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Saving vs. Investing: Understanding the best approach for Findependence

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By Devin Partida

Special to Financial Independence Hub

Achieving Findependence [aka Financial Independence] requires a balanced strategy combining short-term stability and long-term growth.

Saving and investing both play crucial roles in this journey, serving different financial goals and timelines.

Explore how you can navigate these strategies to optimize your financial portfolio.

 

 

The Role of Saving: Security and Liquidity

Savings are the foundation of Findependence. An accessible savings account provides a safety net for emergencies, such as medical expenses or job loss. Experts recommend maintaining at least three to six months of living expenses in a high-yield savings account or money market fund for quick access.

Here are some key advantages of saving:

  • Risk-free growth: In addition to offering modest interest, savings accounts protect your principal from market fluctuations.
  • Short-term goals: Savings are ideal for upcoming expenses like vacations, home repairs or a new car.
  • Liquidity: Saving provides liquidity during unexpected situations. Certain saving vehicles — like 529 plans — also allow for tax-free growth and withdrawals for qualified expenses.
  • No market risk: Unlike investments, savings are not exposed to fluctuations, making them a reliable choice for safeguarding funds.
  • Psychological benefits: Having a financial safety net reduces stress and fosters confidence in your ability to handle unexpected events.
  • Flexibility: Savings provide liquidity without penalties, making it easy to pivot funds as priorities change.

However, relying solely on saving limits wealth-building potential due to inflation, which can erode the purchasing power of idle cash over time.

The Role of Investing: Growth and Wealth Accumulation

Investing is essential for long-term financial growth, particularly for goals like retirement or major life milestones. By allocating funds to stocks, bonds or mutual funds, you can potentially achieve higher returns that outpace inflation.

Here’s how investing can benefit you:

  • Compound returns: Investments grow exponentially over time due to reinvested earnings.
  • Inflation protection: Historically, investments in the stock market have delivered higher returns than inflation.
  • Wealth generation: Investing enables you to build significant assets over decades.
  • Diversification opportunities: Investments allow you to spread risk across various asset classes, industries and geographies.
  • Passive income generation: Certain investments — like dividend-paying stocks or rental properties — create ongoing income streams.
  • Long-term tax benefits: Investment accounts like individual retirement accounts (IRAs) or tax-free savings accounts (TFSAs) offer tax advantages that amplify growth over decades.

Investing does involve risks, including market volatility and potential losses. It requires a clear understanding of your risk tolerance and financial goals.

Savings and Investments: Finding the right balance

A well-balanced approach integrates saving and investing to address immediate needs and future aspirations. Here are steps to consider:

  • Assess your financial situation: Calculate your emergency savings and allocate sufficient funds to cover unexpected expenses.
  • Define your goals: Short-term goals may require savings, while long-term aspirations like retirement demand an investment strategy.
  • Evaluate risk tolerance: Younger individuals with longer timelines can generally afford higher-risk investments, while those nearing retirement may prefer conservative options.
  • Diversify your portfolio: A mix of savings and investments minimizes risk while capitalizing on growth opportunities.

Practical Tips for Success in Saving and Investing

Finding the perfect balance between saving and investing can seem daunting, but taking specific action steps can make the process manageable and effective. Here are additional practical tips to enhance your financial strategy: Continue Reading…

 Why you should be a bit wary of the U.S. market in 2025

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Getty Images, courtesy BMO ETFs

By Bipan Rai, BMO Global Asset Management

(Sponsor Blog)

When one hears the term ‘American exceptionalism,’ for some investors, the first images that come to mind are perhaps that of a certain President-elect and his inclinations towards jingoism. But the usage of the term outside of the U.S. has intensified of late, particularly when it comes to markets.

Indeed, more than any other time in modern history, the U.S. markets are benefitting from a strong influx of foreign capital (Chart 1). The impact has been profound, with U.S. equity market valuations now at levels that go beyond what is generally thought reasonable, while the U.S. dollar (USD) is trading close to two-year highs. Within the leading global equity index, the U.S. accounts for almost 70% of the weight, well over double where things stood a few decades ago.

Chart 1 – U.S. Attracts more Foreign Capital than any Other Point in History

Source: BEA, BMO Global Asset Management, as of December 31, 2024.

Chart 2 – Two-Year Price Return of Selected Equity Indices

 

*In USD terms, prices only. Source: BMO Global Asset Management, as of December 31, 2024.

Now, there are several easily digestible reasons why the U.S. market continues to capture the hearts and minds of investors worldwide. To start, U.S. economic fundamentals remain sound, with flexible labour and deep capital markets combining to deliver an enviable track record of productivity. That’s directly helped generate impressive earnings for American companies. Additionally, lower debt levels among U.S. households (compared to other developed markets) buttress a strong propensity to consume. As such, the U.S. economy has expanded by an average of just under 3% year-over-year (YoY) over the past four quarters – even with interest rates not far off generational highs.

Chart 3 – Average Real Growth by Economy (Past Four Quarters, Year-Over-Year)

Source: BMO Global Asset Management Q3 2023-Q3 2024

Those sorts of fundamentals form the bedrock of why the U.S. continues to draw in foreign capital. From the eyes of global investors, Japanese and European markets offer too low of a yield, with political risk for the latter becoming more of a risk going forward. Meanwhile, authorities in China appear bent on moving forward with deleveraging in the real estate sector and at the regional government level. That means the necessary stimulus to prop up Chinese consumption will likely be done piecemeal and via monetary policy. Elsewhere, while some Emerging Markets (EM) may still offer relatively attractive yields, the risk profile looks very different as inflation threats linger and the world’s largest buyer of EM goods (the U.S.) becomes more insular. And we haven’t even mentioned the liquidity of U.S. assets – which becomes very attractive during volatile periods. Add it all up, and the risk/return profile in the U.S. looks far better than it does in any other country.

4 Reasons to Reorient Exposures

However, having said the above, the coast is not all clear for another banner year for U.S. assets. Instead, we see strong enough arguments that tell us that U.S. assets shouldn’t perform to the same degree that they have over the past few years. Being less enthusiastic about the theme of ‘U.S. exceptionalism’ means that we will be orienting our strategy for the coming year away from index plays and towards alternative investments and structured outcomes that are tailored towards generating cashflow. There are many reasons why we think this will be the optimal strategy to pursue. Continue Reading…

Canada’s best Asset Allocation ETFs

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By Dale Roberts

Special to Financial Independence Hub

When the Canadian asset allocation ETFs were introduced several years ago, the investment community hailed them as “game changers.” That is, the final nail in the coffin for high-fee / low-performance Canadian mutual funds.

The asset allocation ETFs are well-diversifed, managed global portfolios available at 5 risk levels. The fees represent about a 90%-off sale compared to the typical mutual fund. The fees range from 0.17% to 0.25%. It’s a no-brainer for most Canadians. You can open an account with a discount brokerage, enter one ticker symbol (XEQT for example), enter an amount, press Buy and own thousands of companies around the globe. Are these the best funds available in Canada? Yes, that’s a rhetorical question.

Here’s an ode to XEQT from Loonies and Sense.

 

Cut The Crap Investing is the only blog that tracks the performance of the leading Asset Allocation ETF providers. I also sort them by risk level. For example, you’ll see the performance comparison between the balanced portfolios from Vanguard and BlackRock and the rest of the AA gang. You’ll also see the surprising outlier “winner” that includes modest amounts of bitcoin in its offerings.

Check out the ultimate Canadian asset allocation ETF page. Here’s a teaser: the balanced growth models. They range from 80% stocks / 20% bonds to 90% stocks / 10% bonds. The returns listed are average annual.

Build your own portfolio

While the asset allocation ETFs are the easiest, hands-off way to go, you can certainly build your own ETF portfolio. You’ll save modestly on fees, and you will be allowed some flexibility on how you would like to shape the portfolio. I’ve offered examples of core portfolio models.

Here’s the updated (to the end of 2024) total returns for the core Canadian ETF Portfolios on Cut The Crap Investing. The build-your-own models have outperformed the asset allocation ETFs, in modest fashion. Continue Reading…

7 Business Leaders on handling Dividend Stock volatility

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Image: Jakub Zerdzicki on Pexels

Navigating the unpredictable waters of dividend stocks requires a steady hand and a well-informed strategy. To help you master the art of managing volatility and work toward Financial Independence, seven seasoned business leaders share their invaluable advice. From adopting a long-term perspective to assessing the fundamentals of dividend stocks, these insights are grounded in real-world experience. Whether you’re a seasoned investor or just starting out, this article delivers practical strategies from top professionals to strengthen your investment approach and achieve sustained success.

 

  • Focus on Long-Term Perspective
  • Track Dividend Payout Ratios
  • Maintain a Cash Cushion
  • Diversify Across Multiple Sectors
  • Stay the Course
  • Reinvest Dividends Automatically
  • Check Dividend Stock Fundamentals

During periods of volatility, I focus on maintaining a long-term perspective with dividend stocks and ensuring that the underlying companies have strong fundamentals. I recommend prioritizing dividend growth over just high yields, as companies with a history of increasing dividends, even in turbulent times, tend to be more resilient. One specific piece of advice I offer is to avoid panic selling when the market dips. Instead, consider reinvesting dividends or using the volatility as an opportunity to acquire shares at a lower price, provided the company’s outlook remains strong. This strategy allows you to take advantage of market fluctuations while staying focused on the long-term growth potential of the dividend stream. — Peter Reagan, Financial Market Strategist, Birch Gold Group

Track Dividend Payout Ratios

I discovered that tracking dividend payout ratios has been crucial during market swings: I specifically look for companies maintaining ratios below 75% even in tough times. Just last quarter, when the market got shaky, I held onto Procter & Gamble despite price drops because their steady 60% payout ratio showed they could sustain dividends through the volatility. — Adam Garcia, Founder, The Stock Dork

Maintain a Cash Cushion

As a financial expert, I’ve learned that the best defense during volatile periods is maintaining a cash cushion equal to about 2-3 years of living expenses alongside my dividend stocks. Last month, this strategy helped me stay calm when one of my core holdings dropped 15%: instead of panic-selling, I actually bought more shares at a discount because I knew my basic needs were covered. — Jonathan Gerber, President, RVW Wealth

Diversify across Multiple Sectors

As a financial advisor specializing in income investments, I understand that periods of market volatility can be unsettling: especially for dividend investors who rely on steady income. However, my approach is centered on maintaining a long-term perspective and staying disciplined with my strategy. Here’s how I handle volatility in my dividend stock portfolio: 

In volatile markets, it’s easy to get caught up in short-term price swings. However, I prioritize the fundamentals of the companies I invest in. Are they consistently generating revenue and profits? Are they able to maintain their dividend payouts, even if the stock price fluctuates? Companies with a history of stable earnings and reliable dividend payments are generally better equipped to withstand market downturns.

During times of volatility, I make sure my dividend stocks are well-diversified across multiple sectors. Some sectors—such as utilities and consumer staples—are typically more stable during economic downturns. Diversification helps mitigate the risk that a downturn in one sector will significantly impact my overall income stream. Continue Reading…

Real Life Investment Strategies #6: Beware the Risk of the Cult Stock Roller Coaster

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The Pitfalls of Fanatically Following the Stock Hype

Graphic by Steve Lowrie: Canvas Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub 

“There are recurring cycles, ups and downs, but the course of events is essentially the same, with small variations. It has been said that history repeats itself. This is perhaps not quite correct; it merely rhymes.”

Dr. Theodor Reik

It seems to me that the central tenet of the financial media (group-think central) is to glorify stocks or sectors that have experienced recent outsized returns. The hype of cult stocks extends and is amplified by social media channels and its various influencers.  Ask any reputable financial economist about these past monumental gains and they will indicate that “past performance is not indicative of future returns.”

Despite the restrained advice of these financial experts, it’s easy to get swept up in the hype surrounding these popular stocks and investment trends. Some choose to surrender to FOMO (fear-of-missing-out) and follow these financial fads. for the chance of scoring a big financial win with a little excitement on the side. While these stocks may seemingly promise rapid growth, there are some obvious (and not-so-obvious) risks of chasing high-flying stocks.

It’s important to consider the other option: a more thoughtful, measured investment plan. Maybe not as thrilling, but certainly a better path to reaching your long-term financial goals.

In my experience, the greatest risk to someone’s financial well-being is not so much panicking and selling in a bear market (although that can be devastating), it is getting caught in up in a fad in an up market.  Just  look back at previous fads or bubbles like dot-com stocks (late 1990s-early 2000s), housing and mortgage crisis (mid-2000s), SPACs (2020-2021), and cannabis stocks (2018-2020), to name just a few.  In all these cases, there are numerous examples of hyped stocks running up, but then going down 90% or worse. This is where we need to embrace the theory of history repeating itself to be alerted to the potential pitfalls of investing in cult stocks: they might bring the excitement but they typically underperform and create significant risk.

Let’s explore some examples of how some stocks can achieve a cult-like following and a take realistic look at how they could play out for some real-life investors.

Individual Stock with a Cult-Like Following

Looking back helps us see what is most likely to happen in the future. So, we’ll look at two individual stocks that ended up with a cult-like following.

By 2020, Nvidia was no longer just a stock: it had become a movement. There were legions of investors, bloggers, and social media influencers all singing its praises. You could barely scroll through an investment forum without seeing someone post about Nvidia being the future, with charts projecting its exponential growth.

Similarly, Peloton had developed a near-cult following. The company’s sleek bikes weren’t just fitness equipment: they were a lifestyle. And its stock wasn’t just an investment: it was a symbol of the new, post-pandemic world. As Peloton soared, so did the confidence of its investors, who believed they had found a company that was reshaping fitness forever.

But there are two major problems that plague hyped stocks:

  1. People start to believe that the company can do no wrong and that its growth is limitless. And they make investment decisions based on that ill-conceived confidence.
  2. Investors are real people with real emotions and real egos. Cult-like stocks can cloud judgment, leading to irrational decisions based on emotional narratives rather than rational analysis.

And that’s where the danger lies.

The Reality of Compounding and the Impossibility of Endless Growth

For those watching Nvidia and Peloton stocks with bated breath, it seemed like the stock would climb higher, feeding the belief that it would never stop. But here’s the thing about high growth rates: eventually, they hit a wall.

Let’s break it down: Nvidia’s market value today is about $3.4 trillion, and the entire U.S. stock market is worth around $55.2 trillion. If Nvidia kept growing at 32% annually while the market grew at a typical 10%, in less than 20 years Nvidia would make up 100% of the entire stock market.

That’s impossible.

No company can make up 100% of a market that includes every company. At some point, the math just doesn’t work. Yet in the heat of the moment, many investors don’t think about that. They were so caught up in Nvidia’s incredible growth that they assumed it could just keep going.

But in the stock market, what goes up can come crashing down.

When the pandemic waned and people started going back to gyms, Peloton’s sales fell. Its stock price, which had soared by 500%, tumbled by more than 80%.

What investors didn’t realize is that outsized returns like 32% annually for Nvidia or 500% for Peloton don’t last forever. No stock can keep compounding at such high rates indefinitely. In fact, the higher the growth, the harder it is to sustain.

For every Nvidia that defies expectations for a while, there are countless Pelotons: stocks that rise quickly but fall just as fast. The excitement and fervor around these “cult stocks” can make it easy to ignore the reality: high growth eventually stops, and the bigger the growth, the harder the fall when it comes.

The Emotional Trap of Cult Stocks

When a stock becomes a movement, like Nvidia or Peloton did, investors often fall into an emotional trap. They start to believe that their stock can only go up, and they cling to it even when the data suggests otherwise. This is where the cult-like following can become dangerous. It’s not just about numbers anymore: it’s about identity, belonging, and belief.

A hyped-up investor can come to believe in their stock so strongly that they willfully disregard data that suggests the stock’s looming downfall. And when the stock crashes, it can rock them to their emotional core.

In addition to emotional investing, ego can play a major role in financial decisions. Think about the talk around the office water cooler; it usually involves some light bragging about unimaginable investment gains on the hottest stock. But do you ever hear about the inevitable fall of those cult investments?

People are human. They want their peers to respect them and think they are brilliant. And it feels good to talk about their successes and impress their coworkers. Which makes it even less likely that they will cut their losses and have to admit an investment downfall. In fact, when there is a loss, it can often make the cult investor even more determined to regain their big wins.

Consider how behavioural finance theories impact our investment decisions; it’s such an important concept that we’ve written several blogs on the topic:

Instead of focusing on individual stocks, smart investors build diversified portfolios, which mitigate the emotional highs and lows of stock performance and allow for participation in broader market growth.

The Tale of Three Investors

Let’s take a realistic look at how this could have played out for some real-life investors…

Meet Barry, Robin, and Maurice. They were coworkers at a mid-sized corporation. They had similar lifestyles and investing background/goals:

  • Age 45 – 50
  • Married
  • 2-3 kids, aged 13 – 23
  • Senior manager or director at their company
  • Accumulators: they had made significant progress towards their financial goals but were considering their options to kick it into a higher gear Continue Reading…