As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”
Recently a friend asked, “Pat, I see that several prominent Canadian investor advisors recently wrote articles that said it’s a bad time to buy bonds right now. Do you agree?”
He was surprised when I told him I haven’t bought any bonds for myself since the 1990s. I haven’t bought any for clients in the last couple of decades, except on client request.
In the 1990s, I used to buy “strip bonds” for myself and my clients, as RRSP and RRIF investments. This was the Golden Age of bond investing. Back then, high-quality bonds yielded almost as much, pre-tax, as the historical returns on stocks. In addition, they provided fixed income that simplified financial planning.
Bonds have tax disadvantages, of course. But you can neutralize those disadvantages by holding your bonds in RRSPs and other registered plans.
The big difference back then was that bond yields and interest rates were much higher than usual. That’s because we were still coming out of (or “cleaning up after,” you might say) the inflationary bulge of the 1970s and 1980s.
In the 1980s, government policies pushed up interest rates and took other measures to hobble inflation, and it worked. But interest rates stayed high for a long time after the government polices broke the back of inflation: kind of like finishing the antibiotic after the infection goes away.
High-quality stocks vastly superior to Bonds
Long-time readers know my general view on the stocks-versus-bonds dilemma. When interest rates are as low as they have been in recent decades, high-quality stocks on the whole are vastly superior to bonds. (See below for a further explanation). However, you have to understand the differences between the two. For one thing, stocks are more volatile than bonds. But volatility and safety are two different things.
Volatility refers to sharp price fluctuations, often due to short-term uncertainty and the randomness of short-term market movements. Safety refers to the risk of permanent loss. Continue Reading…
Markets ended the first part of the year on a particularly sour note. Over the past four months, the MSCI All Country World Stock Index fell 12.9% in USD terms. High quality bonds, which have held up well in past episodes of stock market weakness, have failed to provide any relief, with the Bloomberg Global Aggregate Bond index falling 11.3%. Given the “nowhere to hide” atmosphere of markets, even a 60%/40% global balanced stock/bond portfolio suffered a loss of 12.3%. Markets have entered a phase which differs from what we have witnessed over the past several years (and arguably over the past 40). In the following, we have done our best to share some of our most closely held beliefs about markets and investing, which we hope can serve as a guidepost for helping investors navigate the current market regime.
It just doesn’t matter … until it does
Most of the time, it doesn’t matter much whether your portfolio is positioned aggressively, defensively, or anywhere in between. Nonetheless, the fact remains that the big money is made or lost during the most violent bull and bear markets.
Defining a “normal” return for any 12-month period as lying between -20% and 20%, the S&P 500 Index behaved normally during 65.7% of all rolling 12-month periods between 1990 and 2021. Of the remaining 34.3% of periods, 29.0% were great (above 20%) and 5.4% were awful (worse than -20%)
Average 12-Month returns during Normal, Great, and Awful periods:
As the table above demonstrates, during normal periods there has not been a significant difference in average returns between the S&P 500 Index, the Bloomberg U.S. Aggregate Bond Index, and a balanced portfolio consisting of 60% of the former and 40% of the latter. It is another story entirely during the 34.3% of the time when bull and bear markets are in their most dynamic stages. The good news is that there are some key signals and rules of thumb that offer decent probabilities of reaping respectable gains in major bull markets while avoiding the devastation from the worst phases of major bear markets.
Don’t fight the Fed
It is with good reason that the “Don’t fight the Fed” mantra has achieved impressive longevity and popularity. The monetary climate – primarily the trend in interest rates and central bank policies – is the dominant factor in determining both the stock market’s major direction as well as which types of stocks out or underperform (sectors, value vs. growth, etc.). Once established, the trend typically lasts from one to three years. When central banks are cutting rates and monetary conditions become more accommodating, it’s a good bet that it won’t be long before stocks deliver attractive returns. In late 2008/early 2009, central banks responded to the collapse in financial markets by cutting rates aggressively and embarking on quantitative easing programs. This spurred a rapid recovery in asset prices. Similarly, to offset the economic fallout of the Covid pandemic, monetary authorities flooded the global economy with money, which acted as rocket fuel for stocks. Conversely, when central banks are raising rates and tightening the screws on the economy, the effect can range from limiting equity market gains to causing a full-fledged bear market (not an attractive distribution of outcomes). Once the Fed began hiking rates in mid-1999, it wasn’t long before stocks found themselves in the throes of a vicious bear market that cut the S&P 500 Index in half over the next two to three years. Similarly, when the Fed raised its target rate from 1% in mid-2004 to 5.25% by mid-2006, it set the stage for a nasty collapse in debt, equity, and real estate prices. When it comes to stocks, bonds, real estate, or most other asset classes, it’s all fun and games until rates go up, which ultimately causes things to break.
Markets don’t care what you think: NEVER fight the tape
The importance of not fighting major movements in markets cannot be overemphasized. Repeat as necessary: Fighting the tape is an open invitation to disaster. This advice not only applies to the general level of stock prices, but also to the relative performance of different sectors, value vs. growth, etc.
Ignorance, which can cause people to fight market trends, is a valid justification for making mistakes during the earlier stages of one’s investment experience. But after suffering the consequences, there are neither any excuses nor mercy when you fight the tape a third or fourth time. The markets only allow so many mistakes before they obliterate your wallet. The perils of following rather than fighting trends are well summarized by investing legend Marty Zweig, who compared fighting the tape and trying to pick a bottom during a bear market to catching a falling safe. Zweig stated: “If you buy aggressively into a bear market, it is akin to trying to catch a falling safe. Investors are sometimes so eager for its valuable contents that they will ignore the laws of physics and attempt to snatch the safe from the air as if it were a pop fly. You can get hurt doing this: witness the records of the bottom pickers on the street. Not only is this game dangerous, it is pointless as well. It is easier, safer, and, in almost all cases, just as rewarding to wait for the safe to hit the pavement and take a little bounce before grabbing the contents.” To be clear, there is no free lunch in investing. Being on the right side of major market moves necessitates getting whipsawed over the short-term every now and then. Inevitably, you will sometimes be zagging when you should be zigging and zigging when you should be zagging. You can get head faked into cutting risk only to watch in frustration as markets rebound, and you can also get tricked into becoming aggressive just before a decline in stock prices. The stark reality is that only geniuses and/or liars buy at the lows preceding major uptrends and exit the very top before the onset of bear markets. Realistically, you can only hope to catch (or avoid) the bulk of the big moves. Getting whipsawed every now and then is a small price to pay for reaping attractive returns during the good times while avoiding large bear market losses.
You don’t need to be perfect. But you’d better be flexible
It doesn’t matter whether you are an aggressive or conservative investor, so long as you are a flexible one. The problem with most portfolios (even professionally managed ones) is that they are not flexible. Conservative investors tend to stick with defensive portfolios heavily weighted in high grade bonds, utility stocks, etc. They never reap huge gains, but they also never get badly hurt. Aggressive investors, on the other hand, often buy risky stocks or speculate in real estate using high degrees of leverage. They make fortunes in boom times only to lose it all in bad times when the proverbial tide recedes.
Neither approach is sound by itself. Being aggressive is okay, but there are nonetheless times to gear down and be a wallflower. By the same token, there are market environments in which even conservative investors should be somewhat aggressive. Continue Reading…
Spending a week in Napa’s wine country, enjoying the good life during retirement, and meeting new friends. Sounds like a dream, right? Having the chance to do all this and be paid might sound too good to be true, but I assure you: it’s possible!
For more than a year, I’ve been using an app called Instawork to pick up shifts whenever and wherever I want. I found the platform through a friend and began using it to pick up shifts in order to build a work schedule that best suits my personal schedule. It’s been a wonderful experience where I’ve been able to meet new people and experience different facets of the world. As a friendly guy who likes socializing, it’s been a perfect fit for me.
Prior to using Instawork, I worked as a journalist. That ranks up there as one of the most stressful careers you can have. That kind of stress can take a toll on you after a while and with me it did. The hospitality shifts I’m working now are much more relaxed and I’m truly enjoying myself. From coordinating and assisting at events throughout the year to interacting with clients and guests at a variety of different locations, no two shifts are the same. As an added bonus, I can expand my budding coaching career and attract new clients from different walks of life.
Despite Great Resignation, many still want to work
There’s a lot of talk right now in the news about the Great Resignation and the Great Reshuffle and how people don’t want to work or how the economy is dying. The pandemic shook everything up and made a lot of people reevaluate how they were living their lives and what they wanted out of work. In my view, the economy is not dying and people absolutely do want to work. They just want to do things their way, on their terms, be treated fairly, and to get paid well while doing it. The country and its hourly workers are in a period post-pandemic, where people are just transitioning from one place to another and deciding what type of jobs works best for them. Continue Reading…
To reduce future tax bills, now is the time to start planning
By Rob Cordasco
Special to the Financial Independence Hub (American Content)
With this year’s income-tax-filing deadline finally past, you may have sat back with a sigh of relief, happy to forget about taxes for another year. But that’s a mistake because it’s already time to start thinking about taxes for next year if you hope to lower the amount you ultimately will owe, says Rob Cordasco (www.cordasco.cpa), a CPA and author of A Framework for Growth: Smart Financial and Tax Planning Strategies Throughout the Entrepreneurial Life Cycle.
“People often make the error of only worrying about taxes when it’s time to file,” Cordasco says. “By then, your taxes are pretty much locked in. Although you can’t avoid taxes, you can take steps to minimize them. But this requires proactive planning – estimating your tax liability, looking for ways to reduce it and taking timely action.”
And timely, he says, isn’t waiting until the week before the filing deadline. The real deadline for taxes in the United States – at least for taking action that could save you money – is Dec. 31 of the tax year, he says. (One exception is that you may be able to make a tax-deductible IRA contribution right up to the filing deadline if you meet certain criteria.)
Cordasco says some things to consider that can help you reduce the tax bill you will owe come April 2023, include:
“Bunch” charitable donations
Many people take the standard deduction when they file their taxes because that’s higher than their total itemized deductions. But Cordasco says you might benefit from “bunching” your charitable donations in alternating years, raising the amount you could itemize every other year. Here’s how that would work: If you make a large donation on Jan. 1 and another on Dec. 31, those donations are essentially a year apart, but they fall within the same tax year for itemizing purposes. In effect, you make two years worth of charitable donations in one tax year. Continue Reading…
To help you live more frugally, we asked finance professionals and business leaders this question for their best advice. From buying used or refurbished items to cutting down on food spending, there are several practical steps to help you adopt a more frugal lifestyle.
Here are eleven simple ways to practice frugality:
Buy Used or Refurbished Items
Understand the Time Value of Money
Spend Cash
Eliminate Unnecessary Subscriptions
Adopt Eco-friendly Lifestyle
Understand the Time Value of Money
Sell Whatever you don’t Need
Invest in Things that Add Value to Your Life
Purchase Quality over Quantity
Live Within Budget
Develop a Habit of Prioritizing
Cut Down on Food Spending
Buy Used or Refurbished Items
You can pay a fraction of the price to buy used or refurbished items. From furniture to electronics, books, clothing, and more, you may be surprised how much treasure can be found online or in thrift stores. A whole house or office could be furnished or decorated with used or refurbished items, and you’ll save hundreds or even thousands of dollars in the process. Plus, the stock is always changing, so with each visit to a thrift store there’s always a chance to find something unique. You can also look out for neighborhood garage sales and online social media sales groups. –Brian Greenberg, Insurist
Spend Cash
I am a big fan of carrying cash. It’s easy to get into the habit of swiping your debit card for every purchase, but you can lose track of how much money you have if you’re not careful. That’s why I always prefer to withdraw fun money from the bank so I always know exactly how much I have to spend. This strategy really helps me to be more mindful of my purchases. Understanding frugality is a skill everyone should master. —Jae Pak, Jae Pak MD Medical
Eliminate Unnecessary Subscriptions
Try to limit your subscriptions. For instance, if you have both Netflix and Hulu, perhaps you can decide to commit to just one of these, since they both have plenty of movie and TV show options. Consider the things that you do not really need to be spending money on. Once you eliminate these things, the money saved will add up. –Jared Hines, Acre Gold
Adopt Eco-friendly Lifestyle
I have found that adopting an eco-friendly lifestyle can really reduce expenditures. LED bulbs generate the same amount of light while using much less energy, and setting my thermostat lower has reduced both gas and electric bills in winter. It also never hurts to turn off lights whenever you’re not using them. As energy prices go up, an eco-friendly life can help ease some of your financial burden. —Candie Guay, Envida
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