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.

Personal Financial Goals vs. Market Benchmarks: Why your Investment Strategy needs a Different Scorecard

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The only investment benchmark that truly matters is whether you’re on track to meet your financial goals

Canva Custom Creation: Lowrie Financial

By Steve Lowrie, CFA

Special to Financial Independence Hub

We all like to know how we’re doing. It’s human nature. Whether it’s checking your golf handicap, your step count, or your investment portfolio, we’re wired to compare.

When it comes to investing, though, comparing can quietly pull you off course.

A client once asked me, “How’s my portfolio doing compared to the market?” It’s a fair question. But the real question is: how do you define the market?

In my experience, that definition changes over time. When one area of the world is outperforming, that’s suddenly what everyone calls “the market.” Over the last decade or so, U.S. stocks have led the way, so many people now define the market as broad U.S. stock indices like the S&P 500, or even narrower ones such as the NASDAQ, which is largely a measure of technology stocks. But in the decade before that, Canadian stocks did significantly better than U.S. stocks, so back then “the market” meant the TSX Index.

So, the idea of “the market” shifts with whatever happens to be doing best lately. That’s a moving target, and it makes for a poor benchmark.

Here’s the truth: unless your goals, timeline, and tolerance for risk are the same as that shifting version of “the market,” the comparison doesn’t tell you very much. In fact, it can distract you from what truly matters.

The Problem with Traditional Investment Benchmarks

Every night, the financial news tells us how some financial market did that day. The TSX was up. The S&P 500 hit a record. Bonds bounced back.

It’s easy to wonder, “Am I keeping up?”

But those numbers have nothing to do with your life. They’re designed to measure markets, not people. They don’t know when you want to retire, how much income you will need, or how much you can save. The list goes on.

When you start judging your progress against those numbers, you’re borrowing someone else’s scoreboard. It might look objective, but it’s not built for your personal situation.

That’s what we call tracking-error regret: the uneasy feeling that your portfolio is “falling behind” when it isn’t mirroring a benchmark or your friend or neighbour’s latest success story. That feeling often leads investors to make changes that feel smart in the moment but work against their long-term goals.

Setting Personal Investment Benchmarks that actually matter

There’s nothing wrong with measuring performance. The key is to measure what matters.

Ask yourself questions like:

  • Am I on track to retire when I plan to?
  • Can I fund the life experiences that matter most to me?
  • Do I have the financial flexibility to enjoy life without worrying about every headline?

If the answer is yes, you’re succeeding. That’s your true benchmark.

Remember, you can beat an index, or outperform a family member, friend, or colleague, but that doesn’t necessarily mean you’ll meet your financial goals.

It’s not about beating an index. It’s about building the life you want and staying on the path that gets you there.

A Road Trip worth taking: Planning your Financial Journey

Imagine you’ve always dreamed of doing a ski road trip through Western Canada. You plan a route from Calgary to Vancouver, hitting some of the best slopes along the way: Banff, Revelstoke, Big White, Whistler.

It’s not the fastest or cheapest way to get from point A to point B. You could fly to Vancouver in a couple of hours for a fraction of the cost.

But that’s not the point, is it?

The goal of your trip isn’t efficiency. It’s the experience itself: the mountain views, the fresh snow, the time with friends.

That’s exactly how a good investment plan works. It’s designed around your goals, not someone else’s shortcut (which, over time, may end up as a long cut). Your journey might look different from someone else’s, but if it takes you where you want to go, it’s the right route.

The Dangers of Portfolio Comparison and Tracking-Error Regret

When you compare your portfolio to an index or to what someone else is doing, you are like the skier who keeps checking flight prices mid-trip. You will always find a cheaper, faster, or flashier option. But constantly changing direction will make it impossible to finish the journey you started.

Comparison is powerful. It plays on our emotions, especially when markets are volatile or when others seem to be “winning.” But most of the time, those comparisons leave us feeling anxious rather than informed.

Any five- or six-year-old can look at two numbers and tell you which one is bigger. In fact, they will tell you that in a second. That is the easy part. The harder part, the adult part in an investing context, is not only spotting the bigger number, but understanding why one number is bigger than another. Continue Reading…

CDRs vs. ADRs: What Canadian Investors need to know

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Learn the key differences between Canadian Depositary Receipts (CDRs) and American Depositary Receipts (ADRs), and how each structure helps Canadians access international stocks.

Image courtesy BMO/Getty Images.

 

By Erin Allen, CIM, BMO ETFs

(Sponsor Blog)

Investing outside of Canada sounds simple. Just buy shares of Apple, right? But if you’ve ever tried, you know it’s not that straightforward. You’ll need U.S. dollars, your brokerage will likely charge a steep currency conversion fee, and you’ll be exposed to foreign exchange (FX) risk the entire time you hold the stock.

That’s where depositary receipts come in. Canadian Depositary Receipts (CDRs) and American Depositary Receipts (ADRs) are two ways to buy foreign stocks without directly trading on an international exchange. They’re designed to make global investing easier: but they work differently.

In this article, we’ll break down the differences between CDRs and ADRs, which could help you determine which one makes more sense for your portfolio.

Canadian Depositary Receipts (CDRs)

CDRs are a homegrown solution designed to make global stocks more accessible to Canadian investors. Listed on a Canadian exchange and priced in Canadian dollars, CDRs give you exposure to foreign companies: without needing to exchange currency or worry about FX fluctuations.

What makes CDRs unique?

CDRs come with a built-in notional currency hedge. That means the value of the receipt adjusts for movements in the Canadian–U.S. dollar exchange rate (or other foreign exchange rate depending on the stock), helping reduce the impact of currency swings on your return. It’s a structural feature that’s automatically factored into the pricing of each CDR, so you don’t need to manage it yourself.

Another feature is fractional share access. Most CDRs are initially priced around CAD $10 per unit, making them more accessible than buying full shares of blue-chip companies like Tesla or Berkshire Hathaway in U.S. dollars. This structure makes it easier to build diversified portfolios: even with modest amounts of capital, which makes them particularly beginner-friendly.

Why consider CDRs?

Because CDRs trade on a Canadian exchange and in Canadian dollars, there’s no need for currency conversion, which means no currency conversion fees and the impact of currency movements is managed through a built-in notional hedge.

They also streamline global access: the current lineup includes U.S. giants, international developed-market companies.

And you can buy them at any major Canadian brokerage, just like any other Canadian-listed ETF or stock.

Notable examples in BMO’s CDR directory include ex-Canada companies like:

  1. ASML Canadian Depositary Receipt (CAD Hedged) (Ticker: ASMH)
  2. LVMH Canadian Depositary Receipts (CAD Hedged) (LV)
  3. Nintendo Canadian Depositary Receipts (CAD Hedged) (NTDO)
  4. Honda Canadian Depositary Receipts (CAD Hedged) (HNDA)
  5. Tesla (TSLA) BMO Canadian Depositary Receipts (CAD Hedged) (ZTSL)
  6. Berkshire Hathaway (BRK/B) BMO Canadian Depositary Receipt (CAD Hedged) (ZBRK)

With lower dollar-per-share amounts and built-in currency hedging, CDRs are designed to simplify international single-stock investing for Canadian portfolios.

American Depositary Receipts (ADRs)

ADRs are the original gateway to international investing for North American investors. Introduced nearly a century ago, ADRs were designed to make it easier for U.S. investors to buy foreign stocks: without dealing with foreign exchanges, unfamiliar regulations, or foreign currencies.

How ADRs work

ADRs trade in U.S. dollars on major U.S. exchanges like the NYSE and Nasdaq. Each ADR represents shares of a non-U.S. company, held by a U.S. depositary bank. These banks issue the ADRs and handle the underlying foreign shares.

There are two types of ADRs:

  1. Sponsored ADRs are backed by the foreign company itself and often come with better disclosure, liquidity, and alignment with investor interests.
  2. Unsponsored ADRs are issued by banks without the direct involvement of the company. These tend to be less liquid and may not offer the same level of investor information. They trade exclusively on Over-The-Counter (OTC) markets making them very hard to retail investors to access.

Unlike CDRs, most ADRs do not include currency hedging. Your returns will reflect not just the performance of the stock, but also any gains or losses from exchange rate movements between the foreign currency and the U.S. dollar.

Why investors use ADRs

ADRs are widely accepted and highly liquid, with a long track record. They provide convenient access to hundreds of international companies, particularly from developed and emerging markets in Europe, Asia, and Latin America.

But for Canadian investors, there are some added frictions. Because ADRs are priced in U.S. dollars, you’ll need to convert Canadian dollars to buy and sell them. That introduces currency conversion costs and FX risk, which can eat into returns.

For Canadian investors, ADRs still remain a viable route to global diversification. But they come with a few more moving parts compared to Canadian-listed alternatives that need to be accounted for.

CDR vs. ADR: Side-by-side comparison

Feature CDR ADR
Currency CAD USD
Exchange Cboe Canada / TSX NYSE / NASDAQ
Currency Hedge Yes (notional hedge) Typically, no
Fractional Access Yes Varies
Accessibility for Canadians High Limited

Investor considerations: a checklist

When deciding between a CDR and an ADR, the best choice often depends on your specific needs as a Canadian investor. Here’s a checklist of key factors to think about:

  1. ✓ Portfolio diversification with local convenience
    Both CDRs and ADRs give you access to global stocks, but only CDRs let you do it without leaving the Canadian market. You can trade them in Canadian dollars, through your regular Canadian brokerage account, during local market hours.
  2. ✓ Currency risk management
    CDRs include a built-in notional hedge that helps offset the effects of exchange rate fluctuations. ADRs, on the other hand, generally leave you fully exposed to currency movements. If FX risk is something you’d rather not manage, CDRs offer a more hands-off approach. Continue Reading…

Retired Money: Experts opine on various tweaks to Bengen’s famous 4% Rule

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William Bengen, creator of the famed “4% Rule.”

My latest MoneySense Retired Money column is titled The 4% rule, revisited: A more flexible approach to retirement income. Click on the hyperlink for full column.

It goes into more detail on William Bengen’s updated book about the 4% Rule, which was one of three recently published financial books we reviewed in the last Retired Money column.

For that column I had originally planned to focus exclusively on that book, A Richer Retirement, Supercharging the 4% Rule to Spend More and Enjoy More. However, I decided to review two other books at the same time; meanwhile I ended up on a related project on my own site, which involved asking more than a dozen financial advisors on both sides of the border what they think of the 4% Rule and the tweaks Bengen covers in his follow-up book. You can see all responses in this blog that appeared earlier this month on Findependence Hub, but at over 5,000 words  it was a tad long for the space normally assigned to the Retired Money column.

 For the MoneySense version, I focused on the most insightful comments and added a few thoughts of my own. The survey was conducted via Linked In and Featured.com, which has long supplied good content for my site.

Broader diversification spawns a 4.7% Rule

Trusts and estates expert Andrew Izrailo, Senior Corporate and Fiduciary Manager for Astra Trust, says Bengen’s original idea was to provide a sustainable income stream for at least 30 years without depleting your savings. In his new book, Bengen “revisits this concept using updated data and broader asset allocations,” summarizes Izrailo, “He now argues the safe withdrawal rate could rise to around 4.7%, supported by stronger market performance and portfolio diversification beyond the original stock-bond mix.”

For American investors, Izrailo still begins with 4% as a baseline because “it remains simple and conservative. Then I evaluate three major factors before adjusting: market volatility, portfolio performance, and expected longevity.” For Canadian retirees, “I tend to start lower, around 3.5%, due to differences in taxation, mandatory RRIF withdrawal rules, and the impact of currency and inflation differences compared to U.S. portfolios.”

Toronto-based wealth advisor Matthew Ardrey, of TriDelta Financial was not part of the original Featured roundup but agreed with the general view that while a helpful starting point, the 4 Rule is only a guideline. “When I meet with a client, I don’t rely on the 4% rule at all,” said Ardrey, who has worked with clients for more than 25 years “I’ve learned that rules of thumb — like the 4% rule — pale in comparison to the clarity and confidence that come from a well-crafted” and personalized financial plan.  Such a plan should reflect each person’s unique circumstances, priorities, and goals, allowing them to build the right decumulation strategy for their situation.

No one size fits all

Almost all the experts caution against taking a one-size-fits-all approach to the 4% Rule or its variants. Over 20 years with her own clients financial advisor and educator Winnie Sun, Executive Producer of ModernMom, starts with 4% as the baseline, then adjusts it based on actual client spending patterns and market conditions … The biggest mistake I see isn’t about the percentage itself: it’s that people forget about tax efficiency in withdrawal sequencing.”

Oakville, Ont.-based insurance broker James Inwood says the 4% rule is “a decent guideline, but it’s not some magic number you can set and forget. I’ve watched people get into trouble because they didn’t account for medical bills, which are a real wild card here in Canada. I always tell people to build in a cash buffer and check in on that withdrawal rate every couple of years instead of just locking it in permanently.” Continue Reading…

HCAL turns 5: Enhanced Exposure to Canadian Banks

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Image courtesy of Hamilton ETFs

By Hamilton ETFs

(Sponsor Blog)

Since launching in October 2020, the Hamilton Enhanced Canadian Bank ETF (HCAL) has provided investors with a simple way to get more from one of Canada’s most reliable sectors, the Big-6 banks. By adding modest 25% leverage to an equal-weight portfolio of Canadian bank stocks, HCAL has delivered strong results over the past five years, offering investors enhanced income and growth potential from a sector known for its stability and consistent dividends.

Five years of Enhanced Growth & Income

HCAL’s structure is straightforward: for every $100 invested, HCAL borrows ~$25 at institutional borrowing rates and invests it back into the same six banks, providing roughly 1.25x exposure to the sector. This approach has supported higher monthly income and higher long-term returns since HCAL’s inception when compared to a non-levered Canadian bank portfolio, specifically the Solactive Equal Weight Canada Banks Index (“Canadian Bank Index.”)

HCAL vs. Canadian Bank Index — Growth of $100K [1]

Long-Term benefits of Modest Leverage

Over time, the power of compounding is a key driver of returns, and modest leverage can amplify that effect. In HCAL’s case, the 25% leverage applied to Canada’s largest banks has contributed to meaningfully higher long-term returns. The leverage is realized at institutional borrowing rates, typically lower than those available to individual investors, and HCAL can be held in registered accounts, providing access to the benefits of low-cost leverage in accounts where margin isn’t normally available. Continue Reading…

Fritz Gilbert: My biggest Surprise in Retirement

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TheRetirementManifesto

By Fritz Gilbert, TheRetirementManifesto

Special to Financial Independence Hub

I’m fortunate to have saved aggressively in my company’s 401(k) since I started my career at Age 22.

It’s what allowed me to retire at Age 55.

And yet, like many folks my age, those savings were predominantly in “Before-Tax” accounts in my company’s 401(k) plan.  Sure, I got the tax break while working, and I felt like a genius. Besides, we didn’t have the option of investing in a Roth, so the decision was easy.

I knew those taxes would come due when I “got old,” but I’d worry about that later.

Later has arrived. 

As I shared in my Retirement Drawdown Strategy, when I retired, we had 56% of our retirement savings in Before-Tax accounts, as shown below:

The Golden Age of Roth Conversions

Now that I’m retired, I’ve been laser-focused on doing annual Roth conversions to reduce that Before-Tax balance. As I wrote in The Golden Age of Roth Conversions, it makes sense to do Roth conversions in your early retirement years (be careful if you’re getting ACA subsidies, and ugly Aunt IRMAA can be a problem if you’re 63 or older).  I won’t rehash the arguments for why; you can read about it in the linked article.

My goal is to manage the taxes on my terms, rather than being “forced” into whatever the Required Minimum Distributions rule requires in my 70s.  I’d also like to get as much of that money converted into a Roth for the benefit of my wife, in the event I die early (she’d pay higher taxes as a single tax filer vs. our current “Married Filing Jointly” status). For now, I’m playing the tax bracket “stuffing” game (topping off my selected tax bracket with Roth conversions) and trying to be smart about minimizing the taxes I pay throughout my retirement.

The Bad News: The Roth conversions are not making as much of a difference as I had hoped.

My Biggest Surprise in Retirement:  It’s Hard to reduce your Pre-Tax Account Balance!

We’ve all heard about the power of compounding and how valuable it is in personal finance.  If you want a refresher, check out my post, “The Most Powerful Force in the Universe.” 

What I didn’t think about, and only realized after I retired and started doing Roth conversions, is the fact that compounding makes it difficult to reduce your pre-tax account balance.

Despite doing aggressive Roth conversions, our pre-tax balance isn’t coming down like I expected!

In fairness, part of that “problem” is driven by above-average returns since my retirement in 2018.  First world problem, I know.  But it’s still been a big surprise.

Let’s do a hypothetical example to demonstrate the point. 

To make the math easy, let’s say you have $1M in your pre-tax account, and your first full year of retirement is 2019.  If you had that entire $1M in stocks, here’s what would have happened without doing any Roth conversions (S&P 500 returns from ycharts, including dividends):

In this example, a $1M portfolio would have grown to $2.6M in 6 short years.  That’s the power of compounding. Amazing!

Let’s modify the above example, and say you’re doing an annual Roth conversion of $50k.

How much impact would Roth conversions make? Not much…

Despite doing annual Roth conversions of $50k, the pre-tax value has still doubled, to $2.15 M!

A More Realistic Scenario – $500k 

Ok, I hear you.  No one has $1M in their pre-tax account.  I got your attention, though, right?

Fair enough, let’s assume the starting balance is $500k (which compares nicely with the average 401(k) balance of $573k for folks in their 60’s):

The problem remains.

With a $500k starting balance and $50k annual Roth conversions, the account has still grown by $357k (to $857k), or 71%.

Bottom Line:  It’s difficult to reduce your pre-tax account balance due to the power of compound interest.

In fact, the only way to reduce your pre-tax account is to do annual Roth conversions in excess of the annual return generated by the pre-tax portion of your portfolio.  Sticking with the $500k example, an average annual Roth conversion of $89k would have been required to maintain the pre-tax balance at $500k, as shown below:

(Note:  you could argue about my $0 Roth conversion in a down year, but it’s just an example.  Quit whining and do your own math – wink.)

What About A 60/40 Portfolio @ $500k?

No one has a 100% stock portfolio in their pre-tax accounts, right?  Let’s see what things look like if our retiree had a 60/40 stock/bond allocation in their pre-tax accounts.  We’ll use the S&P 500 for stocks, and Vanguard’s Total Bond Market Index Fund (VBMFX) for bonds, we can find their annual returns here.

Without any Roth conversions, the account would have grown from $500k to $990k, as shown below:

Add in our $50k/year of Roth conversions, and the ending balance is $609k, an increase of 22%:

Bottom Line:  Even with a 40% bond allocation, it’s difficult to reduce your pre-tax balance via Roth conversions.

We’ve done aggressive Roth conversions every year, yet I continue to be frustrated by how little we’ve moved the needle.  In full transparency, we’ve reduced it, but only by 15% of its starting value.  That’s far less than I would have expected, given the size of the conversions we’ve done. Continue Reading…