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.

Invest in the Index, not in individual stocks

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By Alain Guillot

Special to Financial Independence Hub

Every day, there are many companies experiencing significant price drops. There is a section on Yahoo Finance called “Day Losers” where the biggest losers of the day are highlighted.

Are those good buying opportunities?

Maybe.

All of our favorite Blue Chip stocks have been part of this list. Some of those stocks have recovered, while others continued their downward slide. The truth is that we never know for sure which stock will recover and which one will just disappear. Remember Nortel, Nokia, Kodak, BlackBerry, Blockbuster, RadioShack, Toys R Us? These were stock market leaders that never recovered.

On the other hand, for those investors who have bought the U.S. or Canadian index, they have always seen their money coming back after any major drop.

Instead of discussing the pros and cons of buying any individual stock, I think we should look at the big picture and talk about the difference between buying a basket of individual stocks when they are down versus buying the index.

The main difference between buying any individual stock and buying the index when they both go down is that, up until now, the index has always bounced back, while some of the blue-chip stocks that we have learned to love/trust might never recuperate. Kodak, Blockbuster and Nokia never recuperated. They slowly declined into the graveyard of market history.

On the other hand, the S&P 500, which came into existence in 1957, has seen many deep declines and it has always recovered:

  • Black Monday: Oct. 19, 1987
  • Dotcom bubble crash: 2000-2002
  • Global financial crisis: 2008-2009
  • COVID-19 pandemic: 2020

Why? Because, unlike individual stocks, the S&P 500 is always changing.

S&P 500 from 1927 to 2023 from 20 to 4,090; a 17,620% gain.

Looking at this graph, you might think that you could have invested $20 in the most popular stocks of 1927 and just waited to get rich. But it doesn’t work out that way. The companies that represented U.S. stocks in 1927 are very different from the companies that represent U.S. stocks in 2023. Most of the original companies composing the S&P 500 no longer exist, but the S&P is still going strong.

Regardless of how quickly companies are moving in and out of the index, you can see that owning an index is fundamentally different from owning a basket of individual stocks. While your basket of individual stocks might remain the same over time, the index will not.

There are many benefits provided to index investors.

We get the highest returns and pay the lowest fees. Hundreds of analysts go on a hunt for the best stocks; they spend their time, money, and energy crunching numbers, buying the stocks that are going up and selling the stocks that are going down, and we get to reap the rewards.

According to the SPIVA Report, the S&P 500 index has outperformed 92% of money manager professional over the past 15 years, and the cost to us is usually 0.05%/year. There is no better deal in town.

Alain Guillot is a part time event photographer, part time Salsa teacher, and part time personal finance blogger. He came to Quebec as an immigrant from Colombia. Due to his mediocre French he was never able to find a suitable job, so he opened a Salsa/Tango dance school and started his entrepreneurship journey. Entrepreneurship got him started into personal finance and eventually into blogging. Now he lives a Lean FIRE lifestyle and shares his thoughts in his blog AlainGuillot.com. This blog originally appeared on his blog on Oct. 9, 2023 and is republished here with permission. 

Misleading Retirement Study?

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Ben Carlson, A Wealth of Common Sense

By Michael J. Wiener

Special to Financial Independence Hub

 

Ben Carlson says You Probably Need Less Money Than You Think for Retirement.  His “favorite research on this topic comes from an Employee Benefit Research Institute study in 2018 that analyzed the spending habits of retirees during their first two decades of retirement.”  Unfortunately, this study’s results aren’t what they appear to be.

The study results

Here are the main conclusions from this study:

  • Individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets.
  • Those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent.
  • Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median.
  • About one-third of all sampled retirees had increased their assets over the first 18 years of retirement.

The natural conclusion from these results is that retirees aren’t spending enough, or that they oversaved before retirement.  However, reading these results left me with some questions.  Fortunately, the study’s author answered them clearly.

At what moment do we consider someone to be retired?

People’s lives are messy.  Couples don’t always retire at the same time, and some people continue to earn money after leaving their long-term careers.  This study measures retirement spending relative to the assets people have at the moment they retire.  Choosing this moment can make a big difference in measuring spending rates.

From the study:

Definition of Retirement: A primary worker is identified for each household. For couples, the spouse with higher Social Security earnings is the assigned primary worker as he/she has higher average lifetime earnings. Self-reported retirement (month and year) for the primary worker in 2014 (latest survey) is used as the retirement (month and year) for the household.

There is a lot to unpack here.  Let’s begin with the “self-reported retirement” date.  People who leave their long-term careers tend to think of themselves as retired, even if they continue to earn money in some way.  Depending on how much they continue to earn, it is reasonable for their retirement savings either to decline slowly or even increase until they stop earning money.  What first looks like underspending turns out to be reasonable in the sense of seeking smooth consumption over the years.

The next thing to look at is couples who retire at different times.  Consider the hypothetical couple Jim and Kate.  Jim is 6 years older than Kate, and he is deemed to be the “primary worker” according to this study’s definition.  Years ago, Jim left his insurance career and declared himself retired, but he built and repaired fences part time for 12 more years.  Kate worked for 8 years after Jim’s initial retirement.

Their investments rose from $250,000 to $450,000 over those first 8 years of retirement, declined to $400,000 twelve years after retirement, and returned to $250,000 after 18 years.  Given the lifestyle Jim and Kate are living, this $250,000 amount is about right to cover their remaining years.  Although Jim and Kate have no problem spending their money sensibly, they and others like them skew the study’s results to make it seem like retirees don’t spend enough.

What is included in non-housing assets?

From the study:

Definition of Non-Housing Assets: Non-housing assets include any real estate other than primary residence; net value of vehicles owned; individual retirement accounts (IRAs), stocks and mutual funds, checking, savings and money market accounts, certificates of deposit (CDs), government savings bonds, Treasury bills, bonds and bond funds; and any other source of wealth minus all debt (such as consumer loans).

So cottages and winter homes count as non-housing assets.  This means that a large fraction of many people’s assets is a property that tends to appreciate in value.  Even if they spend down other assets, the rising property value will make it seem like they’re not spending enough.  It is perfectly reasonable for people to prefer to keep their cottages and winter homes rather than sell them and spend the money. Continue Reading…

Should you have 100% of your portfolio in stocks?

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The 100% equity ETFs from iShares and Vanguard/Canadian Portfolio Manager

By Mark Seed, myownadvisor

Special to Financial Independence Hub

A reader recently asked me the following based on reading a few pages on my site:

Mark, does it make sense to have 100% of your portfolio in stocks? If so, at what age would you personally dial-back to own more cash or GICs or bonds? Thanks for your answer.

Great question. Love it. Let’s unpack that for us. 

References:

My Dividends page.

My ETFs page.

Should you have 100% of your portfolio in stocks?

Maybe as a younger investor, you should.

Let me explain.

Members of Gen Z, which now includes the youngest adults able to invest (born in the late-1990s and early-2000s), represent a cohort that could be investing in the stock market for another 60 more years. 

According to a chart I found on Ben Carlson’s site about stuff that might happen in 2023, over 60+ investing years in the S&P 500 (as an example) historical indexing performance would suggest you’d have a better chance of earning 20% returns or more in any given year than suffering an indexing loss. Pretty wild.

S&P 500 - 100 stocks

Source: A Wealth of Common Sense. 

Shown another way as of early 2023:

S&P 500 Returns Updated

Source: https://www.slickcharts.com

This implies younger investors, in my opinion, should at least consider going all-in on equities to take advantage of long-term stock market return power when they are younger given:

  1. As you age, your human capital diminishes – your portfolio (beyond your home?) can become your greatest asset.
  2. Younger investors can also benefit from asset accumulation from periodic price corrections – adding more assets in a bear market; allowing assets to further compound at lower prices when corrections or crashes occur (i.e., buying stocks on sale).

Consider in this post on my site:

In the U.S.:

  • a market correction occurs at least once every 2 years, of 10% or more
  • a bear market at least every 7 years, where market value is down 20% or more
  • a major market crash at least every decade.

And in Canada for additional context:

The C.D. Howe Institute’s Business Cycle Council has created a classification system for recessions, grouping them together by category.

According to the council: Continue Reading…

An ETF Strategy with Exposure to High Credit Security and High Monthly Income

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Harvest Premium Yield Treasury ETF (HPYT)

Harvest ETFs this week announced its new Harvest Premium Yield Treasury ETF, now available.

By Michael Kovacs, President & CEO of Harvest ETFs

(Sponsor Blog) 

Canadian investors have been forced to adapt to aggressive interest rate hikes from the Bank of Canada. This was preceded by a prolonged period of low interest rates that continued since the 2007-2008 Financial Crisis.

Some experts and analysts are projecting that interest rates are at or near the peak of this tightening cycle. In this environment, an optimal investment strategy factors in high interest rates while preparing for the eventual downward move that many analysts expect in 2024 or later. When the period of high interest rates subsides, there may be great potential for capital appreciation and income generation with an investment strategy that captures those benefits/opportunities. That is where the brand new HPYT ETF comes into play!

What is it?

HPYT is an ETF that holds several long-duration US Treasury ETFs and actively manages a covered call write position on those ETFs to generate an attractive monthly income.  It has an approximate yield of 15%, representing the highest fixed-income yield in Canada. The approximate yield is an annualized amount comprised of 12 unchanged monthly distributions (the announced distribution of 0.15 cents on Sept. 28 multiplied by 12) as a percentage of the opening market price of $12 on September 28, 2023.   Continue Reading…

Retired Money: Time for a Newsletter Purge?

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My latest MoneySense Retired Money column suggests that for retirees and semi-retirees like myself, it may be time for a newsletter purge. You can find the full column by clicking on the highlighted text here: Check your inbox: Investing newsletters can cost you more than a sub fee.

The column is a frank confession of some rather painful investment losses sustained the last three years, mostly from recent IPOs or SPACs.

When I asked myself where some of these investment “ideas” came from I realized that almost all of them came from investment newsletters published by various American stock pundits, self-proclaimed or otherwise, including two I mention below.

The worst of these is supposed EV play Lordstown [RIDE], down in my account an astounding 100%, following its recent bankruptcy. And no, I did not renew the newsletter responsible, which I have been persuaded I should not divulge here.

Credit another Letter for tipping me to such losers as Matterport (MTTR/Naqsdaq: down 83% after its recommendation), Zoom (ZM), down 80% and Coinbase (COIN), down a whopping 78%. I won’t name his newsletter as it doesn’t matter: the culprit responsible left some time in 2022, his patience exhausted long before the “Hold with strong hands” patience he recommended for his hapless readers.

When I further asked myself how it came about that I subscribed to these newsletters in the first place, I realized that well more than half were the result of email pitches and — typically — a US$49 per year offer. You know the drill: get 3 or 4 “special reports” that divulge the ticker symbols of these moonshots that are as apt to crash your portfolio as they are the hoped-for 10-baggers.

From a risk management perspective, I tend to invest far less in such speculations (for that’s what they are), compared to blue-chip individual stocks, broadly based ETFs or GICs, but those $1,000 or $1,500 per spec losses do add up.  The MoneySense column goes into some detail on the hazards of holding such losers in registered accounts, versus tax-loss selling in taxable ones.  [The tax tail often waves the investment dog in both directions.}

Stop biting on initial pitches, then stop renewing

So job one is to stop clicking on those email pitches. Second, do not renew them when they come up for it, typically after a year. Beware automatic renewals: you may have to contact the publishers directly to cancel.

A few exceptions

I don’t want to throw out the baby with the bathwater and it’s only fair to say there may be the odd exception, particularly here in conservative Canada. I have long been on the record for reading and sometimes acting on the recommendations of Patrick McKeough of The Successful Investor and his stable of newsletters like Wall Street Forecaster and Canadian Wealth Advisor. Most of Patrick’s stock picks are well-known blue chips. When he does go further afield with foreigner domestic juniors he identifies them as being riskier and suitable mostly for “aggressive” investors. Fair enough! Incidentally, Patrick kindly allows us to run an article here on the Hub roughly on a monthly basis: you can do worse than act on recommendations like this recent instalment: Use these successful investment strategies for your portfolio success.

I also respect the work of fellow Canadian Gordon Pape, who is a regular writer for the Globe & Mail. For the most part I find the Motley Fool to be decent, although I tend to focus on their free audio podcasts rather than their paid-for newsletters. At one point, in fact, I wrote for them.

Minimize media market noise

The MoneySense column also mentions some related topics, like monitoring cable TV all-news channels that also run stock quotes. We’ve looked before on the Hub about steps to take to avoid investment noise and the Fear of Missing Out (aka FOMO: currently, it’s all about AI). CFA and investment advisor Steve Lowrie, also a Hub contributor, and one who I initially met through the aforementioned Pat McKeough, captured this nicely in this blog: SPACs, NFTs and another Tech-inspired Silly Season. Continue Reading…