General

The economy and stock markets making for strange bedfellows

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By Ian Riach and David Andrews, Franklin Templeton Canada

(Sponsor Content)

Equity markets that bear little resemblance to the wider economy has been one of the major investment stories of 2020. It has been an historic year, marked by some wild swings in stock valuations, and with the prospect of much more volatility to come. The U.S Presidential Election in November looms large on the horizon, not to mention the small matter of COVID-19.

The coronavirus has devastated the world economy; in its most recent forecast, the IMF predicted a global economic contraction of 4.9% for 2020. To put that number in perspective, such a downturn would represent the worst annual decline since the Great Depression of the 1930s.

Equity markets tell a different story, and stocks have rallied strongly since the bear market lows of March this year. In fact, U.S. equities reached record highs with the S&P 500 up more than 21% on a one-year basis at the end of August.

This disparity has brought the relationship between stocks and the overall economy into sharp focus in 2020. While both the U.S. and Canada posted some positive job numbers in August, unemployment remains high (10.2% in Canada; 8.4% in the U.S.) and the stimulus measures that kept the economy afloat during the lockdown will not continue indefinitely. Then there is the virus itself to consider, particularly the threat of a second wave that is even more devastating than the first, which is what happened with the Spanish Flu of 1918–1920.

The economy is precarious

The economy is clearly in a quite precarious position and some areas (tourism, hospitality, air travel) could take years to recover, if at all. It does seem logical to presume that stock market performance and economic conditions should go hand in hand — economic growth resulting in higher corporate profits and in turn, higher share prices.

Often that is not the case, with a low, and sometimes even negative, correlation between stock market returns and GDP throughout history. Despite Donald Trump’s assertion that everything is fine when the stock market goes up, the stock market is not the economy.

Stock markets, represented by indices such as the S&P 500, are comprised of a very select group of firms that are publicly traded. Most indices are market cap weighted, which means larger firms have more of an impact on overall index movements — think of the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks and their influence this year.

The chart above displays just how influential large stocks can be on an index. Year to date, the S&P 500 has a positive return but only because of strong returns by the FAANG stocks. The ‘other 495 stocks’ have not fared nearly as well as the index would imply. It is clear that a few companies have benefitted from the fallout of the COVID-19 pandemic, but most have not. Continue Reading…

Vanguard’s VRIF: Your new single-ticket Retirement Income Solution

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Two years ago, Vanguard launched a suite of asset allocation ETFs that changed the game for DIY investors in their accumulation years. These balanced ETFs provide low-cost, global diversification, and automatic rebalancing with just one fund.

On Wednesday (Sept 16), Vanguard announced another evolution in the asset allocation ETF space with a new product aimed at retirees in the decumulation phase. The Vanguard Retirement Income ETF Portfolio, or VRIF, uses global diversification and a total return approach to provide steady monthly income at a target payout rate of 4% per year.

ETF TSX Symbol Management fee Target annual payout
Vanguard Retirement Income ETF Portfolio VRIF 0.29% 4%

Saving for retirement is by far the number one objective for investors and Vanguard believes that space is well covered with their now flagship products like VEQT, VGRO, and VBAL. An investor in his or her accumulation phase could simply move down the risk ladder, switching from VEQT to VGRO to VBAL as they get closer to retirement age.

But what to do with your ETF portfolio in retirement? It’s a question I get every time I mention the benefits of investing in asset allocation ETFs. Prior to today, the answer was to sell ETF units as necessary to meet your spending needs or rely on smaller, quarterly distributions of around 2% per year.

With VRIF, investors get a predictable monthly income stream (targeted at 4% per year) to help meet their regular spending needs and not have to worry about rebalancing and/or selling ETF units.

Indeed, you could think of VRIF as the retirement equivalent of VBAL.

Vanguard Retirement Income ETF Portfolio (VRIF)

VRIF is a single-ticket income solution. It’s a wrapper containing eight underlying Vanguard ETFs that offer global exposure to more than 29,000 individual equity and fixed income securities.

Related: Top ETFs and Model Portfolios in Canada

Here’s a look under the hood of VRIF:

Asset class ETF Weight
Canadian equity VCN 9.0%
Canadian aggregate fixed income VAB 2.0%
Canadian corporate fixed income VCB 24.0%
Emerging markets equity VEE 1.0%
U.S. fixed income (CAD-hedged) VBU 2.0%
U.S. equity VUN 18.0%
Developed ex North America equity VIU 22.0%
Global ex U.S. fixed income (CAD-hedged) VBG 22.0%

Here is the geographic breakdown of VRIF’s holdings:

  • Canada – 35%
  • United States – 20%
  • Developed ex North America – 44%
  • Emerging markets – 1%

VRIF focuses on a total return approach using an approximate asset allocation of 50% equity and 50% fixed income. This approach allows the portfolio to payout from capital appreciation in years when the portfolio yields fall below the target.

A total-return approach is more tax-friendly because VRIF can distribute from capital appreciation. In that case, only the difference between the cost basis and the sale price is taxed. Meanwhile, the full dividend distribution from underlying securities is taxable.

Vanguard highlights the transparency of VRIF and its underlying holdings, saying because its building blocks are clear, you always know what you’re investing in and why, adding that regular monitoring and rebalancing helps maintain exposures across key sub asset classes and risk levels.

VRIF’s 0.29% management fee (before taxes) is roughly one-third the cost of any comparable monthly income mutual fund in Canada. Costs matter, especially to retirees with sizeable portfolios who are looking to keep more of their returns and protect their investment base. Continue Reading…

Book Review: 12 takeaways from Michael Cohen’s Trump book, Disloyal

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There are of course a glut of books about Donald Trump, especially now we’re fewer than two months away from the U.S. election. We have previously looked at several of these from an investment point of view, and most recently Mary Trump’s book, Too Much and Never Enough.

On the weekend I read Michael Cohen’s Disloyal, which — like Mary Trump’s book — provides the kind of insider perspective that outsider journalists and authors can’t quite match. Cohen spent a decade as Donald Trump’s personal lawyer and “fixer” and as he says in the book, “I know where the skeletons are buried, because I helped bury them.”

In its review this week, the Washington Post is a bit harsh on Cohen but I found the book to be among the most insightful I have read about Trump: certainly more enlightening than John Bolton’s snoozer, or some of the early journalistic books like Michael Wolff’s Fire & Fury.

Below are a dozen takeaways that provide either insights not before quite articulated, or which seem to bear repeating. While much of what follows may be known or hinted at it in earlier books and journalistic investigations, Cohen wraps it all up with his ten years of close observance of Trump as he evolved from real estate hustler to Reality Show “star” and now his turn as the Reality TV president.

Clearly, Cohen views Trump as a purely transactional beast who cares little for anything but his own hide and possibly his close family members. He doesn’t come out and say it explicitly but my own view of Trump is that he epitomizes the single-minded pursuit of the four goals cherished by many in this secular society: Money, Power, Sex and Fame. And give him credit for this if nothing else: he certainly has attained copious quantities of all four.

1.) Motivation to run in the first place was as a “lark and a PR stunt.”

Trump, largely at Cohen’s instigation, initially decided to run for president because “it would be cool” and as “a lark and a P.R. stunt.” Or as Cohen has famously said, the presidency would prove to be “the greatest infomercial in the history of politics.” Not exactly noble motivations and there’s not a hint of even pretending it was ever about “public service.” Even if Trump’s team thinks he deserves the Noble Prize (which his team infamously misspelled the other day, when the correct spelling of course is “Nobel,” after Alfred Nobel.)

2.) What’s with the Putin obsession?

Trump’s fascination for Russia’s Vladimir Putin is based on his perception that Putin is also the richest man in the world, and therefore hugely influential. He also serves as a model for the “dictator for life” aspiration Trump clearly harbours. And, Cohen insists that should he lose the November election, he will try to find a way not to leave.

3.) “a cheat, a liar, a fraud, a bully, a racist, a predator, a con man.”   

No surprise here on this list of character traits. From page 15 of the e-book I read on SCRIBD:

“…. I bore witness to the real man, in strip clubs, shady business meetings, and in the unguarded moments when he revealed who he really was: a cheat, a liar, a fraud, a bully, a racist, a predator, a con man.”

It’s been previously reported how Trump has repeatedly stiffed contractors but Cohen cites several particular examples, including even those that backfired: like when he tried to welch on one of those famous $130,000 porn star payoffs covered by the tabloid National Enquirer.

4.) Pathological lying and baseless smears

The dirty tricks and pathological lying will continue. Cohen nicely recaps how the birtherism lie about Barack Obama originated, which first propelled Trump to media prominence. Similarly, he recaps the shameful smears that let Trump eliminate his Republican rivals in 2015-2016, ending with the smear about Ted Cruz’s father’s alleged (and ridiculous) role in the assassination of JFK.

5.) Sexual allegations

There’s plenty of salacious material about Trump’s sexual predator inclinations, both as the owner of beauty pageants and various ogling incidents, including ones about Cohen’s own daughter on a tennis court. That same daughter declared soon after Trump’s run was announced that he “wasn’t qualified” to become president. Out of the mouths of babes …. Continue Reading…

8 financial benefits employers can use to attract good employees

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In today’s environment, great candidates are not just looking for a competitive salary. They want great benefits as well! With many companies offering unique perks like extended vacation days or flex time, it is important that you bring something to the table that stands out. Financial benefits are a great way to do just that! 

By rewarding employees with more than just disposable income, you are creating new opportunities for things that they find rewarding. To get a better understanding of how different companies implement financial benefits, we chatted with eight business leaders about their approaches. Check out their ideas below!

Signing Bonus

While offering a signing bonus isn’t a necessity, employees greatly appreciate it. This could give your new employee some extra cash to compensate for moving or for making up for the time in between jobs. It is a great way to say “welcome to the team!”  — Pete Newstrom, Arrowlift

Pension Matching 

To attract good employees, it is necessary to offer something competitive that other companies might not offer. Matching your employee’s 401(k) contributions up to a certain percentage is a great way to let the people that work for you know that you care about their future. — Chris Dunkin, Portable Air  Continue Reading…

Big Data & AI: What’s the Connection?

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By Lachlan Malone

Special to the Financial Independence Hub

Big Data and AI are buzzing technologies that are gaining traction by the day due to their potential to revolutionize their respective fields completely. Aside from the promise they show by themselves, their combination might revolutionize the world as we know it.

Data has played a critical role in marketing, analysis, and corporate endeavors. With the addition of AI, those fields will change for the better in a multitude of ways.

In this article, we’ll explore everything there is to know about these two technologies and how their merger could change the virtual landscape as we know it.

What are Big Data and AI?

Big data and AI are two different technologies. What ties them together is the popularity and traction they’ve garnered in recent years. Both technologies are relatively young and still have many evolutions to undergo before they’re fully implemented.

Big Data

Big data is a data field that promises to analyze, refine, and assess vast amounts of otherwise too complex data for conventional means. This technology could revolutionize how we deal with data and significantly impact the corporate world.

Big data is the next logical step in the data world and promises to solve current stump traditional data processing software issues. It can do this through advanced data processing, which is often assisted by some form of AI.

AI

AI stands for artificial intelligence, a software program that mimics human and animal intelligence. Chatbots, problem-solving software and other machines capable of learning are all considered AI. AI is one of the most promising technologies of the 21 countries and has many potential implementations.

Since it’s one of the most popular technologies, investments and improvements are being made daily. This cognitive technology could change the way we live by a considerable margin.

How are Big Data and AI connected?

While both are popular technologies that show promise to change the world as we know it, as of now, there is minimal connection between them. The relationship between AI and Big Data could significantly augment the desirable features of both.

The implementation of this connection is usually seen in data refinement software. Data, in its initial form, is known as raw data and is virtually useless. It requires extensive refinement to become a usable piece of data, and that’s where AI steps in.

Since AI is a cognitive mimicking technology, it could significantly augment the quality of the refined data. Data refinement becomes seamless through AI, making things like business analytics simple, quick, and efficient.

AI works well with big data since AI machine learning and deep learning technologies are getting more sophisticated by the day – it’s hard to predict what the future could hold for this technology.

What does this combination provide?

This combination works well to bring both technologies to new horizons. Machine learning isn’t a simple or automatic process, as it requires vast amounts of data. Huge amounts of data need a lot of processing power and cognitive problem-solving capabilities to undergo refinement. Through this merger, the two technologies complement each other.

Most business, marketing, and analysis landscapes undergo fundamental changes in operation, sophistication, and complexity through their mutual evolution.

Below, we’ll list four ways that this combination promises to revolutionize the world, and how it’s doing so: Continue Reading…