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Fed Watch: The “New” normal is really just the “Old” normal

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By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

The first Federal Open Market Committee (FOMC) meeting of 2019 is now in the books. While the result did not deviate from the market’s expectations on the rate front, the policy statement did provide further evidence that the Federal Reserve (Fed) is going about things in a different way than investors have been accustomed to over the last few years. Is this decision-making process the “new” normal? No, it is really just the “old” normal, or how the Fed typically conducts monetary policy when the Fed Funds Rate target is not zero.

Since the FOMC began raising rates in December 2015, and picked up the pace during the last two years, the plan was to move the Fed Funds Rate target away from zero, i.e., to normalize policy. Now, with the upper band of the policy rate target at 2.50%, or close to what is considered a neutral rate, the voting members have achieved their goal. So instead of raising rates in a somewhat gradual, but more importantly, predictable manner, further possible rate hikes will hinge upon upcoming economic data. In other words, monetary policy has become data-dependent. This is how the FOMC typically went about its business prior to the global financial crisis/great recession.

With inflation below the Fed’s 2.0% target, the policymakers can afford to be patient and, in the words of Chair Powell, “flexible” as well. Certainly, the decline in risk assets as 2018 came to a close created an environment of tighter financial conditions. The question now is whether that development had any visible, longer-lasting impact on economic growth.

Waters will be muddy for a while

So, where do things stand as the markets look ahead? Unfortunately, the waters will be muddy for a while. Due to the partial government shutdown, both the Fed and the bond market have not been receiving any fresh insights on the economy. The only exceptions have been the Bureau of Labor Statistics and private vendors. Continue Reading…

5 mistakes people make buying Term Insurance

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By Jane Rupert

Special to the Financial Independence Hub

An essential component of planning for the future involves planning your finances. After all, when your career finally falls into place, your funds need to be managed appropriately too. How you save, invest, spend and leverage your income can help with deciding how secure (or not secure) your finances for the coming years will be. In times like these, when the avenues and options are aplenty, it shouldn’t be too difficult to choose the right options for yourself. You can also do research on finding recommended independent agents who can help you get the right insurance policy for your need.

However, making mistakes when you try to work things out on your own is only human, and that’s why we’re here to throw light on some mistakes that you can avoid.

When we say mistakes, we’re talking particularly about Term Life Insurance. Term Life Insurance involves selecting the term or duration for which you will be paying your premium and also allowing your policy to mature and grow in monetary value. Needless to say, the longer you let it mature, the larger your policy amount is going to be when you decide to cash it in or pass it on to your family. That being said, it’s a given that we believe in the importance of taking up a life insurance policy. So, let’s also throw some light on mistakes that you should avoid making when you decide to invest in one.

1.) Being hasty

There are tons of policies and financial companies that you can choose from, so why be hasty about it? A common mistake some people make is to go for the first policy that is presented to them, without doing their own research and weighing out the alternatives in the market. Now, this could lead to you overpaying for your policy or taking up too many riders, without deriving any actual, significant benefit from it. Hence, step one is to always check out multiple, get instant term life insurance quotes, make a proper comparison and then decide which policy best suits your requirement.  

2.) Buying small

For some of us, an insurance policy is a way to make up for deficit income. Whether it’s because of disability or unemployment, it’s important to have something as a backup to help you out in times of financial crisis. However, a common mistake people make is to take a policy that is only just enough to make up for their income, without considering the long-term repercussions of it. Taking a small policy amount also means that it won’t last you too long, and if a sudden medical emergency arises, for example, you might burn through that amount in no time. Taking a larger policy amount is a smart move because it ensures that you have a broader net to fall on if times get rough. Continue Reading…

Three times you might want to change your asset allocation

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By Steve Lowrie

Special to the Financial Independence Hub

2018 was a tough year for many investments: including equities, which delivered negative returns.”  As we covered here, periodic negative returns are nothing new. But it’s been a while since they’ve lined up with a calendar year: not since 2011 here in Canada.

I suppose it’s human nature to want to try to avoid the dive by heading for higher ground. So, when markets trend down, this FAQ heats up: Is it time to change my asset allocation?

In past posts, like this one here at the Hub, I’ve generally advised sticking with your investment plans, including your asset allocation, rather than reacting to market volatility. But that doesn’t mean you can’t ever change your asset allocation. Today, let’s cover three times you may want to.

1.) If you’ve built your portfolio on shaky ground

If your current “allocation” is actually just a random assortment of investments, there’s never a bad time to establish an underlying plan to guide the way, and to alter your allocations accordingly. Especially if your current portfolio is high-priced and premised on active management (trying to dodge in and out of winning/losing markets or securities), the sooner you can transition into a solidly built portfolio, the better. In this piece, I covered how to determine and document your asset allocation with an Investment Policy Statement.

2.) If your financial circumstances have changed

What if you receive a financial windfall such as an inheritance, or you encounter a hardship such as losing your job? If your financial “landscape” changes, it makes sense to revisit your asset allocation and adjust it if needed, to reflect any changes in your personal financial goals, and any increased or decreased capacity to take on investment risks.

3.) If your life has changed

Even if your financial circumstances haven’t changed, your life may. Marriage, divorce or widowhood; the birth of a child; a career change or retirement. These are the sorts of events that might call for a fresh look at whether your current asset allocations continue to reflect your evolving needs.

You may have noticed a theme here: If particulars in your own life change, it can make good sense to alter your asset allocation to reflect your revised circumstances.

The flip side of this coin holds true too: Avoid changing your asset allocation just because the markets are heading up, down or sideways.

So, if your annual performance reports had you seeing red at year-end, please ask yourself: Has anything in your own life changed, or are you reacting to market mood swings? If you’ve built a plan and it still reflects your goals, your best bet is to stick with it. That still doesn’t guarantee success, but it still gives you your greatest odds.

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on Dec. 1, 2018 and is republished here with permission. 

Can you afford to launch a startup? Yes!

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By Emily Roberts

(Sponsored Content)

There is a common misconception that starting a business is an expensive proposition. You need equipment, a website, an office, and staff to get the venture off the ground. Sure, in some instances, you will need all that and more: but there are ways to minimize your expenditure and secure funding to help you get going.

Why start a business?

Whether you have been ‘packaged out’ or are looking to transition into a new career, there has never been a better time to start a business. Working for yourself gives you unprecedented freedom. You can work flexible hours, from home if you choose, and any profit you make is yours. For anyone tired of working for someone else, while they reap the benefits, there’s a lot to like about being your own boss.

Financial support for entrepreneurs

There is a ton of support available for entrepreneurs. Fundera recently compiled a list of 105 different ways to secure money for your small business. You might not be eligible for all of them, but it’s worth taking a look.

Look for free loans first. These don’t need to be repaid, so it’s a win-win for you. If your startup is in a tech, science, or health niche, there are Federal small business grants available. These include the Small Business Technology Transfer Program and the Small Business Innovation Research Program. Check grants on offer in your state too, as there is less competition for state funding.

To check the full list of available grants and funding packages, click here.

Tools and equipment

Many businesses need tools and equipment to get started. For example, if you want to set up a handyman business, you’ll need a truck, basic tools, and possibly gardening equipment. Some of these you’ll likely already have, but you may need to purchase other items. Continue Reading…

How to build the best long-term stock portfolio for retiring in Canada

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Diversification, RRSPs, and compounding interest are important topics for investors building portfolios for retiring in Canada

Long-term stock investment strategies aren’t built to make a fast dollar. They are built to prosper over time, and most important, teach you how to pick the right stocks. Retiring in Canada can be easier if you follow our tips for building a long-term stock portfolio.

Retiring in Canada: Diversify your holdings to create a long-term retirement portfolio

One of our key rules for successful investing is to maintain a diversified stock portfolio. This means spreading your money out across most, if not all, of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

Here are some additional suggestions to prepare investors for retiring in Canada:

  • When it comes to a diversified stock portfolio, stocks in the Resources and Manufacturing & Industry sectors expose you to above-average share price volatility.
  • Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
  • Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

Conservative or income-seeking investors may want to emphasize utilities and Canadian banks for their high and generally secure dividends.

Long-term value investing is a key part of building a balanced and diversified portfolio

The core of the long-term value investing approach is identifying well-financed companies that are established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

Here are three of the financial ratios we use to spot them:

  • Price-earnings ratios
  • Price-to-sales ratios
  • Price-cash flow ratios

A long-term investment strategy for retiring in Canada maximizes compound interest

Compound interest — earning interest on interest — can have an enormous ballooning effect on the value of an investment over the long-term. It can be considered the mother of all long-term investment strategies. This tip is especially important for young investors to learn. The benefits of this stock trading tip apply to both dividend-paying stocks and fixed-return, interest-paying investments such as bonds. When you earn a return on past returns, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

To profit from this tip, you need to pay attention to steady drains on your capital, even seemingly small ones: like high brokerage commissions. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.

Registered Retirement Savings Plans as an option for retiring in Canada

Registered Retirement Savings Plans, or RRSPs, are a form of tax-deferred savings plan. RRSP account contributions are tax deductible, and the investments grow tax-free. When you begin withdrawing funds from your RRSP, they are taxed as ordinary income. RRSPs are the best-known and most widely used tax shelters in Canada.

Bonus tip: If you’re retiring in Canada soon, you should switch your RRSP to a registered retirement income fund (RRIF)

Why should you switch your RRSP to a registered retirement income fund (RRIF) if you’re retiring soon in Canada: as opposed to other options?

If you have one or more RRSPs, you’ll have to wind them up at the end of the year in which you turn 71. We think converting your RRSP to a RRIF (registered retirement income fund) is the best option for most investors. You have three main retirement investing options:

  • You can cash in your RRSP and withdraw the funds in a lump sum. In most cases, this is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income.
  • You can purchase an annuity.
  • Proceed with the RRSP to RRIF conversion.

Converting your RRSP to RRIF is the best retirement investing option for most investors. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal.

Like an RRSP, a RRIF can hold a range of investments. One convenient thing to note about the RRSP-to-RRIF conversion process is you don’t need to sell your RRSP holdings when you convert: you simply transfer them to your RRIF.

Retiring in Canada can be easier if long-term strategies are used. Have you employed any short-term investment strategies to prepare for retirement, and if so, how have they performed for you?

If you’ve already retired, what investment tips would you offer to those just planning their retirement finances?

 

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was originally published in 2017 and is regularly updated, most recently on July 10, 2018. It is republished on the Hub with permission.