General

Should investors buy individual stocks?

Posted By Financial Independence Hub | May 10, 2019

By Steve Lowrie, CFA

Special to the Financial Independence Hub

In most walks of life, rugged individualism is a virtue. No wonder so many investors still seem so determined to beat the odds by trying to pick the very best individual stocks (and avoid the stinkers). Unfortunately, the odds are stacked so high against these sorts of financial heroics, you might as well be buying lottery tickets versus trying to consistently outperform the long-term returns everyone can expect by embracing an evidence-based investment strategy.

I’ve posted on this subject before, in “How understanding statistics can make you a better investor.” Today, I want to take a closer look at why individuals should still avoid picking individual stocks – and, briefly, what you can do instead to come out ahead.

A Grumpy Advisor

There are numerous real-life illustrations that have crossed my path over the years … generally on opposite ends of the spectrum. On one extreme, there is using some mad money to buy shares (usually penny stocks) in an emerging technology or fad. The other extreme is cashing out a well-diversified portfolio and putting everything into one illiquid investment, promising high yields, but with significant hidden risks (mostly private real estate recently).

Often, these individuals would like me to help them with the transaction. I won’t do that. While I can’t stop them from proceeding without me, I can vehemently advise against it. If they’re a client and they still insist on getting in on the deal, they can do so directly, through a discount brokerage account.

Why am I so grumpy about it?

It’s my job

I couldn’t claim to be offering anything remotely akin to best-interest financial advice if I weren’t highly skeptical of investment “opportunities” that conflict with everything I know about how capital markets work. I can assure you, every bit of evidence I’m aware of (based on more than six decades of peer-reviewed, academically grounded research) informs me that dumping your entire nest egg into a single, risk-laden venture flies in the face of good advice.

It’s not even investing

Alright, so maybe you’re already with me on not staking your entire life’s savings on a single bet. But what about that modest stake in a penny stock? Is there any harm done in throwing a bit of fun money at a venture that, at worst, won’t ruin you; and, at best, just may pay off?

The problem is, most investors don’t realize that stock-picking isn’t actually investing. It’s speculating. In practice and expected outcome, it’s no different than gambling in a casino or buying a lottery ticket. As I covered in that past post of mine, the odds are stacked anywhere from mildly to steeply against you, making it far more a matter of luck than skill whether you “win” or “lose.”

This is where I see people running aground, even with seemingly “harmless” penny stock ventures. In my experience, if they happen to lose their stake, they tend to justify it as a “nothing ventured, nothing gained” adventure, especially if they weren’t hurt too badly.

Worse, if someone happens to come out ahead now and then by picking individual stocks, a bevy of behavioral biases (including, but not limited to: confirmation, framing, outcome, overconfidence and pattern recognition biases) tricks them into believing it was NOT random luck. For better or worse, we humans love to conclude we’re somehow smarter than the rest of the crowd. It’s so common, there’s even a name for it: “The Lake Wobegon Effect.”

It’s usually not only incorrect, it’s dangerous to mistakenly assume a successful stock pick happened because you or your stock-picking guru outwitted the entire market. Why is it dangerous? Because it increases the likelihood you’ll try your luck again, potentially with bigger bets. Eventually, you may convince yourself that stock-picking is a great way to invest in general, not realizing how much it’s probably costing you over time. This is especially so if you have no financial advisor to turn to: one who is committed to serving your best interests by showing you how your actual, long-term portfolio performance numbers stack up to a more sensible investment strategy. Which leads me to my final point today …

This rarely ends well

Based on my 25 years of experience, the vast majority of individual stock-pickers not only underperform the general market, they typically lose capital in the long-run. Recalling the casino analogy, even if you win a “hand” or two, the system (capitalism) is essentially set up so the house (the market) comes out ahead in the end, regardless of which players (investors) win or lose along the way. Continue Reading…

Why you need a Financial Planner

Posted By Financial Independence Hub | May 9, 2019

By David Miller, CFP, RFP

Special to the Financial Independence Hub

When you start to look for help with your finances, whom do you ask first? Your best friend, parents, or a banker? By asking for a financial planner first, you are more likely to keep more of your money, save your time, and reduce your financial risks to help you reach your goals.

Here are my three favorite reasons you should look for and hire a financial planner:

Increased Financial Confidence
Accountability of Actions
Advancing Your Financial Literacy

Before I dive into these three reasons, I need to acknowledge that there seems to be some serious confusion for most of the Canadian public about who is advising them and what a financial planner is. Most people either don’t understand or don’t have enough information about who is advising them on their financial matters. This is an especially difficult task as everyone will have a slightly different experience with an advisor, given the advisor’s level of experience, education, skill, registration requirements, ethical requirements, personal biases, employment requirements and specialisation within the industry.

The complexity in the industry, with slight differences between advisor titles, is staggering. You may be meeting with a financial adviser, financial advisor, investment advisor, portfolio manager, investment counsellor, financial consultant and wealth coach among others. They may each do different things, target different niches, and/or specialize in different areas but may not actually provide financial planning services. Adding to the complexity is the lack of legislation for the term financial planner in all provinces except for Quebec.

“There is no legislated standard in place for financial planners or for those who offer financial planning services. In fact, in every Canadian province except Quebec, people may call themselves financial planners without having any credentials or qualifications whatsoever” – Financial Planning Standards Council.

I bring this up because I want to be clear that people looking for financial advice should look to hire and pay for the right type of financial advice. This is in the form of Certified Financial Planning professionals (CFP®) registered with the Financial Planning Standards Council (FPSC, now called FP Canada) and/or Registered Financial Planners (R.F.P.) from the Institute of Advanced Financial Planners (IAFP). These are the people I call financial planners with a nod to the IAFP for placing a higher level of ethical and planning experience requirements upon registrants.

I understand how valuable it can be when you meet the right advisor and get the right advice. Yet the value of financial planning has been described as incredibly difficult to quantify and you may see it as a secondary benefit and a waste of money or time. After all, there is great information on the internet, and your parents, best friend, banker etc. must know how best to help you, right?

Without further ado, here are my top reasons you should look to hire a financial planner instead:

Increased Confidence – Know your WHOLE picture

The statistics speak loudly:

Utilizing the FPSC’s most recent survey is maybe the best way to quantify how financial planning can increase levels of confidence. People feel much more on track with their financial affairs than compared to those without a financial plan.

Let’s look at an example of someone looking to plan their retirement. In preparation, a person must understand not only that they have enough money to last through their retirement but go through a laundry list of to-do items and complex decisions to make. Just to list a few: Continue Reading…

Almost half of North American Boomers may delay Retirement over Savings Concerns

Posted By Jonathan Chevreau | May 8, 2019

Almost half of North American’s young baby boomers would consider postponing retirement because of Savings concerns, a survey out Wednesday finds. Even so, more than half surveyed had to retire early, often because of circumstances beyond their control.

Franklin Templeton’s 2019 Retirement Income Strategies and Expectations (RISE) survey found that 21 per cent of Canadian young baby boomers (ages 55 to 64) in pre-retirement have not saved anything for retirement. And in the United States, 17 per cent of young boomers are in a similar predicament.

13 to 15% expect to work until they die

As a result, 46% of young Canadian boomers and 48% of young American boomers are considering postponing retirement, with roughly 15% of Canadians and 13% of Americans expecting to work until the end of their life. Furthermore, 22% of self-employed Canadians don’t ever plan to retire.

However, things don’t always go as planned: 54% of young Canadian boomers and 60% of their American counterparts retired earlier than expected, compared to 32% and 37% of Canadian and American older boomers aged 65 to 73.

More Canadian young boomers retired due to circumstances beyond their control than Canadian older boomers (34% versus 20%, respectively). There was a slightly wider gap amongst Americans: more American young boomers retired due to circumstances beyond their control than American older boomers (33% vs 17%, respectively).

Boomers in different life situations after post 2009 bull run

“In 2009, when equity markets started to recover, many young boomers were moving up the career ladder; whereas older boomers were approaching retirement at the top of their earning years,” said Duane Green, president and CEO, Franklin Templeton Canada. “A decade later, after a long bull market run, young and older boomers are in different life situations once again. We see many older boomers benefitting from the transfer of wealth from their parents, yet the young boomers have had a challenging experience balancing more expensive lives – due to caring for elderly parents and still having financially dependent children – all while saving for that increasingly elusive retirement.”

Nearly a quarter (24%) of Canadian young boomers in pre-retirement currently support a dependent family member, compared to 9% of retired older boomers. The top three sacrifices young boomers made for dependents were: saving less money, cutting back personal spending and withdrawing from personal savings. They were least likely to use employer vacation time or take unpaid time off work for caregiving.

“With life expectancy increasing and retirement savings becoming ever more challenging, due to the high costs of living, we are seeing increased concern over having enough money for retirement across all generations,” said Matthew Williams, SVP, Franklin Templeton Canada. “Although it’s never too late to start saving, the best time to start contributing to retirement savings vehicles is when a person starts out in their career and may not have big financial commitments like a mortgage or childcare costs: and to find a way to maintain healthy savings habits as they age.”

Those employed by companies offering group RSP or pensions that allows employees to make contributions directly from their paycheque — and perhaps receiving a company match to their contributions — should fully take advantage of this and potential ‘free’ money, as it will assist their retirement nest egg in compounding over time, Williams said.

Americans more concerned about medical expenses in Retirement

Of those Canadians who plan to retire within five years, 86% expressed concerns about paying expenses in retirement. 27% of these Canadians nearing retirement ranked lifestyle as their top concern, compared to 17% of Americans.

Should you rent a home or buy a home? That is the question

Posted By Financial Independence Hub | May 7, 2019

By Dale Roberts

Special to the Financial Independence Hub

It’s a tough question, especially if you live in one of the major cities where home prices are skyrocketing. Or let’s say the home prices have skyrocketed over the last couple of decades. For many potential homeowners it’s a race against the clock. The price of entry might keep increasing at a rate that is faster than you can amass that initial down payment.

On that front the government agencies are working hard to help first time home buyers with greater access to RRSP home buyer’s plan funds and even down payment monies from the CMHC. Please have a read of Cream and sugar and tens of thousands of dollars for first time home buyers.

Trying to raise enough cash for that initial deposit is more than challenging, and discouraging, when you see home prices increase by several percent or more per year. We’ll use Toronto area real estate prices to demonstrate the recent history.

Over the last decade average Toronto home prices have more than doubled. Of course, in certain desirable pockets the price increases have been outrageous. And if we head out to the west coast we’ll see periods when the Vancouver area market had rates of increase over several years that is nothing short of silliness.

You don’t have to own a home or property to build wealth

While home ownership is a wonderful goal, and it can help build that more than important total net worth, it’s not the only route to finding a wonderful place to live and growing your long-term wealth. You can rent and invest the monies that would ‘normally’ go to pay that mortgage and surprising list of costs that come with home ownership.

I recently had a question from a reader on the very subject of renting vs home ownership. For an answer I turned to John Robertson the author of The Value of Simple. John also operates the blog Blessed by the potato. And on that site here is the go-to post for Rent vs Buy. On that page you can click on a rent vs buy spreadsheet.

In an email reply to the reader and me John framed the proposition quite succinctly …

In some cases it can make sense to invest your money and rent instead. Indeed, I’m a renter myself in Toronto. It’s a bit more complicated than the scenario you paint, though. Remember that keeping that house is not just about your mortgage payment, you also have to pay property tax, maintenance, insurance, and somewhere account for the transaction costs for your eventual move — expenses that a renter doesn’t face (or are implicit in the rent). So when you do the math, you’ll have to back those costs out, meaning you need less of a return from your investments to help offset the rent. And exactly what (after-tax) return you use when estimating your investment performance will matter to the decision, too.

The main takeaway from John’s opening remarks is that home ownership (or condo with fees and such) is much more expensive than one might think. Beyond the mortgage and property taxes the additional costs of home ownership is quite surprising.

Check out this home ownership mortgage calculator on ratehub.ca. There are some incredible tools on that site that will help you determine affordability and the expected costs. You’ll discover that you have to add at least several hundred dollars per month in costs above your mortgage.

The Price To Rent Ratio

Work Optional: Retire sooner to live your best life

Posted By Financial Independence Hub | May 6, 2019

By Vicki Peuckert Cook

Special to the Financial Independence Hub

If you’ve spent any time reading about personal finance lately, you’ve likely heard about the “FIRE” movement. FIRE means Financial Independence – Retire Early.

Suze Orman got headlines by announcing she hated the FIRE movement (but she changed her position a few weeks later.) While Clark Howard “FIRE’d” before it ever became a popular thing to do. (If you think “retire early” doesn’t pertain to you, I strongly urge you to keep reading!)

Whether you agree with people who want to retire early in their 30s or 40s or not, it’s not hard to support the idea of becoming financially independent. Making work optional at some point so you can choose how to live your best life makes good sense.

Tanja Hester and her husband, Mark Bunje, left their careers behind to retire early (at ages 38 and 41) after reaching financial independence. Tanja’s new book, Work Optional – Retire Early the Non-Penny-Pinching Way teaches you how to get there too: no matter when you start or what age you’ll be when you leave work for the last time.

Retiring Is about your life, not just your money

It’s hard to think about retirement without focusing on money. After all, retiring without a solid financial plan – especially retiring early – is a recipe for disaster.

Tanja clearly explains what a bad idea it is to think you can just get back into the workforce if you run out of money in retirement. Her conservative advice is to Make Your Plan Bulletproof by diversifying your “magic money” sources.

Tanja doesn’t just tell you what to consider. She provides action steps and detailed information on ways to shore up your finances before quitting your day job for good.

What I really love about Work Optional is how Tanja embeds the importance of financial planning within retirement life planning. She redefines money as a tool to “help you live your best life as soon as possible.”

This helped me think about early retirement less as a race to get done with work but as a path to defining “living” according to your own terms.

Work Optional is organized in 3 main sections:

Determining what kind of life will thrill you
Creating a conservative financial plan to be able to live that life
Adapting to live your best “post-work” life

You can see that crafting and living your retirement dreams bookend the part of retirement planning most people really focus on: money. But Tanja doesn’t let you skip the tough questions you need to answer in order to transition to living the retirement you want.

She knows there is more to it than money, and she asks you to dig deep and engage with the most critical person in your retirement planning: YOU.

You have to do more than read

If you’re on this site, you probably listen to podcasts and read plenty of articles, blog posts, and books focused on personal finance. When I started on my own FIRE journey, I read everything I could find. Even with all of the information I had, I was still hesitant to act.

Did I really understand what I was reading? What if I missed something and made a mistake? Did new information come out that would help with my retirement planning? Continue Reading…