Worried you’re behind the “Magic 8 Ball” when it comes to investing in retirement savings? If your retirement fund is a bit anemic (or nonexistent), there’s no time like the present to get started! It’s never too late to invest your money but do you know where to start? Will explore active, passive, and wise investment options in this quick guide to your financial freedom.
Adobe image courtesy Logical Position
By Dan Coconate
Special to Financial Independence Hub
Investing is often seen as a young person’s game. But the truth is, it’s never too late to start investing your money.
This is especially relevant for retirement planners and seniors. Whether you’re planning ahead or looking to make your savings work harder, investing can play a crucial role in your financial future. Below, we take a closer look at why you should start investing, what to look for when you invest, and how to prepare your family for the future with this wise financial decision.
Is it really never too late to Invest?
Many people think investing is only for the young. But countless success stories prove otherwise. Take Colonel Sanders, for example. He started Kentucky Fried Chicken (KFC) at the age of 65. Another prime example is Ray Kroc, who expanded McDonald’s in his 50s. These stories highlight that it’s possible to achieve financial success later in life, including when you think it’s time to retire.
Certain investments work for different age groups, which makes it easier for seniors to start investing. For instance, dividend-paying stocks offer a steady income. Bonds provide low-risk options suitable for conservative investors. Even real estate is a lucrative investment at any age.
Starting later can be just as rewarding as investing early. The key is finding the right opportunities. By doing so, you can make your money work for you, irrespective of your age and stage in life.
Active vs. Passive Investments
Active investments require regular attention. Examples include actively managed mutual funds and day trading. These investments aim to outperform the market. They need more effort but can offer higher returns.
Passive investments, on the other hand, are more hands off. Index funds and ETFs are good examples. These options track market indexes and require less management. They are ideal for those who prefer a simple approach.
Understanding the differences between active and passive investments is important. By knowing your options, you can choose the one that suits your lifestyle and risk tolerance. Whether you prefer to be hands-on or hands-off, there’s an investment strategy for you.
Benefits of Investing at a Later Stage
Investing later in life offers long-term financial security. It helps grow your money and secures enough funds for retirement. A well-planned investment can provide a steady income stream and offer peace of mind. Continue Reading…
Markets can be Scary but more importantly, they are Resilient
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By Steve Lowrie, CFA
Special to the Financial Independence Hub
Most investors understand or perhaps accept the fact that they are not able to time stock markets (sell out before they go down or buy in before they advance).
The simple rationale is that stock markets are forward looking by anticipating or “pricing in” future expectations.
While the screaming negative headlines may capture attention, stock markets are looking out to what may happen well into the future.
Timing bond markets is even harder than timing stock markets
When it comes to interest rates and inflation, my observation is that the opposite is true. Most investors seem to think they can zig or zag their bond investments ahead of interest rate changes. This is perplexing, as you can easily make the case based on evidence that trying to time bond markets is even more difficult than trying to time equity markets.
Another observation is that many investors tend to be slow to over-react. Reacting to today’s deafening headlines ignores that fact that all financial markets are extremely resilient. Whether good or bad economic news, good or bad geopolitical events, markets will work themselves out and march onto new highs, albeit sometimes punctuated by sharp and unnerving declines. Put another way, declines are temporary, whereas advances are permanent. And remember, this applies to both bond and stock markets.
It is easy to understand why we might be scared about the recent headline inflation numbers and concerned about rising interest. It is very important to keep this in context, which is what we will address today.
I see the bad moon a-risin’
I see trouble on the way
I see earthquakes and lightnin’
I see bad times today
Don’t go around tonight Well it’s bound to take your life There’s a bad moon on the rise
Creedence Clearwater Revival
The Curious Case of Missing Inflation
Image by Shutterstock/Outcome
Prior to the global financial crisis of 2008, if you had asked me what would happen if the Fed and other central banks slashed rates to zero and then left them there for over a decade, I would have told you that it wouldn’t be long before the world faced a serious inflation problem. I would have been dead wrong!
The Phillips curve is an economic concept developed by A. W. Phillips that describes the relationship between inflation and unemployment. The theory holds that there is an inverse tradeoff between the two variables. All else being equal, lower unemployment leads to higher inflation, while higher unemployment is associated with lower inflation.
Phillips’ theory proved largely resilient for most of the postwar era. However, a notable exception occurred in the years following the global financial crisis (GFC). From 2009 to 2021, despite unprecedented amounts of monetary and fiscal stimulus and record low unemployment, global prices remained unexpectedly subdued.
The Evolution of the Phillips Curve
As the chart above illustrates, in the years following the GFC the Phillips curve seemed to have shifted downward. This change allowed global economies to sustain low levels of unemployment that historically would have been accompanied by runaway inflation.
The classic unemployment vs. inflation tradeoff seemed to have vanished, leaving central bankers in the enviable position of being able to leave rates at uber stimulative levels for an extended period without spurring runaway inflation. This dynamic remained in place until 2021, when the rubber of unprecedented quantities of monetary and fiscal stimulus met the road of Covid-related supply-chain disruptions. This combination brought an abrupt end to the disinflation party of the past decade, causing central banks to raise rates at a blistering pace the likes of which had not been seen since the Volcker era of the 1980s.
Declining Interest Rates: How do love thee?
The long-term effects of low inflation and record low rates on asset prices cannot be overstated. On the earnings front, low rates make it easier for consumers to borrow money for purchases, thereby increasing companies’ sales volumes and revenues. They also enhance companies’ profitability by lowering their cost of capital and making it easier for them to invest in facilities, equipment, and inventory. Lastly, higher asset prices create a virtuous cycle: they cause a wealth effect where people feel richer and more willing to spend, thereby further spurring company profits and even higher asset prices. Continue Reading…
Stock market volatility can and will happen, which can really spook many investors.
To help with that, should you use an all-weather portfolio for changing market conditions?
Would an all-weather portfolio be best long-term?
How would I build an all-weather portfolio using Canadian ETFs?
Read on and find out our take, including the pros and cons of this all-weather investing approach.
The portfolio is designed for all seasons
If you prefer a more passive approach to investing, building an all-weather portfolio may be right for you. While this portfolio is designed to perform well during all seasons of the market, from an economic boom or bust and the messy stuff in between, we’ll see below that this approach is not without some flaws and drawbacks – just like any investing approach. Further, you could be missing out on some important aspects or assets for investing entirely.
Understanding how an all-weather portfolio works can help you to decide if this path could be right for you, or even if a blended all-weather approach could make much more sense.
What Is an All-Weather Portfolio?
Just as the name sounds, an all-weather portfolio is a portfolio that’s built to do well, regardless of changing market conditions.
This investing approach was popularized by Ray Dalio, a billionaire investor and founder of Bridgewater Associates, the largest hedge fund in the world. At the time of this post, Bridgewater currently manages over $140 billion in assets.
(FYI – this sounds very impressive of course, but we don’t invest in hedge funds and neither should you!)
Dalio’s all-weather philosophy is largely this:
Diversify your investments, hold specific asset classes in certain allocations, such that the portfolio can perform consistently throughout most economic conditions.
This includes periods of increasing volatility, rising inflation, and more. More specifically, this portfolio strategy is designed to help investors ride out four specific types of events:
Inflationary periods (rising prices)
Deflationary periods (falling prices)
Rising markets (bull/booming markets)
Falling markets (bear/busting markets)
How an All-Weather Portfolio Works
Based on back-testing, essentially Dalio and his Bridgewater team came up with a model after studying the relationship between asset class performance and changing market environments. The result of this relationship crystallized the following asset class allocation that would investors to benefit whether the market is moving up or down or sideways.
Here is the asset class breakdown:
We’ll provide more detailed funds to mimic this portfolio in a bit.
One thing you’ll realize from the portfolio above is the all-weather portfolio takes a much different approach than age-based allocations (i.e., more bonds as you get older in your portfolio), the traditional 60/40 balanced portfolio, or other popular couch potato approaches. It essentially ignores an investor’s personal need for changing risk appetite. A drawback we’ll discuss more in a bit.
The theory of the All-Weather Portfolio is that:
The equity portion will thrive in bull markets.
Commodities and gold should support the portfolio for inflation.
Bonds will help investors when stock market growth is suffering…
Here are some of the ways ETFs can be used strategically to help you sleep better at night.
Image courtesy BMO ETFs/Getty Images
By Erin Allen, VP, Online Distribution, BMO ETFs
(Sponsor Blog)
Volatility is often seen as the price of admission for achieving investment returns, but too much of it can feel like paying a hefty fee for a ride on an intense roller coaster, only to find yourself feeling queasy by the end and unable to enjoy the rest of the amusement park.
If the recent stock market turbulence in early August has left you contemplating panic selling, take a moment to breathe. Market corrections are a normal and healthy aspect of investing, and your portfolio doesn’t have to experience such dramatic ups and downs.
Why? Well, various defensively oriented ETFs can offer strategic ways to manage and mitigate risk, helping you stay the course and remain invested through the market’s inevitable fluctuations. Here are some ideas featuring BMO ‘s ETFs lineup:
Low-volatility ETFs
Imagine the broad market, such as the S&P 500 index, as a vast sea where the waves represent market volatility, and your investment portfolio is your boat navigating these waters.
How your boat responds to these waves is dictated by its beta, a measure that indicates both the direction and magnitude of your portfolio’s fluctuations relative to the market.
To put it simply, if the market’s “waves” have a beta of 1, and your portfolio also has a beta of 1, this means your portfolio will typically move in sync with the market, rising and falling to the same degree.
Now, consider if your boat were lighter and more susceptible to the waves, symbolized by a beta of two. In this scenario, your portfolio would be expected to swing twice as much as the market: more pronounced highs and lows.
Conversely, imagine your boat is a sturdy cargo ship with a beta of 0.5. In this case, your portfolio would react more calmly to market waves, experiencing only half the ups and downs of the market. This stability is what low-beta stocks can offer, and they can be conveniently accessed through various ETFs.
One such example is the BMO Low Volatility Canadian Equity ETF (ZLB)1, which selects Canadian stocks for their low beta. Compared to the broad Canadian market, ZLB is overweight in defensive sectors like consumer staples and utilities, which are less sensitive to economic cycles.
Holding allocations are as of August 19, 2024; sourced here1.
This ETF not only offers reduced volatility and smaller peak-to-trough losses compared to the BMO S&P/TSX Composite ETF (ZCN)2 but has also managed to outperform it — demonstrating that it is very much possible to achieve more return for less risk2.
While ETFs like the ZLB1 are engineered for reduced volatility through low-beta stock selection, it’s important to remember that they still hold equities.
In extreme market downturns, such as the one experienced in March 2020 during the onset of COVID-19, these funds can still be susceptible to market risk. This is pervasive and unavoidable if you’re invested in stocks; it affects virtually all equities regardless of individual company performances.
To fortify a portfolio against such downturns, diversification into other asset classes, particularly bonds, is crucial. However, not just any bonds will do — specific types, like those held by the BMO Ultra Short-Term Bond ETF (ZST)6, are particularly beneficial in these scenarios.
ZST, which pays monthly distributions, primarily selects investment-grade corporate bonds6. The focus on high credit quality, predominantly A and BBB rated bonds, is critical for reducing risk as these ratings indicate a lower likelihood of default and thus, offer greater safety during economic uncertainties.
Moreover, ZST targets bonds with less than a year until maturity6. This short duration is pivotal for those looking to minimize interest rate risk. Short-term bonds are less sensitive to changes in interest rates compared to long-term bonds, which can experience significant price drops when rates rise.
Charts as of July 31st, 2024 6
This strategic combination of high credit quality and short maturity durations7 is why, as demonstrated in the chart below, ZST has been able to steadily appreciate in value without experiencing the same level of volatility as broader aggregate bond ETFs like the BMO Aggregate Bond ETF (ZAG)8.
Buffer ETFs
If you recall the days of using training wheels when learning to ride a bike, you’ll appreciate the concept of buffer ETFs. Just as training wheels keep you from tipping over while also limiting how fast and freely you can ride, buffer ETFs aim to moderate the range of investment outcomes — both up and down.
Buffer ETFs may sound complex, but the principle behind them is straightforward. These ETFs utilize options to limit your downside risk while also capping your potential upside returns.
For example, a buffer ETF might offer to limit your exposure to a maximum 10% price return of a reference asset (like the S&P 500 index) over a year while absorbing the first -15% of any losses during the same period.
If the reference asset rises, your investment increases alongside it, up to a 10% cap. However, if the reference asset declines, the ETF absorbs the first 15% of any loss. Only after this “downside buffer” is exhausted would you start to experience losses.
BMO offers four such buffer ETFs, each named according to the start month of their outcome period when the initial upside cap and buffer limits are set. These include: Continue Reading…
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