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.
Jeremy Siegel recently wrote, with Jeremy Schwartz, the sixth edition of his popular book, Stocks for the long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies.
I read the fifth edition nearly a decade ago, and because the book is good enough to reread, this sixth edition gave me the perfect opportunity to read it again.
I won’t repeat comments from my first review. I’ll stick to material that either I chose not to comment on earlier, or is new in this edition.
Bonds and Inflation
“Yale economist Irving Fisher” has had a “long-held belief that bonds were overrated as safe investments in a world with uncertain inflation.” Investors learned this lesson the hard way recently as interest rates spiked at a time when long-term bonds paid ultra-low returns. This created double-digit losses in bond investments, despite the perception that bonds are safe. Siegel adds “because of the uncertainty of inflation, bonds can be quite risky for long-term investors.”
The lesson here is that inflation-protected bonds offer lower risk, and long-term bonds are riskier than short-term bonds.
Mean Reversion
While stock returns look like a random walk in the short term, Figure 3.2 in the book shows that the long-term volatility of stocks and bonds refutes the random-walk hypothesis. Over two or three decades, stocks are less risky than the random walk hypothesis would predict, and bonds are riskier.
Professors Robert Stombaugh and Luboš Pástor disagree with this conclusion, claiming that factors such as parameter and model uncertainty make stocks look riskier a priori than they look ex post. Siegel disagrees with “their analysis because they assume there is a certain, after inflation (i.e., real) risk-free financial instrument that investors can buy to guarantee purchasing power for any date in the future.” Siegel says that existing securities based on the Consumer Price Index (CPI) have flaws. CPI is an imperfect measure of inflation, and there is the possibility that future governments will manipulate CPI. Continue Reading…
The 60/40 portfolio has been long considered the prototypical balanced portfolio. This strategy consists of the portfolio investing 60% of its capital to equities and the remaining allocation of 40% in fixed income.
The two segments in the portfolio each have its unique purpose: equities have provided growth and fixed income has historically provided stability and income. When combined, it allowed a portfolio to have stable growth, while generating steady income.
In the last decade, however, the 60/40 portfolio has been challenged on two fronts. The first has been due to the lack of yield available in the bond market, as interest rates have grinded to all-time lows. As a result, many looked to the equity market to generate higher dividends in order to make up for the yield shortfall left by fixed income.
The second shortcoming of the 60/40 portfolio has been the higher correlation between bonds and equities experienced in recent years, which has limited the ability for balanced portfolios to minimize volatility.
However, the resurgence of bond yields in the recent central bank tightening cycle has breathed new life into the 60/40 portfolio. Suddenly, bonds are generating yields not seen since the pre-Great Financial Crisis era. A higher sustained interest rate environment also means a slower growth environment; that means equity risk premiums (the expected excess returns, needed to compensate investors to take on additional risk above risk-free assets) will be lower. This means fixed income may look more attractive than equities on a risk-adjusted basis, which may mean more investors may allocate to bonds in the coming years. Fixed income as a result, will play a crucial role in building portfolios going forward and its resurgence has revived the balanced portfolio.
Investors can efficiently access balanced portfolios through one-ticket asset allocation ETFs. These solutions are based on various risk profiles. In addition to the asset allocation ETFs, we also have various all-in-one ETFs that are built to generate additional distribution yield for income/dividend-oriented investors. Investors in these portfolios only pay the overall management fee and not the fees to the underlying ETFs.
How to use All-in-One ETFs
Standalone investment: All-in-one ETFs are designed by investment professionals and regularly rebalanced. Given these ETFs hold various underlying equity and fixed income ETFs, they are well diversified, and investors can regularly contribute to them over time. Continue Reading…
With people living longer than ever, retirement now makes up a significant portion of our lives. Could it be the perfect time to start a business? Here are the pros and cons of becoming an entrepreneur in your golden years.
Important Considerations
Entrepreneurship can enrich your life in immeasurable ways. However, before launching your own business, you should consider the following challenges.
Financial Risk
According to a 2018 study by Harvard Business Review, older entrepreneurs tend to run more successful companies. The businesses that financially thrive in their first five years are, on average, started by 45-year-old entrepreneurs, probably due to this cohort’s experience and willingness to take risks.
Although the odds may be in your favor, it’s still important to consider whether you have the capital to run a business — and to pick up the pieces if it doesn’t work out. Over 80% of small businesses fail because of cash flow problems. Decide how much money you’re willing to invest and potentially lose in your new venture.
Time Commitment
How do you envision retirement? If you’re considering entrepreneurship, you’re probably not the type of person who wants to lounge around sipping drinks on a beach.
If you do want a more relaxed retirement, however, you might find the time commitment required to run a business overwhelming. Entrepreneurs often put in long days to get their businesses up and running. Even after your company gets off the ground, you may find yourself having to work longer hours than you were expecting.
Of course, as a business owner, you also have a lot of sway over how big you want to let your venture get. If things start getting out of hand, you can always scale back.
Social Security Deductions
If you’re younger than full retirement age in the U.S. — which can range from 66-67, depending on when you were born — becoming an entrepreneur during retirement can affect your Social Security benefits.
Before you reach full retirement age, the IRS will deduct one dollar from your benefit payments for every two dollars you earn above $21,240. The year you reach full retirement age, the IRS will subtract one dollar from your Social Security benefits for every three dollars you earn above $56,520.
Consider whether these fees will impact your ability to retire comfortably. You might find you’re earning more money from your business than you would from Social Security anyway, so the deductions may be of little consequence.
Benefits of Entrepreneurship
Although it may be challenging, starting your own business will likely enrich your life. Here are some ways it could positively affect your retirement: Continue Reading…
Money management is essential to help your savings thrive and benefit your [U.S.] retirement accounts. Discover movements to minimize taxable income.
By Dan Coconate
Special to Financial Independence Hub
Navigating the path to a financially secure retirement can often seem like navigating a labyrinth with no exit. With so many potential strategies and considerations, it’s easy to feel overwhelmed. However, efficient tax management is key to unlocking a financially comfortable retirement.
By adeptly managing your taxable income, particularly through individual retirement accounts (IRAs) [or in Canada, RRSPs], you can pave a clear path through the complexities of retirement planning, positioning yourself for a secure, worry-free future. Understanding the necessary movements to minimize taxable income in a retirement account will help you optimize and maximize your retirement savings.
Contribute to a Traditional IRA
Investing in a traditional IRA can be a smart move to effectively reduce your taxable income. Your contributions may be tax deductible, depending on your income and whether your work’s retirement plan also covers your spouse.
The more you contribute to your traditional IRA within the IRS contribution limits, the more you can reduce your taxable income for the year.
Consider a Roth IRA Conversion
A Roth IRA conversion is a strategic financial decision that can secure tax-free income during retirement. When you convert from a traditional IRA to a Roth IRA, you pay taxes on the converted amount in the year of conversion. [Roth IRAs are the U.S. equivalent of Canada’s Tax-Free Savings Accounts or TFSAs] Continue Reading…
The following is an edited transcript of an interview with Michael Kovacs, CEO of Harvest ETFs, conducted by Financial Independence Hub CFO Jonathan Chevreau.
Jon Chevreau (JC)
Thanks for taking the time today, Michael. We all know that 2022 was a pretty bad year as markets were impacted by higher interest rates. That turbulence bled into much of 2023, although the last few weeks have seemed much rosier.
How do you respond to unitholders of funds who are currently down year over year? Does your covered call writing protect retirees?
Michael Kovacs
Michael Kovacs (MK)
Thanks for having me, Jon. It is important to remember that we offer equity income funds. That means that you have to look at the total return of the product, which includes the price of the ETF and its accumulating distributions.
Yes, there has been turbulence in 2022 and through much of 2023. However, over that period, products like the Harvest Healthcare Leaders Income Fund (HHL) have paid consistent distributions.
Let’s look at the Harvest Diversified Monthly Income ETF (HDIF). In terms of actual returns, this ETF is down nearly double-digit percentage-wise in the year-over-year period (as of early November). But, when you look at the distributions paid over that same period, HDIF has delivered positive cashflow for its unitholders, which reduces the decline by more than half.
JC
Are you saying that between the covered calls, the distribution and the leverage plus the underlying equity income, that a retiree could expect annual yields as high as 10% or 12% or higher?
MK
Yes. Yields are anywhere from 1.5% to 3%, depending on the equity category. Then you have option writing. We can go right up to 33% on any of those portfolios, which generates additional yield. So, to be able to generate 9-10% is very achievable. And we’ve been able to do that consistently for a quite a few years now.
Jon Chevreau
JC
What is your view on the current interest rate climate? Have we reached a top? If so, when will they start to come down?
MK
Many of us remember the high interest rates of the 1980s, especially some of your readers who were trying to obtain their first mortgages. We have experienced a big jump in interest rates over the past two years. However, we believe that we have probably seen the top for rates for now. Or, if we haven’t, we are very close to the top. That means there are going to be some great opportunities in fixed-income markets. The next move for interest rates may be down by mid-to-late 2024.
That said, there are still great opportunities that will benefit equities and bonds in the current climate. Our first launch in the Bond area is the Harvest Premium Yield Treasury ETF (HPYT). We’ve launched with a high current yield. We are targeting long treasury bonds in this fund. This is about generating a high level of income while owning a very good credit-worthy security like a U.S. Treasury. So, if rates start declining next year, it is a great time to be holding fixed income.
JC
Findependence Hub readers tend to be retirees who want steady cash flow. What is Harvest’s view of cash flow for retirees?
MK
I think cash flow for retirees is essential. Once your employment income has gone, you must depend on your investments, your pensions, your CPP, and so on. The recent increases in interest rates have been good for retirees in the short term. Higher rates allow retirees to keep shorter-term cash and generate a safe yield of 5% or more.
Our longer-term equity products aim to have that heavy bias toward equities. For example, the Harvest Healthcare Leaders Income ETF (HHL) is typically written at about 25-28% average, with the other 70% or so fully exposed to health care stocks. The covered call option writing strategy allows us to generate a high level of income.
Cash flow is the basis behind our name: Harvest. People have spent decades building up capital, sowing the seeds. Our products allow them to harvest the fruits of their life-long labour.
We believe our equity-income and fixed-income products are a fantastic way to do that. If we can help you preserve capital and generate consistent income, we are doing our job.
JC
There is also interest among investors in asset allocation ETFs. Is HDIF essentially your answer to that demand?
MK
You’re correct. Some people prefer to allocate to specific funds, but the idea behind HDIF is to allocate to the best of Harvest’s top products that generate cash flow. In the case of HDIF, you do have a leverage component. You are increasing the yield but at the same time, you do increase your risk as well. Continue Reading…
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