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.

Playing Defence with Canadian Utilities

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

The utility sector is known for its defensive qualities, providing a stable investment option in times of market uncertainty. By overweighting defensive sectors, investors can lower the volatility (risk) of their portfolios. Many will refer to Canadian utilities as ‘bond proxies’ due to their steadiness. However, the true strength lies not in the dividends they offer but in the inherent defensive nature of these companies. Utility stocks are considered defensive because they tend to perform well during economic downturns. Consumers continue to need electricity, water, and other essential services even when the economy is struggling. So here we’ll take a look at Canadian utility stocks and ETFs.

There are a few reasons for an investor to embrace the utilities sector. They may want a portfolio that is less volatile. A retiree can witness a real financial benefit as a portfolio that experiences lesser drawdowns in recessions can create greater and more durable income over time.

Defensive sectors

In this post, the Defensive sectors for Retirement, the three defensive sectors were almost twice as good as a traditional balanced stock and bond portfolio. That is to say, the portfolio moved through the financial crisis of 2008-2009 and left the retiree with a portfolio almost twice as large as the traditional 60/40 balanced portfolio.

Keep in mind past performance does not guarantee future returns. That said, consumer staples, utilities and healthcare have a long history of offering greater portfolio stability.

Canadian utility stocks and ETFs

That above posts looks to U.S. staples, utilities and healthcare stocks. There’s no better place to find multinational consumer staples and healthcare stocks. The healthcare sector is non-existent in Canada. Our consumer staples sector in Canada (XST.TO) is very good, but is mostly domestic. More on that later.

In the Globe & Mail Rob Carrick offered an article (sub required) on Canadian utility ETFs. Rob noted that the fees for these ETFs are quite large compared to market index-based ETFs. The fees are in the 0.32% to 0.61% range. That said, that is the norm for ‘specialty’ or sector ETFs. Rob looked at three Canadian utility ETFs …

The two high-fee funds are the BMO Equal Weight Utilities Index ETF ( ZUT-T), with assets of $500-million and 14 total holdings; and the iShares S&P/TSX Capped Utilities Index ETF ( XUT-T) with assets of $379-million and 15 holdings.

A third fund, the Global X Canadian Utility Services High Dividend Index ETF ( UTIL-T) will on March 4 reduce its current MER of 0.61 per cent to an estimated 0.32 per cent. UTIL has assets of $379-million and 15 holdings.

Core utilities or extended universe?

One key decision that an investor will make is: what types of utilities do you want to own? You can stick to the traditional power/electricity producers, or you can include pipelines and the modern utilities known as the telcos.

ZUT.TO and XUT.TO are traditional power utilities. They are very similar, except the BMO ZUT is equal-weighted while the iShares XUT is cap-weighted (the largest companies get the greater weighting within the index). I’d give the edge to the BMO ETF. Continue Reading…

Offence vs Defence

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  • Ch-ch-ch-ch-changes
  • Turn and face the strange
  • Ch-ch-changes
  • Don’t want to be a richer man
  • Ch-ch-ch-ch-changes
  • Turn and face the strange
  • Ch-ch-changes
  • There’s gonna have to be a different man
  • Time may change me
  • But I can’t trace time — Changes, by David Bowie
Image courtesy Outcome/Shutterstock

By Noah Solomon

Special to Financial Independence Hub

There is a basic principle that most people follow when it comes to their spending decisions. In essence, people generally try to either

(1) Get the most they can for the least amount of money, or

(2) Spend the least amount of money on the things they want (i.e. get the best deal)

In other words, rational utility maximizers try to be as efficient as possible when parting with their hard-earned dollars.

Strangely, many investors abandon this principle when it comes to their portfolios. With investing, what you get is return (hopefully more than less), and what you pay (other than fees) is risk. People often focus on return without any regard for the amount of risk they are taking. Alternately, many make the mistake of reducing risk at any cost, regardless of the magnitude of potential returns they leave on the table.

The foundation of successful investing necessitates achieving an optimal balance between return and risk. Different types of assets (volatile speculative stocks, stable dividend paying stocks, bonds, etc.) have very different risk and return characteristics. Relatedly, a portfolio’s level of exposure to different asset classes is the primary determinant of its risk and return profile, including how efficient the balance is between the two.

Offense, Defense, & Bobby Knight

Robert Montgomery “Bobby” Knight was an American men’s college basketball coach. Nicknamed “the General,”h e won 902 NCAA Division I men’s basketball games, a record at the time of his retirement. He is quoted as saying:

“As coaches we talk about two things: offense and defense. There is a third phase we neglect, which is more important. It’s conversion from offense to defense and defense to offense.”

Nobody can escape the fact that you can’t have your cake and eat it too. You can’t increase potential returns without taking greater risk. Similarly, you can’t reduce the possibility of losses without reducing the potential for returns.

Picking up Pennies in Front of a Steamroller vs. Shooting Fish in a Barrel

Notwithstanding this unfortunate tradeoff, there are times when investors should focus heavily on return on capital (i.e. being more aggressive), times when they should be more concerned with return of capital (i.e. being more defensive), and all points in between.

Sometimes, there is significantly more downside than upside from taking risk. Although it is still possible to reap decent returns in such environments, the odds aren’t in your favour. Reaching further out on the risk curve in such regimes is akin to picking up pennies in front of a steamroller:  the potential rewards are small relative to the possible consequences. At the other end of the spectrum, there are environments in which the probability of gains dwarfs the probability of losses. Although there is a relatively small chance that you could lose money in such circumstances, the wind is clearly at your back. At these junctures, dialing up your risk exposure is akin to shooting fish in a barrel – the likelihood of success is high while the risk of an adverse event is small.

John F. Kennedy & the Chameleonic Nature of Markets

Former President John F. Kennedy asserted that “The one unchangeable certainty is that nothing is certain or unchangeable.” With regard to markets, the risk and return profiles of different asset classes are not stagnant. Rather, they change over time depending on a variety of factors, including interest rates, economic growth, inflation, valuations, etc.

Given this dynamic, it follows that determining your optimal asset mix is not a “one and done” treatise, but rather a dynamic process that takes into account changing conditions. Yesterday’s optimal portfolio may not look like today’s, which in turn may be significantly different than the one of the future.

It’s not just the risk vs. return profile of any given asset class that should inform its weight with portfolios, but also how it compares with those for other asset classes. As such, investors should use changing risk/return profiles among asset classes to “tilt” their portfolios, increasing the weights of certain types of investments while decreasing others.

In “normal” times, the expected return from stocks exceeds the yields offered by cash and high-grade bonds by roughly 3% per annum. However, this difference can expand or contract depending on economic conditions and relative valuations among asset classes.

In the decade plus era following the global financial crisis, not only did rates remain at historically low levels, but the prospective returns on equities were abnormally high given the positive impact that low rates have on spending, earnings growth, and multiples. Against this backdrop, the prospective returns from stocks far exceeded yields on safe harbour investments. Under these conditions, it is no surprise that investors who had outsized exposure to stocks vs. bonds were handsomely rewarded.

Expected Return on Stocks vs. Yield on High Grade Bonds: Post GFC Era

As things currently stand, the picture is markedly different. Following the most significant rate-hiking cycle in decades, bonds are once again “back in the game.” Moreover, lofty equity market valuations (at least in the U.S.) suggest that the S&P 500 Index will deliver below-average returns over the next several years. Continue Reading…

Tariff Tantrums: Protecting your Portfolio with Defence and Income

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Image via Harvest ETFs/Shutterstock

By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog)

In his 2024 re-election campaign, U.S. President Donald Trump vowed to pursue an aggressive trade policy that aimed to reduce or altogether eliminate what he viewed as unacceptable deficits between adversaries and allies alike. Following his January inauguration, President Trump has put Canada and Mexico into his crosshairs. Tariffs continue to be one of his favourite tools, if his rhetoric is any indication.

A tariff is a tax that is imposed by a country on the goods imported from another country. It is typically collected by a country’s customs authority. Some economists have argued that this results in a larger burden being paid by consumers, as companies will pass on tariff costs to the consumer.

In this piece, we will look at how ongoing trade tensions could impact world economies and markets. After that, we will zero in on ETFs that can potentially provide protection against the current bout of volatility.

Trade policy volatility and Canada

Last month, we looked at the impact the new GOP administration could have on the industrials space. That piece explored the trade policy volatility that existed in the first Trump administration.

Baker, Bloom & Davis
US Categorical Economic Policy Uncertainty Index – Trade Policy

Source: Baker, Bloom & Davis. Bloomberg, Harvest ETFs, as of January 21, 2025.

On Monday, February 3, 2025, U.S. and global markets suffered sharp pullbacks in the morning hours. However, markets recovered after the Trump administration announced that tariffs on Mexico and Canada would be delayed for 30 days.

Canada finds itself at a crossroads as it contends with unprecedented pressure from a long-time ally, political uncertainty on the domestic front, and muted and decelerating economic data. The Bank of Canada must weigh these pressures as it determines how much it can slash interest rates to bolster economic activity..

That aside, Canada is home to many great companies with oligopolistic qualities. We detailed their strengths in a piece in October 2024. The Harvest Canadian Equity Leaders Income ETF (HLIF:TSX) invests in 30 of Canada’s most powerful and largest companies for their traits and growth potential. It overlays an active covered call strategy, which seeks to generate high monthly cash distributions.

Combat trade volatility with defence and diversification

Defensive sectors contain businesses that are stable, possess key barriers to entry, and are relatively immune to economic fluctuations.

Healthcare falls in this defensive category and is unique in its diversity. It includes companies that manufacture medical devices and equipment, as well as those that are involved in the making of diagnostic tools and lab equipment, companies involved in the ownership of doctors’ networks, as well as facilities and companies in the Managed Care segment.

The Harvest Healthcare Leaders Income ETF (HHL:TSX) is an equally weighted portfolio of 20 large-cap global healthcare companies. HHL aims to generate an attractive monthly distribution through an active covered call writing strategy. This ETF has paid out over $500 million in total monthly distributions to unit holders since its inception.

Utilities is a space that is often targeted by investors who are looking to shore up a defensive position in their portfolios. Companies in the utilities space possess enormous scale, significant barriers to entry, and dominance in their respective markets. The Harvest Equal Weight Global Utilities ETF (HUTL:TSX) offers access to a globally diversified portfolio of utilities equities. That global diversification offers benefits like reducing interest rate and natural disaster risk with exposure to different countries and regions. Continue Reading…

7 Hidden Traps of Retirement

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By Fritz Gilbert, TheRetirementManifesto

Special to Financial Independence Hub

The article was from the Harvard Business Review and highlighted 7 Hidden Traps of Retirement, which the writers discovered during interviews with “dozens of highly respected former chief executives.”

As I read the article, I realized the traps of retirement don’t apply only to folks retiring from top management positions.

These traps present a risk to all of us.

Today, I’m presenting each of the 7 Hidden Traps of Retirement and my thoughts on how best to avoid them.

Be forewarned.

Don’t get trapped.

Don’t fall into any of these 7 Hidden Traps of Retirement. Use these tips to avoid them and live a great life in retirement. Share on X

7 Hidden Traps of Retirement

The article that made me think was The Challenges of Retiring from a High-Powered Job, written by three founders of ONYX, an invitation-only group designed to build a community for current and former CEOs.  I encourage you to read the article, but I’ll summarize the key points below.

In their work helping CEOs prepare for retirement, the team has discovered seven hidden traps of retirement. While focused on senior managers, I’m taking a different twist with their list and considering how these traps apply to all of us. I’ve taken the liberty of renaming each of the seven hidden traps of retirement to better align with the readers of this blog and providing my thoughts on how to avoid falling into each.

The risks apply during our planning for and transition into retirement.  If you’re struggling with the transition into retirement, perhaps it’s because you’ve fallen into one of these traps.

1. Focusing on who you are, instead of who you want to become.

Original Title:  Looking through the lens of the present impedes you from seeing future possibilities.

In your final years of work, it’s easy to procrastinate on retirement planning and focus on your current role.  You’re busy doing your job and you can deal with that retirement stuff after you’re done working.  That’s a dangerous approach that far too many people follow.  It’s one of the traps of retirement for a reason. Seeing beyond your current role requires a creative imagination, the type that has likely been dormant for years.  Losing your sense of identity can be a shock in retirement, but the impact can be minimized by the appropriate planning.

How to Avoid the Trap:

Forget about your current role for a minute.  After all, it will be irrelevant the day after you retire. (Let that sink in)

Think about what you want your life to BECOME in retirement.  You’ll no longer have that title, and that sense of identity you get from your work will be gone.  That’s scary, and something a lot of people avoid thinking about. Don’t be that person.  Rather, think about your new identity in retirement. What do you want to be known for? What areas are you curious about?  What did you do as a child that you’d like to revisit now that you’re free from those chains of work? Carve out time to think about what impact you want to have with your newfound freedom.  It takes some time, so be patient.  The important thing is to think beyond your current role and imagine what you can do to make a difference once the job is gone.

In What I’ve Learned From Writing 400 Articles About Retirement, I wrote about my new identities in retirement (writer, running a charity, grandfather, etc).  A quote from that article is relevant here, and I’d encourage you to adopt it as one of your goals in retirement:

“I’m not who I used to be, and I love who I’ve become.”

2. Focusing on too many options.

Original Title:  A wealth of options can overwhelm and paralyze decision-making.

That busy schedule and rigid structure will disappear when you retire, and you’ll be looking at a “blank sheet of paper.”  Having no schedule or structure to your day sounds appealing, but it becomes disorienting after a surprisingly short period.  Your brain will start searching for something to do, and you’ll have difficulty prioritizing what you want to do with your life.

How to Avoid the Trap:

Take some quiet time to think about what impact you want to make with your retirement years.  Think about the causes you have a passion for.  Listen to your inner curiosity, and take that first step to see where it leads. When you’re thinking about something you could do, compare it to that list of things that matter to you.  For example, you may have enjoyed working with younger people during your career and would like to find a way to do that in retirement.  Perhaps you’ll become a mentor, a Big Brother, or a business coach to the next generation.

Find your “North Star” and pursue only those opportunities with strong alignment to the things that matter to you.  Don’t pursue “busyness” for the sake of being busy.  Rather, invest your time in areas where you have a real interest (lack of experience doesn’t matter, as I’ll demonstrate below).

Using your time to impact an area you care about is the true path to happiness.

3. Not building relationships outside of work.

Original Title:  Relying on your old network can distract you from the critical task of building your new one.

Everybody thinks they’ll keep in touch with folks they worked with.  Almost no one does. It’s one of those strange realities of retirement, and it will likely happen to you.  (Note this statistic in “Shining The Light on Retirement Blind Spots”: 62% of retirees missed the relationships from work, whereas only 29% of pre-retirees expected it to be an issue).The relationships at work are about “work.”  Once you’re out of the scene, it becomes difficult and awkward to maintain those relationships.

And yet, relationships matter.

I dedicated an entire chapter in my book to relationships.  People think about their paycheck stopping when they retire, but they often overlook the “softer” benefits they receive from work which will also disappear:

  • Structure
  • Sense of Identity
  • Relationships
  • Sense of Purpose
  • Sense of Accomplishment

Ironically, these 7 traps of retirement align almost perfectly with that list.  That doesn’t surprise me in the least.  If you’re a regular reader, you know I’m passionate about the importance of the “soft side” of retirement.

How to Avoid the Trap:

In your final year or two of work, be intentional about building relationships outside your workplace.  Your mission: build relationships that will be there after you retire.  Spend a few Saturdays volunteering at a local charity.  Get involved with a few Facebook groups in your area that do things that interest you.  Join a gym and learn to play pickleball. Join a local hiking club. Go to a Trout Unlimited meeting.  Call an old friend. Attend a local church.

Explore whatever interests you and pay attention to the people in the groups you visit.  In time, you’ll find a group that feels “right.” Pay attention, that’s where you’ll get your retirement relationships.

They matter more than you expect.

4. Waiting to figure out retirement until after you retire.

Original Title:  Delaying retirement planning can lead to urgent, anxious, and awkward outcomes.

don't retire without a plan

A quote from the original article is telling:

“The majority of CEOs and executives we talked with told us they failed to appropriately plan for their retirement — and nearly all told us they waited too long to start.”

It is, perhaps, the most common of the traps of retirement.  Many people are nervous about retirement, and procrastination is a common response.  “I’ll deal with it when I’m retired,” many people think.  That’s one approach, but research has shown that taking that route will lead to a difficult transition. The cliff is coming, and you can prepare your parachute or just take the leap and figure it out once airborne.  I recommend the former approach, it makes for a much smoother landing.

How to Avoid the Trap:

As I was in my final working years, I was interested obsessed with figuring out why some people had a smooth transition to retirement, whereas others struggled.  As I’ve written before, there’s one single element that is the most highly correlated with the smoothness of your transition.  That element?

The amount of time you spend planning for retirement in your final years of work (both on financial and non-financial issues).

Spend a lot of time planning, and your retirement will be smooth.  Ignore it until you retire, and buckle in for a rough ride.  As I wrote in The 4 Phases of Retirement, only 15% of retirees skip over the dreaded Phase II.  I was lucky enough to be one of them.  So can you. Continue Reading…

A Misunderstanding about Taking CPP Early to Invest

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By Michael J. Wiener

Special to Financial Independence Hub

Recently, Braden Warwick at PWL Capital created an excellent CPP calculator that we can all use.  One of the numbers this calculator reports is the IRR (Internal Rate of Return) you’ll get between your CPP contributions and the CPP pension you’ll collect.  Some financial advisors (but not Braden) decide it makes sense for their clients to take CPP as early as possible (age 60), and invest the proceeds.  Their reasoning is that they believe they can earn a higher return.  Here I explain why this logic compares the wrong returns.

The return you’ll get on your CPP contributions depends on the contributions you and your employer have made and the benefits you’ll get.  These amounts depend on many factors about your life as well as some assumptions about the future.  Typically, the return people get on CPP is between inflation+2% and inflation+4%.  (However, it can go higher if you took time off work with a disability or to raise your children.  It also goes higher if you ignore the CPP contributions your employer made on your behalf, but I think this makes a false comparison.)

If we examine people’s lifetime investment record, not many beat inflation by as much as CPP does.  However, some do.  And many more think they will in the future.  In particular, many financial advisors believe they can do better for their clients.

But what are we comparing here?  These advisors are imagining a world where CPP doesn’t exist.  Instead of making CPP contributions, their clients invest this money with the advisor.  In this fictitious world, the advisor may or may not outperform CPP.  However, this isn’t the world we live in.  CPP is mandatory for those earning a wage.

The choice people have to make is at what age they’ll start collecting their CPP pension.  The CPP rules permit starting anywhere from age 60 to 70.  The longer you wait, the higher the monthly payments get.  Consider an example of twins who are now 70.  The first started CPP a decade ago at 60 and the payments have risen with inflation to be $850 per month now.  The other waited and has just started getting $2000 per month.  The benefit of waiting is substantial if you have enough savings to bridge the gap between retiring and collecting CPP, and don’t have severely compromised health.

Those with enough savings to bridge a gap of a few years have a choice to make.  Should they take CPP immediately upon retiring, or should they spend their savings for a while in return for larger future CPP payments?  Some advisors will say to take CPP right away and invest the money, but this is motivated reasoning.  The more money we invest with advisors, the more they make. Continue Reading…