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.

Take advantage of the U.S. Manufacturing Boom with this Industrials Monthly Income ETF

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Image courtesy Harvest ETFs

By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog)

The passing of three important pieces of legislation in 2021 and 2022 thrust the United States manufacturing sector, and industrials, into the spotlight. But what are industrials, anyway? When we are talking about industrials, we are referring to a sector that is composed of companies that produce goods used in construction and manufacturing that encapsulates several sub-sectors.

Some of the most prominent sub-sectors in the Industrials space include Aerospace & Defense, Electrical Components & Equipment, Industrial Machinery & Supplies & Components, Rail Transportation, and others. The Industrials sector is drawing attention in 2024 for several key reasons.

Today, we are going to explore the resurgence in U.S. manufacturing, the burgeoning aerospace and defense space, and the merits of Harvest’s first-ever covered call Industrials ETF. Let’s jump in.

The resurgence in U.S. manufacturing

According to the U.S. Department of the Treasury, real manufacturing construction spending has doubled since the end of 2021. This increase occurred in a supportive policy climate after the passing of three key pieces of legislation: The Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA), and CHIPS Act. These three pieces of legislation provided funding and tax incentives for public and private entities in the manufacturing construction space.

The U.S. Treasury Department report shows that the computer/electronic segment has represented the largest component of the U.S. manufacturing resurgence. However, the growth in the size of that segment has not been offset by a reduction in spending in other manufacturing sub-sectors. Construction in areas like chemical, transportation, and food/beverage have all enjoyed growth through 2022, just at a reduced pace. The chart below shows the top manufacturing construction projects by value and location since August 2022.

The CHIPS and Science Act was signed into law by President Joe Biden on August 9, 2022. It included US$39 billion in subsidies for chip manufacturing on U.S. soil. This included 25% investment tax credits for the cost of manufacturing equipment. The chart below shows construction spending in the manufacturing space over the past two decades, bookended by a surge after three pieces of legislation.

Deutsche Bank research indicated that 18 new chipmaking facilities began construction between 2021 and 2023. Indeed, the Semiconductor Industry Association reported that more than 50 new semiconductor ecosystem projects have been announced after the CHIPS Act.

Aerospace and defense spending today

The aerospace sector involves the design, manufacture, and operation of vehicles that travel in aerospace. Meanwhile, the defense sub-sector produces and seeks to sell weapons, and military technology. Continue Reading…

Creating retirement income from your portfolio

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

There is a 4% “rule” that suggests you can spend about 4% of your portfolio value each year, with annual increases adjusted for inflation. And the idea is to create sustainable income that will last 30 years or more. This post looks to a Globe & Mail article (and chart) from Norm Rothery. We’re creating retirement income at various spend rates and looking at the outcomes.

The ‘problem’ with the 4% rule is that it is based on the absolute worst outcomes including retiring just before or during the Depression of 1929. In this post on MoneySense Jonathan Chevreau shows that in most periods (with a US-centric portfolio) a retiree could have comfortably moved that spend rate to the 6% range. If we use the 4% rule there’s a good chance we’ll leave a lot of money on the table. We will lead a lesser retirement compared to what the portfolio was offering. As always, past performance does not guarantee future results.

The 4% rule suggests that each $100,000 will create $4,000 in annual income with an inflation adjustment.

All said, we do need to manage the stock-market risk. Balanced portfolios are used for the 4% Rule evaluations. The portfolios are in the area of a 50% to 60% equities with the remainder in bonds. The studies will use the stock markets and the bond market indices. For example the S&P 500 (IVV) for U.S. equities and the aggregate bond index (AGG) for bonds. Investment and advisory fees will directly lower your spend rate. A 5% spend rate becomes a 3.0% spend rate with advisory and fund fees totalling 2%. Taxes are another consideration.

Creating retirement income

Here’s the wonderful post (sub required) from Norm Rothery.

And here’s the chart that says it all, creating retirement income from 1994 at various spend rates. A global balanced portfolio is used; I will outline that below.

As Norm states, your outcome is all about the start date. Here’s how to read the chart. Each line represents a spend rate and the current portfolio value from each start date. For example, on the far right we see the portfolio value from the 2024 start date. Of course, it’s still near the original $1 million. On the far left we see the current portfolio value (inflation adjusted) with a 1994 retirement start date. If we look at 2010 on the x axis (bottom) we see the current portfolio value from a 2010 start date. At a 5% spend rate, the portfolio value is near the original $1 million.

The portfolios have a 60/40 split between stocks and bonds, and more specifically put 40 per cent in the S&P Canada Aggregate Bond Index (Canadian bonds), 20 per cent in the S&P/TSX Composite Index (Canadian stocks), 20 per cent in the S&P 500 index (U.S. stocks), and 20 per cent in the MSCI EAFE Index (international stocks).

1994 was a wonderful retirement start date. In and around the year 2000 and just before 2008 provided unfortunate start dates. We see the 2000 start date with 5% and 6% spend rates go to zero.

Some retirees get lucky; some don’t.

That unfortunate retirement start date

In a separate post Norm looked at creating retirement income from that unfortunate year 2000 start date.

In a recent Sunday Reads post I looked at that chart and retiring during the dot com crash. You’ll find plenty of other commentary in that link, including what happened to the all-equity portfolio as it tried to take on that severe market correction. Also for consideration, it might be more about your risk tolerance and emotions compared to the portfolio math. That post also shows that retirees with more conservative portfolios feel free to spend more. Your emotions can certainly get in the way of your spending plans, and hence your retirement lifestyle. Continue Reading…

Retired Money: Review of Die with Zero and 4,000 Weeks

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Chapters Indigo

My latest Retired Money column looks at two related books: Die with Zero and Four Thousand Weeks.

You can as always find the full version of the MoneySense column by clicking on the highlighted text: Why these authors want you to spend your money and die with $0 saved.

I start with Die with Zero because it most directly deals with the topic of money as we age. In fact, as most retirees know, one of the biggest fears behind the whole retirement saving concept is running out of money before you run out of life.

But it appears that many of us have become so fixated with saving for retirement, we may end up wasting much of our precious life energy, and being the proverbial richest inhabitant of the cemetery. For you super savers out there, this book may be an eye opener, as is the other book, 4,000 Weeks.

As I note in the column, this genre of personal finance started with Die Broke, by Stephen Pollan and Mark Levine, which I read shortly after it was first published in 1998. That’s where I encountered the amusing quip that “The last check you write should be to your undertaker … and it should bounce.”

The premise is similar in both books: there are trade-offs between time, money and health. Indeed,  as you can see from the cover shot above, its subtitle is Getting all you can from your money and your life. As with another influential book, Your Money or Your Life,  we exchange our time and life energy for money, which can therefore be viewed as a form of stored life energy. So if you die with lots of money, you’ve in effect “wasted” some of your precious life energy. Similarly, if you encounter mobility issues or other afflictions in your 70s or 80s, you may not be able to travel and engage in many activities that you may have thought you had been “saving up” for.

A treatise on Life’s Brevity and appreciating the moment

Amazon.com

The companion book is Four Thousand Weeks : Time Management for Mortals, by Oliver Burkeman. If you haven’t already guessed, 4,000 weeks is roughly the number of weeks someone will live if they reach age 77 [77 years multiplied by 52 equals 4,004.] Even the oldest person on record, Jeanne Calment, lived only 6,400 weeks, having died at age 122.

I actually enjoyed this book more than Die with Zero. It’s more philosophical and amusing in spots. Some of the more intriguing chapters are “Becoming a better procrastinator” and “Cosmic Insignificance Therapy.” I underlined way too many passages to flag here but here’s a sample from the former chapter: “The core challenge of managing our limited time isn’t about how to get everything done – that’s never going to happen – but how to decide most wisely what not to do … we need to learn to get better at procrastinating.”

 

 

The Benefits of Geographic Diversification for your Portfolio

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TSInetwork.ca

One key factor in successful investing — apart of course from picking good stocks (or ETFs that invest in those stocks) — is to diversify your portfolio.

Our main suggestion would be to make sure that your holdings are always well-balanced among most if not all of the five economic sectors: Manufacturing, Consumer, Utilities, Resources, and Finance.

That way, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or changes in investor fashion.

By diversifying across the sectors, you also increase your chances of stumbling upon a market superstar: a stock that does two to three or more times better than the market average. These stocks come along every year. By nature, though, their appearance is unpredictable.

It’s also essential to diversify within each sector. For example, you shouldn’t let technology stocks dominate your Manufacturing holdings, nor let telecommunications or phone stocks dominate your Utilities holdings.

What about geographic diversification?

We’ve long said that most Canadian investors should hold the bulk of their portfolio in high-quality, dividend-paying Canadian stocks well balanced across the five sectors (or ETFs that hold those stocks).

We also feel that virtually all Canadian investors should have, say, 20% to 30% of their portfolios in U.S. stocks (many of which also offer you international exposure through their foreign operations).

Beyond that, top international stocks or ETFs can also add valuable diversification to your portfolio—through exposure to foreign businesses and to foreign currencies.

To demonstrate how geographical diversification can benefit investors, we examined the risks and returns of an ETF portfolio consisting of 50% Canadian equities, 30% U.S. equities, and with 20% in equities around the rest of the world. We then compared the risk and returns of this diversified portfolio with a broad Canada-only index.

Geographic diversification can cut risk and raise returns

Our results showed that the risk of the diversified portfolio was lower than the Canadian-only portfolio, while the returns were higher. Continue Reading…

Justwealth: The advantages of Evidence-based Investing

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One of the most important developments in the financial world in recent years has been the growth of evidence-based investing. But what exactly is it? In the first of a new series of exclusive articles for Justwealth, the UK based author and journalist Robin Powell explains why founding your investment strategy on four basic principles can dramatically improve your chances of achieving your long-term goals.

By Robin Powell, The Evidence-Based Investor 

Special to Financial Independence Hub

It takes between seven and nine years to train to be a doctor in Canada. For surgeons it takes as many as 14. Even then, both doctors and surgeons are required to engage in continuous learning throughout their careers.

Becoming a financial adviser, investment consultant or money manager is considerably less onerous. What’s more, unless you deliberately set out to defraud your clients, you’re unlikely to be stripped of your right to operate.

Of course, there are still examples of poor medical practice. It was only as recently as the early 1990s that a group of epidemiologists at McMaster University in Hamilton, Ontario, first coined the phrase evidence-based medicine. Sadly, though, professional malpractice in the investing industry is far more common, and there are many who have worked in it for decades and yet act as if they have little or no grasp of the evidence on how investing works.

A glaring illustration of this is a study published in May 2018 called The Misguided Belief of Financial Advisers. The researchers analyzed the returns achieved by around 4,400 advisers across Canada: both for their clients and for themselves. They found that the advisers made the same mistakes investing their own money as they did when investing their clients’ money.

For example, they traded too frequently, chased returns, preferred expensive, actively managed funds, and weren’t sufficiently diversified. All of those things have been shown, time and again, to lead to lower returns. On average, the clients of the advisers analyzed underperformed the market by around three per cent a year: a huge margin.

What is evidence-based investing?

In recent years, we’ve seen the development of what’s called evidence-based investing (EBI). Like evidence-based medicine, it entails the ongoing critical appraisal of evidence, rather than relying on traditional practices or expert opinions.

So what sort of evidence are we talking about? Essentially there are four main elements to the evidence that underpins EBI.

First, the evidence is based on research that is genuinely independent; in other words, the research wasn’t paid for or subsidized by organizations with a vested interest in the outcome.

Secondly, it’s peer-reviewed. This means that the findings are published in a peer-reviewed journal which is closely examined by experts on the subject.

Thirdly, the evidence is time-tested. Investment strategies often succeed over short time periods, but fail over longer ones. Investors should disregard any evidence that hasn’t stood the test of time.

Finally, the evidence results from rigorous data analysis. As everyone knows, data can be very misleading if it hasn’t been properly analysed.

The good news is that, even when all four of these filters are strictly applied, there is still plenty of evidence to inform our investment decisions. Since the 1950s, finance departments at universities across the globe have produced many thousands of relevant studies.

What does the evidence tell us?

What, then, are the main lessons from academic research on investing? This is a wide-ranging subject, and one we’ll look at in more detail in future articles, but there are four main takeaways.

Markets are broadly efficient

Because markets are competitive and prices reflect all knowable information, it’s very hard to identify stocks, bonds or entire asset classes which are either undervalued or overvalued at any one time. No, prices aren’t perfect, but they’re the most reliable guide we have as to how much a security is worth.

Diversification is an investor’s friend

It’s vital for investors to diversify across different asset classes, economic sectors and regions of the world. As well as reducing your risk, diversification can also improve your returns in the long run, and it is rightly referred to as “the only free lunch in investing.”

Costs make a big difference

The investing industry and the media tend to focus on investment performance. But while performance comes and goes, fees and charges never falter. Continue Reading…