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Strategies for Self-Managed Portfolios

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By Del Chatterson

Special to the Financial Independence Hub

First the disclaimer: I am not an expert. Certainly not a certified financial planner or financial advisor. But I have managed my own portfolio for more than thirty years and I’m willing to share the strategies that worked for me and might work for you.

Like the Random Ramblings of Uncle Ralph in my book of advice for entrepreneurs, Don’t Do It the Hard Way [shown on the left], I strongly believe in the value of learning by sharing stories and ideas with my fellow adventurers in life, business and investing. Based on my experience in successfully growing an investment portfolio over several decades, these are my suggestions for your consideration.

Start with educating yourself. Learn from the experts. Read Warren Buffett’s bible, the Intelligent Investor by Benjamin Graham, to understand the basic principles of investment analysis and value investing. (The technical details may be beyond your understanding and are probably more than you need or want to know.) Look at current recommendations and valuation assessments of competent financial analysts to understand their processes and the factors that most affect future prospects for any business. You’ll discover that while there may be consensus, there is never unanimity. Learn to evaluate businesses against the criteria used to identify the top performers in Built to Last and Good to Great by James Collins and Jerry Porras. You will gain confidence and learn to trust your own analysis and instincts to select investments in businesses that you also understand, like and respect. Would you buy from this company? Would you like to work for this company?

Start to build your self-managed portfolio with an online direct-investing resource. You may choose to gradually transition from your current advisor or financial planner as you gain confidence, before deciding whether or not the results justify their fees for portfolio management services. You may decide not to interfere with their good management and avoid taking on the responsibility of managing your own portfolio.

Although I’ve been satisfied with my own portfolio management, I’ve still left some of the family portfolio with an investment advisor. I don’t want all the financial responsibility and it continues to give me a convenient comparative benchmark and resource for evaluating my own portfolio management. But if you’re confident in your knowledge and analysis and in your ability to remain calm, cautious and patient through the inevitable crises and extended downturns, then you’re ready to take charge and do it yourself for some of your investment portfolio.

At this point, the decision depends on your confidence, interest and ability to achieve better performance at lower cost. Although, the rationale for assuming management of a self-directed portfolio can range from loving the challenge and the learning experience to the thrill of taking risks and enjoying the entertainment spectacle of volatile and irrational markets.

If you do decide to start building and managing your own portfolio, it is essential to give yourself some key ground rules related to risk and return, just as you would give your risk tolerance profile and return expectations to your financial planner. Control your impulses with restraining limits on the amount of individual investments and the criteria for risk-reducing diversification. My two overriding guidelines: never more than ten percent of the portfolio in any one investment and never less than fifteen distinctly different investments. Continue Reading…

When the top 1% advises everyone else

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub 

Like most Canadians, financial advisors exist all over the income spectrum.  The major difference is that a disproportionate number of them are highly successful.  That should come as no surprise.  Many would-be clients are comforted by this and some even seek out advisors who are conspicuously successful because obvious opulence is a double form of social proof. First, it implies that advisor is good at what he does by using the rough correlation that financial success and financial savvy correlate highly.  Second, it implies that the client has “made it” by being able to afford the services of someone so obviously brilliant.

In 2020, the top tax bracket [in Canada] kicks in at $214,368, which is just below the threshold for being a one percenter.  It’s only natural that smart, forward-looking professional advisors should attract the smartest and most forward-looking clients.  One percenters.  Similarly, it’s only natural that the most desirable would-be clients should seek out the best advisors.

In some endeavours, merit and talent are difficult to discern.  For instance, doctors are paid through public health programs.  That likely makes it harder to tell which are good and which are not.  Other fields, such as law and accounting, allow for a more conspicuous assessment based on the social norms of affluence.  Basically, the superior professionals can signal their desirability through how they dress, the car they drive, the watch they wear and (if it comes to that) the neighbourhood they live in.  For better or worse, many would-be clients look to these social cues as evidence of competence and excellence.

Jury is out on whether advisors should be like the client

This exercise could have implications for the provision of financial advice.  Many people recommend that, when looking for an advisor, one should actively seek out someone who is more or less like themselves.  In terms of demographics, geography, values and the like, the theory goes that there’s simply a better chance of getting a good fit if you look for an advisor who is like you.  I don’t know how statistically robust the theory is, but it makes sense intuitively.  Of course, online dating sites make similar recommendations and offer similar results.  The jury is out.

If you were to divide Canadians into five equal groups, with each representing a 20% portion of income earners, the top quintile (80% to 100%) would be earning more than the national average (on average), the second quintile (60% to 80% would be earning about the same as the national average (on average) and the three lowest groups (0% to 60% collectively), would all be earning lower than the national average.

Top 20% earn half the disposable household income

The top quintile (20%) earn about half of all disposable household income in Canada.  Perhaps people in the second quintile (top 60% to 80%) might also want and need advice.  It is the second quintile is the most representative of the Canadian average.  It’s this second 20% of the people that also represents about 20% of the disposable income. Beyond that point, however, many people are simply living paycheck to paycheck and saving little or nothing for down the road.  Continue Reading…

Q&A: Fundamentals favour healthcare sector

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By Paul MacDonald (Sponsor Content)

The healthcare sector has been in the spotlight as Big Pharma turns its financial and scientific resources towards a solution to the Covid-19 pandemic. Their efforts to develop a vaccine have put drug companies in a global spotlight and changed perceptions about them.

Beyond a pandemic vaccine, other positive forces are at work in the sector, during a challenging and unusual year. As lockdowns have eased, pent up demand for delayed treatments has been strong. Election year rhetoric south of the border has all but disappeared, making investors optimistic about the prospects for drug companies.

These trends have helped healthcare stocks rebound from their spring lows and the momentum should continue, says Paul MacDonald, Chief Investment Officer at Harvest Portfolios Group Inc. In a Q&A, Mr. MacDonald talked about healthcare’s long term energizers, the philosophy behind the Harvest Healthcare Leaders Income ETF (TSX:HHL) and how the ETF is benefitting from the trends.

Financial Independence Hub: Why have healthcare companies outperformed this year?

Paul MacDonald: Healthcare is what we call a superior good, which means we need it in good times and bad. That affords the sector some positive characteristics in recessions.

For example, between February 28 and April 30, 20201 broader markets were down, but healthcare was the best performing subsector in the midst of all that. The S&P 500 was down 1.12% between those dates, but healthcare was up 8.35% and has continued to advance higher since then. So it did what one would expect it to do.

What are the sector’s long-term energizers?

There are three. The first is aging populations in developed countries, which means an increasing demand for drugs and surgical procedures. This, in turn, is driving technological advances in medical devices, equipment and drugs. The third is that emerging markets are maturing, which means higher demand for basic services, including healthcare insurance.

These are ongoing and noncyclical forces.

How have attitudes changed?

We have seen Big Pharma commit a massive amount of resources towards a solution to Covid-19. That investment has the potential to change our lives for the better and has helped shift the overly negative sentiment towards them.

Coming into the year, things were different. Bernie Sanders’ proposal for a medicare for all cast a shadow over the sector. From a Canadian perspective universal healthcare makes sense, but attitudes in the U.S. are different. Their system is extraordinarily complex, with many vested interests and is resistant to radical change. Joe Biden is more of a centrist on healthcare policy so that eased concerns.

How else has the pandemic affected the sector?

Medical devices were hard hit as elective surgeries were cancelled, which has left a lot of pent up demand. If you think about it, as things recover what will you do first, buy a new TV or get your hips done? I would think hips would be top of the list. So the med techs are seeing activity pick up.

You also like managed care companies

Managed care is not something that we have in Canada. It’s effectively big U.S. insurance companies focused strictly on healthcare. These are massive companies. UnitedHealthcare Group, which is in our ETF, has a market cap of US $296 billion as at September 14, 2020. They manage insurance plans, have physicians and pharmacies they work with and offer employee health and wellness plans.

They also administer Medicare and something called Medicare Advantage, which allows you to upgrade your Medicare plan. The growth rate of their earnings per share is in the mid teens. At the same time you’ve got attractive 16 and 17 times for multiples.

So we really like the business. It has a great growth profile. Continue Reading…

Should I take the Commuted Value of my pension?

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By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

Breaking up is hard to do.

Or is it – when it comes to your employer?

Whether that is voluntary leave or involuntary leave, at some point, some people are faced with a very important financial decision: should I take the commuted value of my pension?

This post will hopefully provide some insights, based on a reader question, including my own situation with my pension to share any considerations as food for thought!

Pensions 101

I already have a very detailed post on pensions including the introductory basics on my site so I won’t repeat all details here, but I think it’s very important to understand there are two main types of pensions that we’ll talk about today:

  • Defined Contribution (or DC for short), and
  • Defined Benefit (DB).

The difference?

Think of your DC plan just as the words sound – your contribution is defined but ultimate pension value is not. Meaning, there are no promises. You’ll get what you’ll get based on what you invest in and the returns of what you invest in over time.

Think of your DB plan this way – your (pension) benefit is defined – meaning your pension value at the end of the line is known, usually based on a formula with your company that goes something like this:

Best Average Five Years’ Salary x Benefit Percentage x Years of Plan Membership = Annual Pension Income

So, using real numbers it could be this for some:

$60,000 x 1.5% x 25 = $22,500

Here is a quick pension comparison summary worth noting:

  Defined Contribution (DC) Plan Defined Benefit  (DB) Plan
Philosophy  Assisting employees accumulate retirement savings during their career. Rewarding long-service employees with a lifetime retirement income.
Investment Decision Employees decide how contributions are invested in (usually) a limited number of funds. Professional money managers look after investment decisions based on strict guidelines.
Investment Risk Employee bears the investment risk (since they selected the investments). Employer bears the investment risk.
Income at retirement  Based on employer and employee contributions and investment performance. Based on a formula that includes your annual earnings and years of service.
Valuing Your Pension Simple, as employees have their account balance readily available. Difficult, the commuted value is not readily available for most pension plans (except at termination). Actuaries help calculate.
Other notes My wife has this plan. I have this plan 🙂

What happens when you leave the organization and you have a pension?

When leaving your employer, if you have a DC plan, things are rather straightforward.

If you own a DC plan, the full market value of that plan at the time of your leave can be transferred to a personal Locked-In Retirement Account (LIRA).

I won’t go into too many details on LIRAs since as you guessed it, I also have other blogposts about that subject including how I manage my LIRA. (I used to have a DC plan when I worked and lived in Toronto. I moved my DC plan money into a LIRA when I left my former employer. I’ve had this LIRA ever since.)

With a DB plan, it’s a bit more complex to say the least. Which brings us to our reader case study for today and my thoughts and comments on that.

Reader Case Study (questions and information adapted slightly for the site):

Hi Mark!

I really enjoy your blog! 

I also really like your concept of hourly passive income wage – it’s something I’m now tracking myself!

Thoughts on this for us although I know you can’t offer specific advice but your perspectives would be good given I have read you have a pension as well. Continue Reading…

3 ways to build your Finances with minimal sacrifice

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Image by Pixabay

Gary Bordeaux

Special to the Financial Independence Hub

Money is an ever important facet of living in human society. As they say, “money makes the world go ‘round,” but it often seems like your bank account is never full enough to meet all your needs, let alone desires. However, there are methods available to help the average person get ahead of the curve to improve their finances and otherwise build their dream lives. Here’s what you need to know.

Financing Luxuries

When thinking of financing, one tends to think of a house or a car. This service has been integral in providing the working class with things that are necessary but prohibitively expensive for quite some time. However, there are other scenarios in which financing expensive products can be the best way to balance smart financial decision making with living your best life. For example, you can finance swimming pools to get the summertime recreation and relief you desire without spending a fortune on it in the moment. By spreading that cost out over time, you can bring your vacation to you without breaking the bank. This principle can also apply to many high end electronics, such as iPads, and it can also apply selectively with general retail products via layaway programs. Using these methods, you can gain the advantages of living beyond your means without actually taking the risk of doing so.

Reducing Costs

One of the most important methods of saving money is by spending less. Some might argue that refusing to spend money on creature comforts and luxuries is the right choice, that is only partially true. While some luxuries can be eliminated, those that enrich your life are important to maintaining mental health. Instead of making meaningful sacrifices, costs can be cut by simply buying less expensive alternatives to costly staples. Name brand products often fill that role, but you can often get the same value at a lower price by choosing off brand products instead. Continue Reading…