General

Q&A: Understanding Liquid Alternatives

Posted By Financial Independence Hub | July 4, 2019

By Brooks Ritchey

(Sponsor Content)

Alternative investment funds are an exciting new strategy class that were previously unavailable to retail investors in Canada. Since they are new to the scene, many advisors and investors are interested, but don’t quite know where to begin. Since I have worked in the alternative investment space for years, I thought I could help explain how investors could benefit from these hedging strategies.

Demystifying Liquid Alternatives for investors

Some advisors feel that these strategies are too volatile or complicated to explain to their clients. We spend a lot of our time trying to explain that these are not complicated mysterious investments. The irony is that many alternative investments, liquid alternatives, especially with regulatory oversight, are about the same risk level as fixed-income products.

Others also worry about the fees on hedge funds, but they have come down a lot. Since I’ve been involved in the hedge fund industry, fees have come down from 2% management and 20% performance fees to 75 basis points management fees and no performance fees for some products.

How would you explain Liquid Alternatives to investors?

It’s an investment that has different characteristics than traditional equity and fixed income. Equity markets depend on the trend in economic growth and bonds depend on a different set of macroeconomic factors, but they’re both dependent on a trend. If you’re trying to find a strategy that’s looking for winners in the equity or in the bond market when the trends aren’t positive, you want to consider liquid alternatives. Continue Reading…

Searching for yield without reaching for risk

Posted By Financial Independence Hub | July 3, 2019

By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

What do almost all major global bond markets have in common thus far in 2019? You guessed it: lower rates. As a result, investors have returned to an environment that could be characterized as “yield challenged” and one that had become all too familiar before last year’s run-up in rates.

Typically, the search for yield comes with added risks as investors either move too far out in duration or lower their credit quality constraints. But what if an investor could enhance yield in their fixed income portfolio while maintaining familiar risk profiles?

Before we focus on a solution, let’s first garner some insights into the Canadian bond market. Similar to the situation south of the border, the Canadian rate outlook going into 2019 was not geared toward a lower rate setting. From a policy perspective, the Bank of Canada (BOC) was projected to continue on its rate hiking path. Prior to the December 2018 U.S. Federal Reserve meeting (the point when expectations began to reveal some change), the implied probability for a BOC rate hike by April was placed around 75% (for those interested, the figure for a rate cut was under 2%). Fast-forward to May 23, and the readings for a rate hike or cut by the end of October are almost split evenly at a little more than 20% each.

CAD 10-Year

How about the Canadian government bond market? As the adjacent graph clearly illustrates, after the 10-Year yield peaked at 2.60% in early October last year, the trend to the downside has been unmistakable. Continue Reading…

How much does it cost to Retire?

Posted By Financial Independence Hub | July 2, 2019

Photo: Elena Saharova, Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Hey, it worked. Last month, I posted “What’s on your mind?” asking you to tell me what financial questions I could help you resolve. Many thanks for your replies!

I’ll start with one good question posed, because it probably crosses everyone’s mind with increased frequency over time: How much money do I need to retire?

Since I’ve been a financial professional now for more than two decades, I feel well qualified to answer that question. The answer is: It depends.

Okay, I realize that isn’t a very helpful answer, even if it’s the truth. Let’s dig a little deeper.

From a purely quantitative perspective, there are several rules of thumb in common use. For example, some say if you’ve got 20 or 25 times your annual income in reserve that should do it. Others suggest you’re ready to retire if you can withdraw no more than 4% of your investment portfolio each year. So, if you have $1 million in your investment accounts, you should plan to withdraw no more than $40,000 annually in a “successful” retirement.

These and similar guidelines offer a decent starting point. But bad luck happens. Even if you’ve diligently saved up 20 times your income, if you happened to retire on the eve of a bear market or if you encounter large unexpected expenses, your handy rule of thumb could end up poking you in the eye. Continue Reading…

Motley Fool: How to move from Saving to Investing

Posted By Jonathan Chevreau | June 29, 2019

What’s the difference between Saving and Investing and how do you move smoothly from the one to the other? Motley Fool Canada has just published the second in a new series of articles by me about the basic steps towards Financial Independence, or what I call “Findependence.” You can find the first one, which ran early in June, here; and the new one by clicking on the highlighted text here: 2 critical steps toward Financial Independence.

The first article discussed how the journey to Findependence hasn’t even begun while you’re still in debt. To paraphrase one of the characters in my book Findependence Day, you can’t even begin to climb the tower of Wealth until you get out of the basement of debt.

It’s nice to be free of debt, whether high-interest credit card debt, student loans or even a mortgage. It’s a big step moving from negative net worth to being merely broke, where your assets and liabilities cancel themselves out. Being free of all debt is certainly a nice place to be if you’ve been anxious over being hounded by creditors. But it’s not financial independence either, which is the stage of life when all sources of income more than meet your monthly financial needs.

As the followup article summarizes, you want to move from Debt elimination to the intermediate step of Saving, and then from Saving to true investing. Saving is being a loaner — you lend money to a bank or other institution and receive a small amount of interest back as well as your principal upon maturity. But to be an investor you want to be an owner: a business owner, through stocks or equities, or more broadly through a diversified basket of equity ETFs.

The end of the piece references a piece by Investopedia about the difference between investing and saving. You can find their explanation here. It says saving is for emergencies and purchases, by which they mean immediate needs. Investing is about a longer-term horizon (defined as seven or more years) and entails more risk than saving. That’s why they refer to the “risk free” return of investing in cash, treasury bills and the like.

Investing is about Money begetting Money

The beauty about saving is that, once the process is begun, it sets the stage for when money begins to beget still more money, a process that will ultimately happen even while you’re sleeping. So does investing: the difference is that saving is a kind of junior partner to investing: it works a bit for you, but nothing so hard as true investing for the long term. Saving begets small amounts of money; ultimately, investing begets huge amounts of money: eventually enough to live on whether or not you choose to work another day in your life. Continue Reading…

You should protect your retirement portfolio assets long before your actual retirement date.

Posted By Financial Independence Hub | June 28, 2019

By Dale Roberts

Special to the Financial Independence Hub

We often think of wealth building and retirement as static dates. We have that accumulation stage when we are building our assets and net worth, and then we have that decumulation stage (retirement or semi retirement) when we are spending our assets. We tend to think of those periods in static terms, with hard stop and start dates. But that could be dangerous thinking thanks to what Dr. Moshe Milevsky of York University describes as the Retirement Risk Zone. That period is typically 5 years before your retirement date and the first 5 years of retirement. That is when the risks are greatest for a retiree.

We need to prepare our investment portfolios well in advance of our planned retirement date. We need to protect our ASSets. And certainly we build wealth in many ways or by many channels. We have our cash and investment portfolios, and we may also have workplace pensions that are building future retirement payments. And of course we have our real estate and perhaps we are also building value and net worth in business ventures. We may have inheritances that we know are likely to come our way. On that front, we don’t want to count those chickens before they hatch.

In this post we’ll discuss protecting the assets that potentially hold the greatest risk: the stocks in your investment portfolios. Of course the funds could be in an RRSP, RRIF, a locked-in plan of sorts, your TFSA or in taxable accounts. And the risk comes from holding those stocks that can be more than volatile at times.

As a refresher, imagine if you had picked January 2008 as your retirement date. In 2007 things are looking rosy and then the Financial Crisis hits and the US stock markets fall by more than 50%. The chart is courtesy of portfoliovisualizer.com

Retirement 2008 start date Your handsome $350,000 RRSP portfolio gets clipped to fall below $200,000. If a retiree was spending down in typical fashion on the above portfolio they would have seen that $350,000 drop to the $170,000 range. If one entered retirement with an aggressive all-stock stance, they might have their retirement permanently impaired. The Retirement Risk Zone is more about the retirement funding math compared to your tolerance for risk.

When should you prepare your portfolio for retirement?

Again, Dr. Milevsky suggests the risks are great even 5 years before retirement. I’ll give an example using perhaps the most dangerous start date for a retiree over the last 50 years: the year 2000. This was the beginning of a stock market correction that simply would not let up. US stocks were down for 3 successive years in 2000, 2001 and 2002. That has only happened twice in US stock market history, you’ll have to go back to the Great Depression of the 1920s and 1930s to find the other event. Canadian stocks were down for 2 years in a row and did not suffer the same level of meltdown (though it was certainly a troubling bear market).

As you can imagine if a retiree had the year 2000 as a retirement start date and they entered retirement with an all stock portfolio that asset bucket would have been permanently impaired. Of course, I’m assuming that they need to spend from that account type. If you need to spend from that plan or retirement bucket, you need to protect those assets at least 5 years in advance.

Here’s an example of failure in the last years of portfolio accumulation for a retiree. The year is 1998, the stock markets are one the greatest kicks in stock market history and our retiree is smiling from ear to ear with those incredible portfolio gains and a planned 2003 retirement date.

In 1998 our future retiree has $350,000 in her RRSP account, she is still adding $700 monthly, or $8,400 annual. Once again, we’ll use the US stock market for demonstration purposes. Of course you hold a more diversified asset mix.

Retirement 2003 No Protection The retiree has been adding monies on a regular schedule for 5 years and has a negative rate of return. The real rate of return when we factor in inflation is even less favourable. The retiree started 1998 with $350,000, added $42,000 and ended the period with just over $369,000.

In Scenario 2 our retiree moves to a Balanced Growth model in 1998. She is now 70% stocks and 30% bonds (I’ve used 10 year treasuries). She enters 2003 with modest but positive returns for the period, and with a portfolio value of $438,000.

Retirement 2003 with Protection And of course, to a point, the more conservative a portfolio (more bonds) the better for the test. But hey, that’s all certainly hindsight as we’ve picked the worst possible retirement start date. Right? Not so fast. Even if we look at the 2008 market correction protecting the assets well in advance works much better, and the more conservative the balanced portfolio, the better. You might at least keep your equity allocation in the 30%-40% area.

*And certainly, one can use other assets beyond bonds to manage risks.

We are on the same last few years accumulation strategy with a 2010 retirement start date. In this example we are ‘protecting’ the funds 6 years in advance.

Portfolio 1 is all US 100% equity.

Portfolio 2 is 60% stocks and 40% bonds.

Portfolio 3 is 40% stocks and 60% bonds.

Retirement 2010 start date various allocations The only time this strategy will fail, that is deliver opportunity cost, is when we take out a severe market correction and invest only in a period of mostly rising markets (bull markets). Of course as an investor or advisor that is not a risk that you want to take. You do not want to guess that a stock market correction is not in the near future. Stock market corrections historically come along with regularity. We are currently in an abnormal period of an extended (mostly) bull market run.