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How I used to sabotage my portfolio

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub

Some recent reader questions prompted me to update this post – let’s go!

Dedicated readers of this site will know I spend a lot of time writing about what’s working in my financial plan and how incremental money management changes are moving us towards financial freedom every month.

Certainly if you look back at my decade in review you can see we’ve made some tremendous progress towards financial independence over time.

That doesn’t mean I didn’t sabotage my portfolio …

With all the success we’ve had to date, it wasn’t without missteps and mistakes. We’re not immune to bad decisions now and then.

In fact, we used to sabotage our portfolio and our personal finances. We really didn’t know what we didn’t know.

Financial disaster

Over the years we’ve learned some financial lessons and so today’s post updates those lessons so you don’t have to make the same mistakes I did. In fact, should you find yourself in one of these financial ruts below this post will go a step further and offer some tips on how to dig out of them.

I should know, I made these changes below!

Here is how I used to sabotage my portfolio – and what you can learn from it.

1.) Investing in high-priced mutual fund products

In my 20s, I invested in mutual funds that charged money management fees close to 2%. Back then I simply didn’t know how much those fund fees would eat into my investment returns. On top of that, I had no idea that most mutual fund managers had no long-term hope of beating their benchmark index, even after a few years let alone after many years.

This is because of this key reason: it is incredibly difficult to overcome the deficits incurred by some funds due to high money management fees charged.

High fund fees basically mean you’re already striving to play catch-up to market-like returns.

Needless to say, we don’t invest in any costly funds any longer. I ditched the mutual fund industry about a decade back now – a decision you can read about including the costly math behind it here.

This is not to say there are not a few mutual funds in Canada, and the companies that manage them, that continue to shine in terms of long-term performance – thanks to their lower-cost structure and diversified approach over their competitors. Lower-cost solutions such as Tangerine funds, Mawer funds and some TD Bank products (e-series funds) come to mind.

If you’re just starting out, you can read this post about some of those alternatives.

You can also now consider some simple all-in-one funds to help you with your investing solutions.

The bottom-line: since lower money management fees are a major predictor and input into future investing gains, it’s best to keep more of your hard-earned money working and less money going out to management fees that offer little to no long-term value.

Beyond my links above, do check out my ETFs page for some of the best, low-cost, diversified funds to own. I’ve also highlighted which ones I own and why!

2.) Lacking diversification – it’s a free lunch!

Did you see the current pandemic coming?

Can you predict gold prices later this year?

I thought so. Same here.

At the end of the day, I have no idea what the future holds. Don’t let any financial expert tell you they know either.

Nobody can predict the future with any accuracy what will happen next. This is why for long-term investing success we should strive for diversification, but it wasn’t always that way for me.

In those aforementioned 20s, the younger My Own Advisor Do-It-Yourself (DIY) investor threw tons of money into tech stocks in the late-1990s. The internet (for those millennials reading this post!) was actually a new thing then. Continue Reading…

Does your Balanced Portfolio need a Remix?

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By Michael Greenberg and Wylie Tollette

(Sponsor Content)

The 60% stocks and 40% bond (60/40) balanced portfolio ― or 70/30 depending on your risk tolerance and time horizon ― has helped many investors build wealth over the past 20 years. It’s a simple recipe for success that has relied on four basic market expectations:

1.) Positive longer-term returns for stocks, driven by underlying economic growth

2.) Falling ― but still positive ― yields on bonds, particularly sovereign bonds

3.) Low and contained inflation

4.) Negative correlations between stocks and bonds (move in opposite directions), particularly during recessions

This last expectation has been especially important. When equity markets are under stress, central banks traditionally have been able to reduce short-term interest rates, increasing the value of nominal bonds. Investor flight to safe-haven assets and quantitative easing (QE) programs initiated by central banks also provide a price boost to the asset class. This helps offset the decline in equities and provides portfolio managers with “dry powder” to reinvest in newly cheap stocks.

But the world has changed. With sovereign bond yields approaching zero in many countries, does this basic equation still hold?

Four Strong (Head)Winds

Today, the 60/40 portfolio faces four formidable headwinds:

  1. Low bond yields – for the past 35 years, yields have fallen and stayed near historic lows. Investors have offset those declines by increasing equity risk; but in a balanced portfolio, more risk means more volatility.
  2. Reduced negative correlation impact – with such low yields, the sought-after negative correlation between bonds and stocks may diminish.
  3. Waning disinflation –increasing pressures on inflation from aggressive monetary and fiscal stimulus, increased protectionism/nationalism, and supply chain disruption/re-shoring could lead to higher yields, which would hurt bond prices.
  4. Limited monetary tools — near-zero/negative interest rates and bloated balance sheets mean less ammunition for central banks to fight the next economic downturn. A move to heavier fiscal policy and resulting increased government bond issuance would also hurt bond prices.

The Real Price of Risk

At this point, taking on more risk may not be worth the incremental return. If your cash flow is negative, you won’t be able to rely on equity risk to carry the load. To fund those cash flows, you would need to sell securities periodically, which introduces timing risk. At the worst, you could be forced to sell a long-term asset during a bad short-term stretch in the markets.

Evolve, don’t abandon

Do these changing conditions mean the trusty 60/40 portfolio should be completely scrapped? We don’t think so. Here are some ways to bring your balanced portfolio up to speed:

  • Adjust your return expectations. Yes, the contribution to returns from bonds will be much lower. On the other hand, we think there is likely a cap on how far and fast yields could rise. That will limit the downside. We suggest a long-term return of 4-5% is a reasonable expectation for a 60/40 portfolio (excluding potential value add from dynamic asset allocation and active security selection).
    . Continue Reading…

Lower for Longer interest rates and Implications for Public Policy

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

In the second half of August, the two countries that share the bulk of the North American continent independently signaled that they are shifting their economic courses and pursuing a public policy initiative which had been considered somewhat heretical until very recently.  We are now left to reflect upon what it all means and how it will play out in the coming months.

Let’s re-cap.  In mid-August, Bill Morneau resigned as Canada’s Minister of Finance and was swiftly replaced by the Prime Minister’s main political fixer, Deputy Prime Minister Chrystia Freeland.  Concurrently, we learned that Trudeau had taken to seeking advice from Mark Carney.  Carney has been the Governor of both the Bank of Canada and Bank of England, a senior consultant at Goldman Sachs, a Chairman of the Financial Stability Board and currently acts as the United Nations special envoy for climate action and finance.

He’s smart, connected and has shown repeatedly that he concurs with the thesis in Minister Freeland’s 2012 bestseller Plutocrats, which spells out just how rapidly income inequality has spread.  There is now a wide consensus that first-world monetary policy has contributed greatly to this phenomenon.  See my thoughts on the Cantillon Effect in a previous blog for more on why that is.  For better or worse, Freeland, Trudeau and to some extent, even Carney are looking to craft a made in Canada policy response.  Their perception is that the COVID-induced slowdown coupled with shockingly low rates has created a once in a lifetime opportunity to be bold.

To that end, the Prime Minister prorogued the federal legislature and, along with his newly-minted Minister of Finance, indicated that when the House resumed sitting, the Throne Speech would put major emphasis on the economy transitioning to a modern economy that is far greener than anything that has ever been seen in Canada previously.  Parenthetically, this transition would also take pains to address growing inequality.  Remember that the Trudeau government was first elected in 2015 with a mandate to look out for and champion ‘people in the middle class and those working hard to join it’.

Continue Reading…

4 ways for a Small Business to thrive

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Pexels Cottonbro

By Sia Hasan

Special to the Financial Independence Hub

Building a company from scratch and being your own boss are the dreams of many. However, it is small businesses that have it the hardest, and you’ll need to bring your A game in order to survive the first year of operation. There are many ways that a small business may stack the deck in its favor, however. Here are the tips you need to know in order to keep your business from going under.

Maintaining Cash Flow

Businesses strive to make money, but a business owner must also cover his or her overhead expenses in order to stay in business. Therefore, one needs to maintain one’s cash flow in order to continue to compete. This is especially pertinent when it comes to invoices, as invoices can be great for consumers while being a detriment to smaller businesses.

An invoice factoring company can help you maintain cash flow by buying your invoices from you at a slight loss in exchange for immediate payment. While this isn’t much an issue for established, successful companies, small businesses can benefit tremendously from this practice.

Reducing Costs

Another important way to strengthen your cash flow is to simply reduce the costs of some of your necessary experiences. In some cases, you can outright eliminate expenses, as well. For instance, you can try to find better prices within your supply chain, or you can even buy directly from manufacturers in order to cut costs. In such cases, you need to be sure that you’re not losing too much in terms of quality or reliability, however. Continue Reading…

The unintended consequences of ESG paternalism

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By Cory Clark

Special to the Financial Independence Hub

As a parent, it can be hard to let your children make their own decisions. Particularly when you question the wisdom of the decisions they may make. At some point however, you have to let children make their own decisions. As they mature, that’s what they deserve, and it’s entirely possible they’ll make the right decision for them, even if it’s not the decision you would have made. One of the unintended consequences of overprotectiveness is that as soon as that child gets the chance, they fly the coop and stay as far away from their overbearing parents as they can. “Local college? No thanks.”

Last month, the U.S. Department of Labor [DoL henceforth] became a helicopter parent and pushed its proverbial children out the door when it issued new proposed rulemaking related to ESG [Environmental, social and corporate governance] investments within retirement plans. “Financial Factors in Selecting Plan Investments” seeks to codify harsh guidance on ESG investments within retirement plans, which will very likely have a chilling effect on the availability of such investment options to retirement plan participants.

The proposed rule is paternalistic to both plan fiduciaries and plan participants. With respect to plan fiduciaries, the DOL takes the unusual step of supplanting industry experts’ professional judgment in favor of their own. But perhaps the more damaging effect of the proposed rule is that it tosses aside the participant’s personal choice related to the values underlying their retirement investments. The Department has in essence said to America’s retirement plan participants, “we know better than you, and as long as you live under our roof…” This positioning can bring about a very predictable response, stop living under that roof and unlock your personal choice. Ironically, the Department issued a second proposed rule the very same month which shows participants the door.

The second proposed rule issued by the DoL, “Improving Investment Advice for Workers & Retirees,” officially reinstated ERISA’s 1975 definition of fiduciary, but made some critical adjustments to its interpretation such that rollover recommendations will be considered a fiduciary act and subject to an annual retrospective review. The proposed exemption would allow otherwise prohibited rollover recommendations, provided that the recommendation is given under an impartial standard of conduct.

DALBAR finds EST investments attractive in DC pensions

A recent DALBAR study shows that ESG investments are an attractant to defined contribution plan participation. It’s only natural that the inverse would also be true; the absence of ESG investments within a plan can be an incentive to invest elsewhere or not invest at all. This incentive is only going to get stronger as the younger generations, who have a greater preference for ESG, begin to make up a greater proportion of the retirement plan market. Continue Reading…