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.

Tariffs Troubles? Remember this Timeless Tip: “It’s already priced in.”

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Image: Canva Custom Creation/Lowrie Financial

By Steve Lowrie, CFA

Special to Financial Independence Hub

A key concern many investors have at the moment is the impact of Trump’s tariffs on goods produced outside the U.S. on the markets. I’m hearing from those wondering if they should do something to protect their wealth; their primary question is: What should I do with my investments?

My answer (as it usually is when investors are concerned about the geopolitical impact on the markets): stick with the plan because, by the time the news is public and you become concerned, the markets have already accounted for it/priced it in, so any reaction you take is too late.

A useful historical reference on tariffs is President Trump’s first term. Starting in 2017, his administration targeted China, implementing tariffs on a broad range of products by 2018. The following years saw ongoing trade negotiations that led to an agreement, though many tariffs remained. Despite the uncertainty, both U.S. and Chinese markets outperformed the MSCI World ex USA Index over Trump’s four-year term. Have a look at the data from 2017 to 2020, as Dimensional compares China MSCI Index to US S&P 500 Index to MSCI World ex USA Index.

Markets are forward-looking, meaning that the potential economic effects of tariffs are likely already factored into current prices. As a result, when these anticipated changes materialize, their impact on markets may be limited.

Understanding how Market Pricing Works

Let’s talk about the price of stocks.

It stands to reason: To make money in the market, you need to sell your holdings for more than you paid. Of course, we’re all familiar with good old “buy low, sell high.” But despite its simplicity, many investors fall short. Instead, they end up doing just the opposite, or at least leaving returns on the table that could have been theirs to keep.

You can defend against these human foibles by understanding how stock pricing works and using that knowledge to your advantage.

Good News, Bad News, and Market Views

How do you know when a stock or stock fund is priced for buying or selling?

The short answer is, we don’t.

And yet, many investors still let current events dominate their decisions. They sell when they fear bad news means prices are going to fall. Or they buy when good news breaks. They invest in funds that do the same.

While this may seem logical, there’s a problem with it: You’re betting you or your fund manager can place winning trades before markets have already priced in the news.

To be blunt, that’s a losing bet.

You’re betting that you know more about what the price should be at any given point than what the formidable force of the market has already decided. Every so often, you might be right. But the preponderance of the evidence suggests any “wins” are more a matter of luck than skill.

Me and You against the World

Whenever you try to buy low or sell high, who is the force on the other side of the trading table?

It’s the market.

The market includes millions of individuals, institutions, banks, and brokerages trading hundreds of billions of dollars every moment of every day. It includes highly paid analysts continuously watching every move the markets make. It includes AI-driven engines seeking to get their trades in nanoseconds ahead of everyone else.

And you think you can beat that?

We believe it’s far more reasonable to assume, by the time you’ve heard the news, the collective market has too, and has already priced it in.

  • News of a recession, under way or avoided? It’s already priced in.
  • Inflation on the rise, or abating? It’s already priced in.
  • A company suffers a calamity or makes a major breakthrough? It’s already priced in.
  • The government passes critical legislation that helps or hinders global trading? It’s…

And so on. Here’s your best assumption:

If it’s public knowledge, it’s already priced in. (And if it’s insider information, it’s illegal to trade on it.)

What we don’t yet Know

As soon as an event is priced in, several things make it difficult to profitably trade on the news:

You’re Buying High, Selling Low: If you trade on news after it’s been priced in, odds are you’ll buy at a higher price (after good news) or sell at a lower price (based on bad news). Continue Reading…

The slow track or the fast track to Wealth

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AlainGuillot.com

By Alain Guillot

Special to Financial Independence Hub

What is the role of wealth in your life?

The role of wealth in one’s life is a complex and multifaceted aspect that varies from person to person. Not everyone wants to become wealthy.

For some, wealth is a means to an end, a tool that facilitates the pursuit of their passions and goals; arts, leisure, family time. Others prioritize different aspects of life, such as love, beauty, sports, or creative expressions like dance and fashion. These individuals might view wealth as a secondary consideration, simply needed to sustain their chosen paths.

There are those who lack clear goals, accepting life as it comes without a distinct sense of direction, merely following societal trends.

On the other hand, some individuals place great importance on wealth, believing that it simplifies and enhances all other aspects of life.

The two tracks to wealth

The pursuit of wealth can be approached through two distinct tracks: the slow track and the fast track. Which track you take depends on your priorities, your ambitions, your self-confidence,  and your willingness to put in the work.

What is the slow track to wealth?

The slow track involves accumulating wealth over time through consistent savings, often achieved through a regular job and disciplined investment strategies. This method, while reliable, requires patience and decades of dedicated effort. It’s a route that many can take, but societal conditioning to spend rather than save often hinders its widespread adoption. If you work a regular job, save every month and invest in low-cost index funds or ETFs, it is almost guaranteed that you will become wealthy.

Let’s do a quick example. For this example, let’s ignore the effects of inflation.

Let’s imagine that a person saves $5,000 per year and he/she gets an average return from the market of 8%. How long will it take this person to become a millionaire?

It will take 36 years to accumulate $1,000,000.

To save $5,000 per year is not that difficult — practically anyone can do it — but most people are conditioned to spend, not save; therefore,  very few people will become wealthy even though it is within their reach.

With one million dollars, a person can spend about $80,000 per year for the rest of their lives without running out of money. The slow track is not bad at all.

What is the fast track to wealth?

Most people who become millionaires do so by creating businesses. They take risks and responsibilities that others are not willing to take. They have a vision of where they want to go, they eliminate all the excuses and work relentlessly toward their goals. A fast-track business should make you wealthy in 20 years or less.

Two fast-track scenarios

Continue Reading…

A Misunderstanding about Taking CPP Early to Invest

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By Michael J. Wiener

Special to Financial Independence Hub

Recently, Braden Warwick at PWL Capital created an excellent CPP calculator that we can all use.  One of the numbers this calculator reports is the IRR (Internal Rate of Return) you’ll get between your CPP contributions and the CPP pension you’ll collect.  Some financial advisors (but not Braden) decide it makes sense for their clients to take CPP as early as possible (age 60), and invest the proceeds.  Their reasoning is that they believe they can earn a higher return.  Here I explain why this logic compares the wrong returns.

The return you’ll get on your CPP contributions depends on the contributions you and your employer have made and the benefits you’ll get.  These amounts depend on many factors about your life as well as some assumptions about the future.  Typically, the return people get on CPP is between inflation+2% and inflation+4%.  (However, it can go higher if you took time off work with a disability or to raise your children.  It also goes higher if you ignore the CPP contributions your employer made on your behalf, but I think this makes a false comparison.)

If we examine people’s lifetime investment record, not many beat inflation by as much as CPP does.  However, some do.  And many more think they will in the future.  In particular, many financial advisors believe they can do better for their clients.

But what are we comparing here?  These advisors are imagining a world where CPP doesn’t exist.  Instead of making CPP contributions, their clients invest this money with the advisor.  In this fictitious world, the advisor may or may not outperform CPP.  However, this isn’t the world we live in.  CPP is mandatory for those earning a wage.

The choice people have to make is at what age they’ll start collecting their CPP pension.  The CPP rules permit starting anywhere from age 60 to 70.  The longer you wait, the higher the monthly payments get.  Consider an example of twins who are now 70.  The first started CPP a decade ago at 60 and the payments have risen with inflation to be $850 per month now.  The other waited and has just started getting $2000 per month.  The benefit of waiting is substantial if you have enough savings to bridge the gap between retiring and collecting CPP, and don’t have severely compromised health.

Those with enough savings to bridge a gap of a few years have a choice to make.  Should they take CPP immediately upon retiring, or should they spend their savings for a while in return for larger future CPP payments?  Some advisors will say to take CPP right away and invest the money, but this is motivated reasoning.  The more money we invest with advisors, the more they make. Continue Reading…

The Cost of Overspending in Retirement: How a Withdrawal Strategy saved $16,500 annually

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A Retirement Income Solution: How Milestones Retirement Insights helped one Alberta Couple Save $16,500 annually

By Ian Moyer

Special to Financial Independence Hub

Retirement is meant to be a time of relaxation and enjoyment, but for many Canadians, managing retirement income efficiently can be a major challenge. This was the case for a couple in Alberta, aged 70 and retired for five years. They were concerned about depleting their savings too quickly and needed a tax-efficient withdrawal strategy to better sustain their retirement lifestyle.

The Problem: Overspending Without a Plan

The couple had a mix of financial assets, including:

  • RRSPs: $400,000 remaining
  • TFSAs: $75,000 remaining
  • Joint Non-Registered Savings: $50,000 remaining

They were spending $80,000 a year without a clear withdrawal strategy, leading to inefficiencies and over-taxation. This lack of guidance was costing them $16,500 annually, money that could have been used to enhance their lifestyle.

 

 The Solution: A Tailored Withdrawal Strategy

Using Milestones Retirement Insights, they were able to restructure their withdrawals to maximize after-tax income while preserving their savings for the long term. Here’s how:

  1. Prioritizing TFSA Withdrawals: We tapped into their tax-free savings account first, allowing them to access funds without triggering additional taxes.
  2. Splitting RRSP Withdrawals Over Time: By drawing from their RRSP in smaller increments, we kept their income within lower tax brackets.
  3. Non-Registered Savings for Gaps: Joint savings were used strategically to fill gaps, minimizing tax exposure while ensuring consistent income.
  4. Optimal RRIF Conversion: We structured their RRSP to RRIF transition to further reduce taxes and take advantage of pension income splitting.

Key Consideration: RRSP to RRIF Conversion

When you reach retirement, a registered retirement savings plan (RRSP) has the option of converting to a registered retirement income fund (RRIF). To provide a sustainable retirement income and minimize your income and estate taxes, we’ve calculated an average annual RRIF payment of $28,112 starting at age 70. At an assumed rate of return of 5%, this investment will deplete to $0 at age 88. Continue Reading…

Canada’s best Asset Allocation ETFs

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By Dale Roberts

Special to Financial Independence Hub

When the Canadian asset allocation ETFs were introduced several years ago, the investment community hailed them as “game changers.” That is, the final nail in the coffin for high-fee / low-performance Canadian mutual funds.

The asset allocation ETFs are well-diversifed, managed global portfolios available at 5 risk levels. The fees represent about a 90%-off sale compared to the typical mutual fund. The fees range from 0.17% to 0.25%. It’s a no-brainer for most Canadians. You can open an account with a discount brokerage, enter one ticker symbol (XEQT for example), enter an amount, press Buy and own thousands of companies around the globe. Are these the best funds available in Canada? Yes, that’s a rhetorical question.

Here’s an ode to XEQT from Loonies and Sense.

 

Cut The Crap Investing is the only blog that tracks the performance of the leading Asset Allocation ETF providers. I also sort them by risk level. For example, you’ll see the performance comparison between the balanced portfolios from Vanguard and BlackRock and the rest of the AA gang. You’ll also see the surprising outlier “winner” that includes modest amounts of bitcoin in its offerings.

Check out the ultimate Canadian asset allocation ETF page. Here’s a teaser: the balanced growth models. They range from 80% stocks / 20% bonds to 90% stocks / 10% bonds. The returns listed are average annual.

Build your own portfolio

While the asset allocation ETFs are the easiest, hands-off way to go, you can certainly build your own ETF portfolio. You’ll save modestly on fees, and you will be allowed some flexibility on how you would like to shape the portfolio. I’ve offered examples of core portfolio models.

Here’s the updated (to the end of 2024) total returns for the core Canadian ETF Portfolios on Cut The Crap Investing. The build-your-own models have outperformed the asset allocation ETFs, in modest fashion. Continue Reading…