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.

9 Business Leaders share best Opportunities for Wealth Accumulation

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To shed light on effective wealth-building strategies, we’ve gathered insights from nine experts in the field, including investment specialists, financial advisors, and more.

From the importance of diversifying your portfolio and investing in yourself to the consistent investment in stock indices, these professionals share their top investment opportunities and asset classes that have proven particularly effective in securing financial independence.

 

  • Diversify Your Portfolio and Invest in Yourself
  • Prioritize Exchange Traded Funds (EFTs)
  • Look into Home Ownership and 401(k) Investments
  • Make Systematic Progress Across Asset Classes
  • Generate Passive Income with a Niche Website
  • Build Wealth through Real Estate
  • Focus on Healthcare and Nutraceuticals
  • Seek Rental Property Investments
  • Be Consistent with Investment in Stock Indices

Diversify your Portfolio and Invest in Yourself

One investment opportunity that has proven particularly effective in building and securing financial independence is a diversified portfolio that includes a mix of equity, bonds, and alternative assets. 

This strategy allows for exposure to different asset classes, mitigating risk while aiming for growth. Equities provide the potential for high returns, bonds offer stability and income, and alternative assets such as real estate, commodities, or private equity can add further diversification and potentially enhance returns. 

However, it’s essential to emphasize that investing in oneself has been the best investment of all. Personal and professional development, education, and acquiring new skills have consistently yielded substantial returns over time. These investments enhance earning potential, open up new opportunities, and empower individuals to adapt to changing circumstances. — Ahmed Henane, Investment Specialist and Financial Advisor, Ameriprise Financial

Prioritize Exchange Traded Funds (EFTs)

The equity market is the single greatest wealth creator for investors. If someone has 10 years or more as their time horizon for investing, then an equity growth mutual fund or ETF (Exchange Traded Fund) is highly recommended to build wealth. 

ETFs are very similar to mutual funds. ETFs typically represent a basket of securities known as pooled investment vehicles and trade on a stock exchange like individual stocks. A growth ETF is a diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividends. 

One such investment would be the Vanguard Growth ETF (VUG/NYSE Area). This ETF is linked to the MSCI US Prime Market Growth Index, which offers exposure to large-cap companies within the growth sector of the U.S. equity market. Investors with a longer-term horizon ought to consider the importance of growth stocks and the diversification benefits they can add to any well-balanced portfolio. — Scott Krase, Wealth Manager, Connor & Gallagher OneSource

Look into Home Ownership and 401(k) Investments

There isn’t any one asset class or investment opportunity I’d recommend over the other for the general populace. Those types of financial decisions are circumstantial and based on the needs of the client. 

Nonetheless, the two ways to “Build Wealth for Dummies” would be to purchase your home and invest in your 401(k). From a behavioral-finance perspective, the automatic contributions to these two vehicles have, more often than not, created better outcomes for clients. — Rush Imhotep, Financial Advisor, Northwestern Mutual Goodwin, Wright

Make Systematic Progress across Asset Classes

A systematic progression across multiple asset classes has been successful in developing wealth and financial freedom. A cash-generating firm provides a stable financial basis for future projects. 

Real estate investing offers passive income and property appreciation, boosting financial security. Diversifying the portfolio with equities and other assets follows, harnessing the potential for exponential growth and mitigating risk through a well-balanced mix. However, amidst this multifaceted approach, it is crucial not to overlook the most pivotal investment: oneself. 

As Warren Buffett wisely advised, “Be fearful when others are greedy and be greedy only when others are fearful.” Investing in self-improvement, education, and personal development enhances decision-making acumen and emotional resilience, providing the intellectual foundation to navigate the ever-evolving landscape of wealth accumulation.  — Galib A. Galib, Principal Investment Analyst

Generate Passive Income with a Niche Website

A few years back, an affiliate website was launched in the personal finance niche. The payoff? Consistent ad revenue and affiliate commissions with minimal oversight, essentially becoming a self-sustaining income stream.

Running a website is not as time-consuming as commonly believed. After the initial setup and content, it just needs occasional updates. Soon enough, it turned into a low-maintenance income source. Continue Reading…

Dividend-Payers: The Volvo of Equities

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By Noah Solomon

Special to Financial Independence Hub

Crazy People is a 1990 American comedy starring Dudley Moore and Daryl Hannah. Moore plays advertising executive Emory Leeson. Leeson experiences a nervous breakdown, which causes him to design a series of “truthful” advertisements that are blunt and bawdy.

By mistake, his ads get printed and turn out to be a tremendous success. One of Leeson’s more memorable campaigns is for Volvos, which includes the tagline “Volvo — they’re boxy but they’re good.”

Dividend-paying stocks are like the Volvos of the investing world. They are not fancy or exciting, nor do they produce windfall profits over the short term. However, they have a lot going for them when you take a deeper look under the hood.

This month, I explore the historical performance of dividend-paying stocks, including the conditions under which they have tended to outperform their non-dividend-paying counterparts. Relatedly I will also discuss whether the current market environment is supportive of future outperformance.

A Caveat to the Volvo Analogy: Having your Cake and Eating it Too

The “Volvo — they’re boxy but they’re good” tagline implies a clear tradeoff: the suggestion being that one needs to sacrifice performance for reliability. However, the historical data imply that this has not been the case with dividend-paying stocks. Not only have they exhibited greater stability than their non-dividend-paying counterparts, but they have also produced higher returns, thereby providing investors with a “have your cake and eat it too” proposition.

S&P 500 Index vs. S&P 500 Dividend Aristocrats Index (1990 – Present)

Since the beginning of 1990, the S&P 500 Index Dividend Aristocrats Index has produced an annualized total return of 11.7% vs. 10.1% for the S&P 500 Index. This difference in annualized performance has amounted to a tremendous difference in cumulative long-term returns, with the S&P 500 Dividend Aristocrats Index producing a cumulative return of 4,083% vs. a far less impressive 2,459% for the S&P 500 Index. In dollar terms, a $10 million investment in the S&P Dividend Aristocrats Index would have produced $408,334,999 in returns, which is 1.66 times more than the corresponding figure of $245,915,810 for the S&P 500 Index.

TSX Composite Index vs. TSX Dividend Aristocrats Index (2002 – Present)

The numbers for Canada tell a similar story, albeit over a shorter period due to historical data limitations for the TSX Dividend Aristocrats Index. Since 2002, the TSX Dividend Aristocrats Index has produced an annualized total return of 9.7% vs. 7.5% for the TSX Composite Index. In terms of cumulative performance, the TSX Dividend Aristocrats has produced a total return of 647.9% vs. 376.4% for the TSX Composite Index. In dollar terms, a $10 million investment in the TSX Dividend Aristocrats Index would have produced $64,790,379 in returns, which is 1.72 times more than the corresponding figure of $37,636,301 for the TSX Composite Index.

As an aside, the tremendous difference from 1990 to the present in the 2,459% cumulative return for the S&P 500 Index and that of 1,120% for the TSX Composite Index is largely attributable to the former’s far larger weighting in technology stocks. Between 1990 and 2010, the two markets were neck and neck, with the S&P 500 delivering a total return of 457% vs. 453% for the TSX. Since then, the S&P 500 went on to crush its northern neighbour, with a total return of 359% vs. 120%. During the same period, the mega-cap tech-heavy Nasdaq 100 knocked the lights out, returning 675%.

Tech stocks, and in particular mega-caps, have experienced tremendous earnings growth and trade at premium valuations. Whether their rates of growth continue, or premium multiples will persist, is beyond the scope of this commentary. That being said, there is no guarantee that these trends will persist, and relatedly whether the U.S. stocks will continue to outperform their Canadian counterparts.

Nice to Have in Strong Markets and Essential in Others

Dividends have historically been an integral part of equity market returns. Going back to 1990, a full 52.2% of the total return of the S&P 500 Index since 1990 can be attributed to the power of compounding reinvested dividends. On a relative basis, Canadian dividends have been even more prominent than U.S. ones, with reinvested dividends responsible for an astounding 63.3% of the total returns of the TSX Composite index.

Although dividends’ contributions to total market returns have been substantial over the past several decades, this contribution has tended to vary substantially over shorter sub-periods. As the table below demonstrates, dividends tend to play a smaller role in times of strong price appreciation. By contrast, during periods when capital gains have been muted, dividends play a far more substantial role in overall returns.

Contribution of Dividends to Total Returns: Rolling 12-Month Periods (1990 – Present)

Taking all 12-month rolling periods since 1990 in which the S&P 500 experienced price appreciation, dividends on average accounted for 18.8% of total returns. However, in periods where prices rose by 7% or more, dividends were responsible for only 13.6% of the total return pie vs. 38.9% when prices rose between 0% and 7%.

In Canada, the relative importance of dividends has also varied with capital gains. In all rolling 12-month periods since 1990 in which the TSX Composite Index experienced price appreciation, dividends were on average responsible for 25% of total returns. In those periods where prices rose by more than 7%, dividends’ share of total returns was only 15.6% as compared to 52.1% when prices rose between 0% and 7%. Continue Reading…

Were you nervous before you Retired?

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By Fritz Gilbert, TheRetirementManifesto

Special to the Financial Independence Hub

“Were you nervous before you retired?”

I was recently asked that question, and it brought back a flood of memories from my “near-retirement” days.

I suspect most of us were nervous before we retired, but it’s not something we talk about.  I believe there’s value in sharing the psychological journey in those final days before retirement.  For folks nearing retirement, it’s reassuring to know they’re not alone.

Recently I had the opportunity to talk about it with a reader who is on the cusp of retirement. We had a wide-ranging discussion and the conversation became the trigger for today’s post.  I suspect many of the questions he asked are also on the minds of other readers who are approaching retirement.

This one’s for you, Mike.  Thanks for letting me share our discussion with the readers of this blog.  I trust they’ll all benefit from our discussion…

 

Were you nervous before you Retired?

That’s one of the questions a reader, Mike, asked me on a recent phone call.  Mike’s a month away from retirement and reached out to me a few weeks ago.  I typically decline reader requests for phone calls (unfortunately, a downside of writing a blog with a large following).  If I said yes to every request, I’d be spending far too much of my time helping folks on a one-on-one basis, time that could otherwise be spent writing and reaching thousands of people with the same effort. It’s a “scalability” thing, and I trust you understand.

However…there was something about Mike.

His initial email hit a chord with me.  Here’s what he said:

Good morning Fritz,

Have heard you on several podcasts and just finished your latest discussion with Jason Parker.  I will be retiring in January and your point about helping others hit a cord.  I would love the opportunity to speak with you about your blog.  I’m currently a financial advisor and feel there is a huge need for financial literacy for just about everyone.  As a former teacher, my passion is teaching/sharing.  Would like to understand better how you got started with your blog, what are some of the watch outs, and any other insights you could provide.

Thanks for your consideration and congratulations on living your best life!

What caught my attention?  The fact that he didn’t ask a single financial question and was focused on helping others. He had some ideas about teaching/sharing and he was considering starting a blog.  I appreciate readers applying the lessons I’m sharing in their lives and searching for Purpose in retirement.  I also had a bit more free time than I usually do, so I agreed to a phone call.

Following are some of the highlights of our discussion, in no particular order.  I trust you’ll find them of interest.

how do I retire

Questions From A Soon To Be Retiree

Should I start a Blog In Retirement?

My first reaction to any question that says “Should I start…” is to say yes.  It’s critical, especially in early retirement, to foster your creative curiosity and try anything that interests you.  Many won’t “stick,” but you’ll likely find a few that do.  Once you’ve found one or two, you’re on your way to a great retirement.

Mike has a passion for teaching and is exploring various avenues to reach others.  I strongly encourage anyone who has an interest in starting a blog to give it a try.  7 years ago, I started this blog on a whim.  I’m 100% self-taught and technically inept.  It’s easy to start a blog these days, with Bluehost and WordPress both designed for folks who have never built a website.  Starting this blog is one of the best things I’ve ever done and has become a Purpose of mine in retirement. I hope it works out as well for others who are considering it.

That said, it’s important to consider your motives.  If you’re doing it to make money, I suspect you’ll fail.  For 3 years, I wrote every week without making a dime and only started adding those annoying ads when I retired.  I get some complaints about them but believe I shouldn’t have to incur costs when there’s an option of generating some revenue for my “work.” As blogs grow, the costs increase (Mailchimp costs me $220/month based on my ~13k subscribers), and I felt it was time to at least cover my costs.  Making money has never been my motive, and it shouldn’t be yours.  Even now, after 7 years, the income from this blog basically pays my health insurance.  Nice to have, but not enough to change our life. Unless you’re in the 0.1%, you won’t get rich writing a blog. Continue Reading…

Tawcan: 10 lessons I’ve learned along the FIRE journey

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By Bob Lai, Tawcan
Special to the Financial Independence Hub
Although I grew up in a household where my dad retired in his early 40s and a couple of my cousins reached financial independence and/or retired early in their 40s, I had never really put much thought or energy on financial independence retire early (FIRE) in my 20s. While I was living frugally, I wasn’t investing my money efficiently and I lacked a core investment strategy.

This changed just before I turned 30. Someone gave my wife and me a book called Secrets of the Millionaire Mind and our lives were forever changed. We aspired to make changes in our financial plans and how we manage our money. We knew FIRE was a possibility and we started investing in dividend-paying stocks with the plan to live off dividends by 2025 or earlier.

Ten years into our FIRE journey, we’ve made great progress on our goal of becoming financially independent. We are appreciative of this journey and how it has transformed our lives and made us more rounded people. We also have learned many lessons that we wouldn’t have learned if we weren’t on this journey.

I’d like to share with you the ten lessons I’ve learned so far on our FIRE journey.

1. FIRE is not the finish line, it’s a journey

Many see reaching FIRE as the finish line. For them, it means an escape from the rat race. However, I believe we can’t see FIRE as an escape route, the happy ending, a finish line, or the solution to everything. Reaching FIRE certainly doesn’t mean you will magically become happy and live happily ever after.

If you don’t work on yourself during the FIRE journey and improve yourself, you will continue to face the same challenges over and over.

Look at FIRE like a journey. It is very important to enjoy the journey and work on yourself while on this multi-year journey. So take the time to learn new skills, take self-improvement courses, gain new hobbies, make new friends, provide a helping hand in your community, etc.

2. Have a core investment strategy

In my 20s, although I was investing in the stock market, I was trading in and out of stocks frequently. I also invested heavily in high-MER mutual funds and low-interest-rate GICs. In other words, I didn’t have a core investment strategy and my money wasn’t working very hard for me.

Since starting our FIRE journey, I learned to get in line and stay in line. I learned the importance of having a core investment strategy.

For us, it means investing in both dividend-paying stocks and index ETFs. This hybrid investment strategy allows us to have a predictable dividend income every month while staying geographically and asset diversified. By getting rid of high-fee mutual funds and so-called “high interest” GICs, on top of investing in the stock market for the long term, our money is working much harder for us.

Having a core investment strategy also means that we stay focused. We aren’t constantly switching back and forth between different investing strategies and losing momentum. If we want to test out a different investment strategy, we can still do that, but we use a small percentage of our portfolio.

For example, less than 5% of our overall portfolio is invested in growth and more speculative stocks.

3. Ignore doubts and noises around you

The FIRE movement has gained popularity in recent years but it is still a niche movement. The niche nature of the movement means that many of your friends and family do not know about it and will cast doubts when they learn what you’re working on. Unintentionally, they may also try to sabotage your plans.

It is important to ignore doubts and noises around you. Believe in yourself, connect with like-minded people, find support from the FIRE community, and stay focused while on this FIRE journey.

4. Understand your whys

Many people start their FIRE journey because they hate their jobs and because they are not happy with their lives. But FIRE isn’t the magic pill, it will not make you happy all of a sudden.

It is important to dig deep, cut through the BS, and really understand why you want to become financially independent and one day retire early.

Perhaps it’s because you want to have more time to spend with your kids. Perhaps it’s because you want to have the ability to go skiing on a Tuesday morning. Perhaps it’s because you want to be able to volunteer at the local soup kitchen without having to worry about money.

Find your reasons.

5. Stop comparing

Becoming financially independent in less than five years doesn’t make you more successful and taking 20 plus years to reach financial independence doesn’t make you a failure either.

Because we are all different individuals, our FIRE journey will never be alike. Therefore, we need to stop comparing our journeys with each other. Instead, support each other and help each other along the way.

And remember, financial independence retire early does not define success in life.  Continue Reading…

Lessons learned in diversification: Reducing Canadian home country bias

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Image by Pexels: Mihail Nilov

By Mark Seed, myownadvisor

Special to Financial Independence Hub

Many financial advisors, analysts and investing gurus alike tout the merits of portfolio diversification. In this updated posted, you can read on about my recent lessons learned in diversification, including reducing my Canadian home bias since becoming a DIY investor well over a decade ago.

Theme #1 – how many stocks are enough?

This answer depends on who you ask but there are some experts who claim owning about 30-40 individual stocks, in various industry sectors, will provide modest diversification to mitigate portfolio risk. Here are some examples:

Lowell Miller author of The Single Best Investment:

“In our portfolios for individuals and institutions we tend to carry thirty to forty stocks.”

“The more stocks you have, the more your group will behave like an index.”

“If you don’t want to hold the thirty to forty stocks that satisfy my personal comfort level, you can reduce the number – bearing in mind that each reduction increases the risk that a single bad apple in your bushel will have an excessive impact on results.”

Gary Kaminsky author of Smarter Than The Street:

“Holding 100 stocks is yet another myth of the great Wall Street marketing machine.”

“If you’re going to do your own work/research, you should feel comfortable that with 25 to 30 names, you have enough diversification and you have enough skin in the game.”

Gail Bebee author of No Hype – The Straight Goods on Investing Your Money:

“A popular rule of thumb asserts than an individual stock should represent no more than 5% of a portfolio.  This would mean owning at least 20 stocks.”

“Some studies of past stock market performance have concluded that owning about 15 to 20 stocks provides the best return for the least risk.”

Stephen Jarislowsky, Canadian billionaire and author of The Investment Zoo:

“Out of the many thousands of stocks I can choose from worldwide, I therefore really only need to look at 50 at most.”

Those estimates seem about right to me as a practising DIY investor.

When it comes to individual stocks though, dedicated readers of this site will know I’m a fan of portfolio diversification myself and practice the following personal rules of thumb to avoid individual stock risk:

  • I strive to keep no more than 5% value in any one individual stock, and
  • I’m working on increasing my weighting in low-cost ETFs over time to avoid my bias to Canadian dividend payers in my portfolio while generating total returns. Read on…

You can always review some of my current stock holdings on this standing page here.

Theme #2 – why diversification?

Portfolio diversification aims to lower the volatility of my portfolio because not all asset categories, industries, nor individual stocks will move together perfectly in sync. By owning a large number of equity investments in different industries and companies, and countries, those assets may and do rise and fall in price differently; smoothing out the returns of my portfolio as a whole.

“There is a close logical connection between the concept of a safety margin and the principle of diversification.” – Benjamin Graham

While I/we continue to hold no bonds in our portfolio at this time, as I contemplate semi-retirement in the coming years, I am seriously considering ramping up our cash on hand to counter any bearish equity markets when we’re not working full-time.

Theme #3 – how can I reduce my Canadian home bias with ease?

During the pandemic, I decided to make a few portfolio changes to simplify my portfolio more as semi-retirement planning continued. These were my decisions related to asset location and further diversification. Continue Reading…