Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

The History of Shiny New Toys: Are U.S. Tech valuations stretched?

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Just as I thought it was going alright
I found out I’m wrong when I thought I was right
It’s always the same, it’s just a shame, that’s all
I could say day and you’d say night
Tell me it’s black when I know that it’s white
Always the same, it’s just a shame, and that’s all

— That’s All, by Genesis

Shutterstock/Outcome

By Noah Solomon

Special to Financial Independence Hub

As we enter 2025, the general consensus is that stocks are set to deliver another year of decent returns. Most strategists contend that we will be in a goldilocks environment characterized by positive readings on economic growth, profits, inflation, and rates.

This sentiment is particularly evident in the current valuation level of the S&P 500 Index. Regardless of which metric one uses, the index is extremely elevated relative to its historical range. Interestingly, U.S. stocks are an outlier when compared to other major markets (including Canada), which are trading at valuations that are in line with historical averages.

 

The Best of Times and the Worst of Times

Unfortunately, the history books are quite clear about what can happen to markets that attain peak valuations. The four largest debacles in the history of modern markets were all preceded by peak valuations.

  • In 1929, the U.S stock market traded at the highest PE multiple in its history up to that time. This lofty multiple presaged the worst 10 years in the history of the U.S. stock market.
  • In 1989, the Japanese stock market was trading at 65 times earnings. The aggregate value of Japanese stocks exceeded that of U.S. stocks despite the fact that the U.S. economy was three times the size of its Japanese counterpart. Soon after, things went from sensational to miserable, with Japanese stocks suffering a particularly prolonged and steep decline.
  • In early 2000, the S&P 500 Index, aided and abetted by a tremendous bubble in technology, media, and telecom stocks, reached the highest multiple in its history. Not long thereafter, the index suffered a peak trough decline of roughly 50% over the next few years.
  • In early 2008, the S&P 500 stood at its highest valuation in history, with the exception of the multiples that preceded the Great Depression and the tech wreck. The ensuing debacle brought the global economy to the brink of collapse and required an unprecedented amount of monetary stimulus and government bailouts.

The bottom line is that markets have historically been a very poor predictor of the future. At times when asset prices were most convinced of heaven, they could not have been more wrong. The loftiest valuations have not merely been followed by tough times, but by the worst of times. Time and gain, peak multiples have foreshadowed the worst results, which brings to mind one of my favorite quotes from John Kenneth Galbraith:

“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”

The Common Feature

There is one common feature to these sorrowful tales of peak multiples which ended in tears. In each case, peak valuations followed a prolonged period of near-perfect environments characterized by strong economic and profit growth unmarred by any obvious clouds on the horizon.

  • The years preceding the Great Depression entailed an economy that had not merely been growing but booming.
  • Prior to 1989, the Japanese economy enjoyed decades of torrid growth, prompting some economists and strategists to predict that it would eventually eclipse the U.S. economy.
  • In early 2008, the U.S. economy was being propelled by a real estate bubble underpinned by an “it can only go up” mindset and a related explosion in lax credit and lending standards.

The S&P 500 Index currently stands at its highest multiple in the postwar era, save for the late 1990s tech bubble. Optimists justify this development by pointing to what they believe to be a rosy future with respect to the U.S. economy, earnings, inflation, and interest rates. Sound familiar?

I’m not saying that highly elevated multiples necessarily foreshadow imminent doom. However, when juxtaposing the current valuation of the S&P 500 with historical experience, one should consider becoming more defensive. As famous philosopher George Santayana stated, “Those who cannot remember the past are condemned to repeat it.”

Driving without Airbags or Seatbelts

The underlying cause of the aforementioned market crashes is not merely economies and profits that were contracting, but that asset prices were priced for exactly the opposite. This left markets woefully exposed when the proverbial music stopped.

Think of market risk like you think about driving a car. If you are driving a car with airbags and you are wearing a seatbelt, then chances are you will emerge with minimal or no injuries if you get into an accident. However, if your car has no airbags and you are not wearing a seatbelt, then the chances that you will sustain serious injuries (or worse) are materially higher. Similarly, when multiples are at or below average levels and profits hit a rough patch, the resulting carnage in asset prices tends to be muted. Conversely, if any financial bumps in the road occur when valuations lie significantly higher than historical averages, then the ensuing losses will be much more severe. Also, even if you manage to complete your journey without any mishaps, it’s not clear that having no airbags and not wearing a seatbelt made your ride much more enjoyable or comfortable than if this had not been the case. Continue Reading…

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…

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…

Retired Money: Tax Brackets, Income Thresholds, Inflation Factors & other things retirees need to consider going into 2025

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My latest MoneySense Retired Money column looks at a variety of tax and savings limits changes that are effective early in 2025. Click on the highlighted headline for the full column: What retirees need to know about tax brackets for 2025.

As the column notes, at or near Retirement taxes and inflation are the two big threats to preserving enough wealth to last a lifetime.  The tax burden hits home with the annual tax-filing deadline in April, but the time to start thinking about the yearly ordeal is before year-end.

The complexity of this task is compounded by almost-annual changes to tax brackets, the Basic Personal Amount, OAS thresholds, inflation adjustments and much more. For starters, I recommend reading an excellent article by CIBC Wealth’s tax guru, Jamie Golombek, which appeared in the Financial Post here on Nov. 23rd, shortly after the Canada Revenue Agency released its new tax numbers for the year 2025.

 Let’s look first at inflation, the second serious scourge retirees face if they live long enough. Here, a useful tool suggested by certified financial planner Morgan Ulmer is Statistics Canada’s Personal Inflation Calculator, which lets you compare your personal inflation rate to the general CPI.

Ulmer, of Toronto-based Caring for Clients, sees the higher tax brackets and inflation adjustments as an “opportunity for retirees to build a savings reserve.” CPP is indexed to inflation yearly while OAS is indexed quarterly.  So “if a retiree is able to increase their spending at a rate that is less than CPI, the difference could be saved as an emergency reserve or invested in a TFSA.”

 Inflation and Tax Bracket changes

 Back to some key data cited by Jamie Golombek.  The inflation rate used to index 2025 tax brackets and amounts will be 2.7%: just over half the 4.7% in effect in 2024.  The good news is that the Basic Personal Amount (BPA) on which no federal tax is levied rises to $16,129 in 2025: It was $15,000 in 2023.

All five federal income tax brackets are indexed to that 2.7% inflation rate. In 2025, the bottom federal tax bracket of 15% will apply to incomes between zero and $57,375. The second lowest bracket of 20.5% will apply to incomes between $57,375 and $114,750. The 26% bracket applies to income between $114,750 and $177,882, while incomes between $177,882 and $253,414 will attract a 29% federal tax. After that the federal rate will kick in at 33%.

Below is a table summarizing that information prepared for MoneySense:

MoneySense.ca

 Don’t forget there will be additional provincial taxes on top of the federal haul, also indexed to inflation at various provincial rates.

 What is relevant for those in the Retirement zone is the higher threshold on Old Age Security: in 2025, according to Canada.ca, OAS begins to get clawed back for taxable income of $90,997.  OAS benefits disappear entirely at $148,451 for those aged 65-74 in 2025, and at $154,196 for those 75 or over. Note the OAS clawback is based on individual incomes, not household income.

Deferring CPP and OAS till 70

 Matthew Ardrey, portfolio manager and Senior Financial Planner for Toronto-based TriDelta Financial, agrees that tax brackets, whether federal or provincial, “become more of a consideration in retirement.” For many Canadians receiving employment income on a T-4, there is little we can do as retirees to keep income in the lower tax brackets. But there’s plenty to think about when considering tax minimization and decumulation strategies. Referring to Golombek’s article, Ardrey says that using federal brackets only, taxpayers can receive $57,375 of income and pay very low rates of taxation, especially when the $16,129 basic personal amount is considered.”

Retirees under age 70 can defer CPP and OAS until 70 and try to live on withdrawals from their registered plans instead. With no other income, taxpayers could have almost $50,000 of after-tax income, or $100,000 for tax-paying couples. Continue Reading…