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.

Timeless Financial Tips from 2023 as we Turn to 2024

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Lowrie Financial/Canva Custom Creation

By Steve Lowrie, CFA

Special to Finanial Independence Hub

Yet another year has gone by. With 2023 behind us and 2024 on the horizon, it’s important to take stock, set goals, and make plans – keep steadfast in your quest for long-term financial planning and wealth management success.

In 2023, I shifted my focus to keep some core financial planning principles at the forefront of your mind. These principles are timeless and are a good touchpoint for whenever your financial resolve starts to soften.

Let’s look back at these timeless financial tips from 2023…

Financial Tip on Market Pricing

Timeless Financial Tip #1: Repeat After Me: “It’s Already Priced In”

Let’s talk about the price of stocks. To make money in the market, you need to sell your holdings for more than you paid. Of course, we’re all familiar with good old buy low, sell high. But despite its simplicity, many investors fall short. Instead, they end up doing just the opposite, or at least leaving returns on the table that could have been theirs to keep.

You can defend against these human foibles by understanding how stock pricing works and using that knowledge to your advantage.

Financial Tip on News vs. Noise

Play It Again, Steve – Timeless Financial Tips #2: Rising Above the Noisy News

Timeless Financial Tip #2: Rising Above the Noisy News

In investing and life, information overload, aka “noisy news,” has long been a thing. In fact, before the Internet came along, I used to publish a hardcopy newsletter called “Rising Above the Noise.” Because even then, investors seemed awash in TMI (too much information).

If media noise was a problem back then, imagine the implications today. Which brings me to today’s Play It Again, Steve – Timeless Financial Tip #2.

To be a successful investor, it’s as important as ever to dial down all the noisy news you invite into your head.

Financial Tip on Tax Planning

You are currently viewing Play It Again, Steve – Timeless Financial Tips #3: Tax-Planning as a Lifetime Pursuit

Timeless Financial Tip #3: Tax-Planning as a Lifetime Pursuit

I would be remiss if I didn’t dedicate at least one post in my “Play It Again, Steve” series to everyone’s least favourite, but still significant topic: taxes. It’s a good thing there’s no tax on writing about tax planning; if there were, I would surely owe a lot.

Read about these six timeless techniques for reducing your lifetime tax load.

Financial Tip on Behavioural Bias

You are currently viewing Play It Again, Steve – Timeless Financial Tips #4: How To Manage Your Financial Behavioural Biases

Timeless Financial Tip #4: How To Manage Your Financial Behavioural Biases

So, what’s really going on inside your head as you make critical decisions about managing your money? By considering this pivotal question each time you’re tempted to react to the latest news, you stand a much better chance of being the boss of your investment outcomes.

There are countless external forces influencing your investment outcomes: taxes, market mood swings, breaking news, etc.

Let’s look inward, to an equally important influence: your own financial behavioural biases.

Financial Tip on Evidence-Based Investing

You are currently viewing Play It Again, Steve – Timeless Financial Tips #5: Trust the Evidence

Timeless Financial Tip #5: Trust the Evidence

If I could, I would grant amazing investment returns to every investor across every market. Unfortunately, that’s just not how it works. In real life, we must aim toward our financial ideals, knowing we won’t hit the bullseye every time.

That’s why I recommend evidence-based investing: or investing according to our best understanding of how markets have actually delivered available returns over time, versus how we wish they would. Our “best understanding” may still be imperfect, but it sure beats ignoring reality entirely.

Financial Tip on Investment Time Horizon

You are currently viewing Play It Again, Steve – Timeless Financial Tips #6: Aligning Your Investments with Your Investment Time Horizon

Timeless Financial Tip #6: Aligning Your Investments with Your Investment Time Horizon

I’ve spent my entire career railing against the dangers of market-timing — i.e., dodging in and out of markets based on current conditions. But there is a time when “timing” of a different sort matters. I’m talking about your investment time horizons.

Your driving force for when to invest — and stay invested — is ideally based on the timing of your own spending plans, rather than external market moves. Let’s look at how to use your personal time horizons to successfully separate today’s spending from tomorrow’s future wealth.

Financial Tip on Retiring on Your Own Terms

You are currently viewing Play It Again, Steve – Timeless Financial Tip #7: 6 Steps to Retiring as Planned

 

Timeless Financial Tip #7: 6 Steps to Retiring as Planned

Retirement isn’t the only reason to set aside current income for future spending. But since it’s usually the elephant in the financial planning room, it’s worth a Timeless Tip of its own.

Essentially, this is what retirement planning is all about:

By being thoughtful about how to save and invest toward retirement, you can best sustain, if not improve your ongoing lifestyle: especially once your prime earning years are over.

If you are walking the line between investing, spending, and your investment time horizon, check out these 6 ways to leverage lifelong financial planning, so you can retire on your own terms and on your own timeline. Continue Reading…

Stocks for the Long Run: Review of 6th edition

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By Michael J. Wiener

Special to Financial Independence Hub

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 Revival of the Balanced Portfolio

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Photo via BMO ETFs: AI generated by Pixlr

By Alfred Lee, Director, BMO ETFs

(Sponsor Blog)

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…

Becoming an Entrepreneur in Retirement: Is it for You?

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By Devin Partida

Special to Financial Independence Hub

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…

Movements to Minimize Taxable Income in Retirement Accounts

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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…