emphasizes how to prepare for retirement as a midwife so that you can build a solid plan that focuses on future financial strategies, career development, and truly golden years.

Get Familiar with your Financial Landscape

To plan effectively for retirement, you need a clear understanding of your financial situation, goals, and needs. Start by calculating your current income, savings, and any existing retirement benefits. Many midwives work as independent contractors or part-time employees, which can often mean fluctuating income. Identify what portion of your earnings you can set aside monthly for retirement savings.

Review any benefits offered by your employer, such as pensions or retirement savings programs, such as 401(k). If these aren’t included, consider opening a traditional or Roth IRA. Understanding your financial opportunities and constraints will form the foundation of your retirement strategy.

Explore Savings Plans and Investment Opportunities

Midwives often face unique challenges in saving for retirement due to irregular salaries or periods of self-employment. That’s why exploring diverse savings plans and investment opportunities is critical.

Consider options, such as SEP IRAs, which allow self-employed midwives to contribute higher amounts than personal IRA plans. Diversifying investments can also bolster your long-term savings. Look into index funds, bonds, or low-risk mutual funds to create a balanced portfolio. Remember, the earlier you start, the more time your compounding interest will grow your nest egg. Continue Reading…

Financial industry’s forecasting is a mug’s game, especially under Trump

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By John De Goey, CFP, CIM

Special to Financial Independence Hub

Around the middle of December, advisory firms and the people who work for them start putting out their retrospectives regarding the year that is just about to end and / or offer their forecast for the new year. I have long argued that forecasting is a mugs game. To the extent that I have grudgingly participated in the exercise previously, I have found it to be humbling. As such, I want to stress that what follows is not so much a forecast as it is a concern for what may – and I stress MAY – come to pass in light of what we already know about the incoming administration south of the border.

To begin, the President-elect is a criminal. He has literally been convicted of 34 felonies. This is in addition to two impeachments, various infidelities, an attempted insurrection, and the stealing of highly classified state secrets. We now have a good sense of what his cabinet will look like: assuming most of his forthcoming nominees are ultimately appointed. This is a man who is quite willing to appoint incompetent sycophants who will help him expand his ongoing criminal activity at the expense of more traditional character traits like relevant education, experience, and character. The notion of traditional public service seems to be foreign to many would-be cabinet appointees.

Will Trump manufacture a Recession?

Early in December, I was in Southern California and spoke with the founder of an AI company in Silicon Valley. He told me there is a theory making the rounds that Donald Trump intends to do something highly unconventional in his longstanding pursuit personal self-interest. The executive told me that a number of thought leaders are of the opinion that Trump intends to deliberately manufacture a recession immediately upon taking office.

Their view is that, given the experiences of both the global financial crisis and the COVID crisis, it has become apparent that when the economy is severely threatened and bailouts are required, billionaires and plutocrats end up doing very well. Meanwhile, ordinary middle-class people and those even lower on the social spectrum fall further behind.

In the aftermath of the election on November 5th, American capital markets responded favorably based on the presumption that lower taxes and less regulation would be highly stimulative and favourable for the economy. This view held sway even though the President-elect campaigned on a platform of indiscriminately-high tariffs, mass deportations, and a draconian cutting of government services via the department of government efficiency (DOGE).

There are some who fear that the promise to rein in the debt will be used as an excuse to cut back on government programs that ordinary Americans rely on. As it stands, approximately three quarters of all U.S. annual expenditures are fixed in law and allocated toward entitlements such as Medicare, Medicaid, and Social Security, as well as interest on the national debt.

Cutting US$2 trillion from the budget is simply impossible without encroaching on at least some of these programs. Stated differently, even if Trump were to cut all other programs (including the CIA in the SEC) to zero, the savings would still be less than the $2 trillion a year he pledged to cut. He will, of course, blame Joe Biden for “the mess he inherited” either way.

No fiscal Conservatives left in America

Meanwhile, the evidence shows that for over half a century, the U.S. accumulated debt has been growing under both major parties. It seems there are no fiscal conservatives left in America. Again, I stress, this is not a forecast, but rather a recounting of a narrative that several thoughtful people who live south of the border believe to be plausible. If you think wealth inequality and income inequality are a problem now, you could be in for a rude awakening if anything close to this narrative comes to pass.

As many people know, I have long been a proponent of efficient capital markets. Any person who espouses this view believes that prices reflect all available information to the point where it is impractical to think that mispricings are sufficiently large and identifiable so as to allow people to engage in trading that would allow that person to make material profit. The American stock market clearly does not subscribe to the narrative I’ve just outlined. Of course, consensus opinions can be wrong. In this instance, perhaps more than any other in my lifetime, I actively want the consensus to be correct. Continue Reading…

Be the House, not the Chump

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Free public domain CC0 photo courtesy Outcome

By Noah Solomon

Special to Financial Independence Hub

I’m just sitting on a fence
You can say I got no sense
Trying to make up my mind
Really is too horrifying
So I’m sitting on a fence

  • The Rolling Stones

 

 

Benjamin Graham and David Dodd are universally regarded as the fathers of value investing. In their 1934 book “Security Analysis” they introduced the concept of comparing stock prices with earnings smoothed across multiple years. This long-term perspective dampens the effects of expansions as well as recessions. Yale Professor and Nobel Prize winner Robert Shiller later popularized Graham and Dodd’s approach with his own version, which is referred to as the cyclically adjusted price-to-earnings (CAPE) ratio.

S&P 500 CAPE Ratio: 1881- Present

Since 1881, the CAPE ratio for U.S. equities has spent about half of the time between 10 and 20, with an average and median value of about 16. Its all-time low of 5 occurred at the end of 1920, and its high point of 45 occurred at the end of 1999 during the height of the internet bubble.

What if I told you …. ?

The following table shows average real (after inflation) annualized returns following various CAPE ranges.

S&P 500 Index: CAPE Ratio Ranges vs. Average Annualized Future Returns (1881 Present)

 

What is abundantly clear is that higher returns have tended to follow lower CAPE ratios, while lower returns (or losses) have tended to follow elevated CAPE levels. An investment strategy that entailed having above average exposure to stocks when CAPE levels were low, below average equity exposure when CAPE levels were high, and average allocations to stocks when CAPE levels were neither elevated not depressed would have resulted in both less severe losses in bear markets and higher returns over the long-term.

By no means does this imply that low CAPE ratios are always followed by periods of strong performance, nor does it imply that poor results are guaranteed following instances of elevated CAPE levels. That would be too easy!

S&P 500 Index: Lowest CAPE Ratios vs. Future Real Returns (1881 – Present)   

 

S&P 500 Index: Highest CAPE Ratios vs. Future Real Returns (1881 – Present) 

 

Looking at the performance of stocks following extreme CAPE levels, it is clear that valuation is best used as a strategic guide rather than as a short-term timing tool. It is most useful on a time scale of several years rather than a shorter-term timing tool.

  • Although there have been instances where low CAPE levels have been followed by weak performance over the next 1-3 years, there have been no instances in which average annualized returns over the next 5-10 years have not been either average or above average. While it sometimes takes time for the proverbial party to get started when CAPE levels hit abnormally depressed levels, markets have without exception performed admirably over the medium to long-term.
  • Similarly, although there have been instances where high CAPE levels have been followed by strong performance over the next 1-3 years, there have been no instances in which average annualized returns over the next 5-10 years have not been either below average or negative. Whenever CAPE levels have been extremely elevated, it has only been a matter of time before the valuation reaper exacted its toll on markets. This brings to mind the following quote from Buffett:

“After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

Be the House, Not the Chump

There have been (and inevitably will be) times when equities post strong returns for a limited time following elevated CAPE levels and instances where stocks post temporarily weak results following depressed CAPE levels.

However, successful investing is largely about playing the odds. If you were at a casino, wouldn’t you prefer to be the house rather than the chump on the other side of the table? Although chumps occasionally get lucky, this doesn’t change the fact that the odds aren’t in their favour and that they are playing a losing game. Over the long-term, investors who refrain from reducing their equity exposure when CAPE levels are elevated and don’t increase their allocations to stocks when CAPE levels are depressed will achieve satisfactory returns over extended periods. That being said, I sure wouldn’t recommend such a static approach for the simple reason that it involves suffering severe setbacks in bear markets and leaving a lot of money on the table over the long-term.

Given the historically powerful relationship between starting CAPE levels and subsequent returns, what if I told you that the CAPE ratio currently stands at 38, putting it at the top 98th percentile of all year-end observations going back over 150 years, and the top 96th percentile over the past 50 years? Presumably you would at the very least consider taking a more cautious stance on U.S. stocks.

Let’s Pretend ….

Let’s pretend that you knew nothing about the historical relationship between CAPE levels and subsequent returns.  A combination of behavioural biases, speculative fervour, and FOMO (fear of missing out) might lead you to adopt an “if it isn’t broken, don’t fix it” stance of inertia.

Recency bias can give people a false sense of confidence that what has occurred in the recent past is “normal” and is therefore likely to continue in the future. Moreover, the strong returns which have occurred since the global financial crisis can exacerbate FOMO, thereby prompting investors to stay at the party (and perhaps even to imbibe more intensely by increasing their equity exposure). Lastly, the potential of innovative technologies such as AI to revolutionize businesses can capture investors’ imaginations and incite euphoria to the point where they believe that there is no price that is too high to pay for the unlimited profit potential of the “shiny new toy.”

Standing at the Crossroads

So here we stand at a crossroads, caught between the weight of history and the possibility that this time it may truly be different. What is an investor to do? One can never be 100% sure. The “right” answer will only be known in hindsight once it becomes a matter of record, at which point it will be too late for investors who get caught on the wrong side of the fence. Continue Reading…

Great things you can do with your TFSA

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Deposit Photos

By Mark Seed, myownadvisor

Special to Financial Independence Hub

A Tax Free Savings Account (TFSA) is far more versatile and powerful than you might think.

Now that we’re into the start of a new year (Happy New Year!) here are some great things you can do with your TFSA.

TFSA Backgrounder

The TFSA was first introduced in the 2008 federal budget.

It became available to Canadians for the 2009 calendar year – as of January 1, 2009. Launched part-way through The Great Recession (where markets collapsed significantly during 2008 triggered by a financial crisis), the account was designed as a savings account (hence the name) to encourage Canadians to save more money.

But the “savings” word in the name is very misleading, no?

Correct. 

Since account introduction in 2009, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before.

While this account is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to this tax-free account are with after-tax dollars and withdrawals are tax-free. Consider it like an RRSP account in reverse.

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account. This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Let me tell you … here is summary of many great account benefits:

  1. Capital gains and other investment income earned inside the account are not taxed.
  2. Withdrawals from the account are tax-free.
  3. Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, like future Old Age Security (OAS) income.
  4. Anything you withdraw can be re-contributed in a following year, in addition to that year’s contribution limit.
  5. While you cannot contribute directly as you could with an RRSP, you can give your spouse or common law partner money to put into their TFSA. Do it without any income attribution!
  6. TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. More details below for you.
  7. The annual contribution limit is indexed to inflation in $500 increments, that happened in recent years …. and more!

I’ve got my preference for which account I focus on for wealth-building purposes (related to the RRSP vs. TFSA debate, including what account I would suggest you max out your contributions to first) but let’s compare each first:

RRSP

TFSA
A tax-deferral plan. A tax-free plan.
Contributions can be made with “before-tax” dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution. Contributions are made with “after-tax” dollars.

 
Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate. Contributions are not tax deductible; there is no refund to be had.
If you don’t contribute your maximum allowable amount in any given year you can carry forward contribution room, up to your limit.
If you make a withdrawal, contribution room is lost. If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year.
Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal.  They are treated as income and taxed at your current tax rate. Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal.
Since withdrawals are treated as income, withdrawals could reduce retirement government benefits. Withdrawals are not considered taxable income.  So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals.
You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year. You can contribute to a TFSA after age of 71.
The Summary:  part of your RRSP is borrowed money (i.e., you owe the government taxation.) The Summary:  all of your TFSA is your money.

Based on my personal investment plan, I feel the TFSA ultimately trumps the RRSP as a retirement vehicle to focus on first at any income level even though I contribute to both every year. All the money in the TFSA is mine to keep, grow and manage with no taxation withdrawal consequences.

Since inception, here are the annual and cumulative limits assuming no withdrawals over that period were made:

TFSA contribution limit 2009 to 2025:

Year TFSA Annual Limit TFSA Cumulative Limit
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500
2019 $6,000 $63,500
2020 $6,000 $69,500
2021 $6,000 $75,500
2022 $6,000 $81,500
2023 $6,500 $88,000
2024 $7,000 $95,000
2025 $7,000 $102,000
Based on the recent bull run in recent years, I know some individuals that have over $200,000 in their TFSAs.

I also know some couples who have their combined TFSA assets worth more than $400,000 in value.

Pretty impressive tax-free money!!

Q&A with Mark – What has worked for me/us over the years?

Well, we’ve bought various assets, namely Canadian stocks and ETFs over the years.

To date, we have avoided any TFSA withdrawals. Instead, like I referenced above, we use our TFSAs for owning equities and wealth-building purposes.

Q&A with Mark – What types of investments can you own inside the TFSA?

Thankfully lots!

Similar to the assets you can hold within a Registered Retirement Savings Plan (RRSP), the TFSA can also be used to help Canadians build significant wealth beyond just holding cash savings. You can own a number of different types of investments inside the TFSA: Continue Reading…