Inflation

Inflation

Retired Money: Should Retirees speculate?

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My latest MoneySense Retired Money column has just been published, and looks at whether speculation has any place in the portfolios of retirees or those almost retired. Click on the highlighted headline to access the full column: Should retirees speculate? 

As I confess in the piece, even at the ripe old age of 67, Yours Truly has been known to indulge in the odd speculative investment, not always with positive results. You may have seen the oft-used distinction between “Serious Money” and Play Money, aka Fun Money or Mad Money. Mad Money typically means investing money you “can afford to lose,” which usually means relatively small amounts in individual stocks.

No one wishes to lose money, of course; on the other hand, the inevitable trade-off is risk and return. These days, young Millennial day traders congregate at the Robinhood platform: since the Covid crisis hit many of the most popular trades there would strike retirees as unabashed speculations: betting, for instance, that depressed airlines, hotels and cruise line stocks will soar once a Covid vaccine is available. The operative word with this cohort seems to be FOMO: Fear of Missing Out.

The advisors consulted in my MoneySense column say no more than 10% of your total equity portfolio should be allocated to speculations like penny stocks, marijuana, cryptocurrencies or other flyers. To me, speculations should be managed just like a venture capital fund approaches investing in risky startups: Of five specs, they figure one may go to zero, three break even and you hope the fifth results in the proverbial 10-bagger or even 100-bagger, assuming you’ve identified the next Apple, Amazon or Netflix.

Analogy to Las Vegas

While being governed by the 10% rule — which means the more you have the more you have available to speculate — personally I imagine myself in Las Vegas and set limits on what I intend to gamble with. (Let’s use that word, for in a way that’s what it is). Continue Reading…

Does your Balanced Portfolio need a Remix?

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By Michael Greenberg and Wylie Tollette

(Sponsor Content)

The 60% stocks and 40% bond (60/40) balanced portfolio ― or 70/30 depending on your risk tolerance and time horizon ― has helped many investors build wealth over the past 20 years. It’s a simple recipe for success that has relied on four basic market expectations:

1.) Positive longer-term returns for stocks, driven by underlying economic growth

2.) Falling ― but still positive ― yields on bonds, particularly sovereign bonds

3.) Low and contained inflation

4.) Negative correlations between stocks and bonds (move in opposite directions), particularly during recessions

This last expectation has been especially important. When equity markets are under stress, central banks traditionally have been able to reduce short-term interest rates, increasing the value of nominal bonds. Investor flight to safe-haven assets and quantitative easing (QE) programs initiated by central banks also provide a price boost to the asset class. This helps offset the decline in equities and provides portfolio managers with “dry powder” to reinvest in newly cheap stocks.

But the world has changed. With sovereign bond yields approaching zero in many countries, does this basic equation still hold?

Four Strong (Head)Winds

Today, the 60/40 portfolio faces four formidable headwinds:

  1. Low bond yields – for the past 35 years, yields have fallen and stayed near historic lows. Investors have offset those declines by increasing equity risk; but in a balanced portfolio, more risk means more volatility.
  2. Reduced negative correlation impact – with such low yields, the sought-after negative correlation between bonds and stocks may diminish.
  3. Waning disinflation –increasing pressures on inflation from aggressive monetary and fiscal stimulus, increased protectionism/nationalism, and supply chain disruption/re-shoring could lead to higher yields, which would hurt bond prices.
  4. Limited monetary tools — near-zero/negative interest rates and bloated balance sheets mean less ammunition for central banks to fight the next economic downturn. A move to heavier fiscal policy and resulting increased government bond issuance would also hurt bond prices.

The Real Price of Risk

At this point, taking on more risk may not be worth the incremental return. If your cash flow is negative, you won’t be able to rely on equity risk to carry the load. To fund those cash flows, you would need to sell securities periodically, which introduces timing risk. At the worst, you could be forced to sell a long-term asset during a bad short-term stretch in the markets.

Evolve, don’t abandon

Do these changing conditions mean the trusty 60/40 portfolio should be completely scrapped? We don’t think so. Here are some ways to bring your balanced portfolio up to speed:

  • Adjust your return expectations. Yes, the contribution to returns from bonds will be much lower. On the other hand, we think there is likely a cap on how far and fast yields could rise. That will limit the downside. We suggest a long-term return of 4-5% is a reasonable expectation for a 60/40 portfolio (excluding potential value add from dynamic asset allocation and active security selection).
    . Continue Reading…

Lower for Longer interest rates and Implications for Public Policy

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

In the second half of August, the two countries that share the bulk of the North American continent independently signaled that they are shifting their economic courses and pursuing a public policy initiative which had been considered somewhat heretical until very recently.  We are now left to reflect upon what it all means and how it will play out in the coming months.

Let’s re-cap.  In mid-August, Bill Morneau resigned as Canada’s Minister of Finance and was swiftly replaced by the Prime Minister’s main political fixer, Deputy Prime Minister Chrystia Freeland.  Concurrently, we learned that Trudeau had taken to seeking advice from Mark Carney.  Carney has been the Governor of both the Bank of Canada and Bank of England, a senior consultant at Goldman Sachs, a Chairman of the Financial Stability Board and currently acts as the United Nations special envoy for climate action and finance.

He’s smart, connected and has shown repeatedly that he concurs with the thesis in Minister Freeland’s 2012 bestseller Plutocrats, which spells out just how rapidly income inequality has spread.  There is now a wide consensus that first-world monetary policy has contributed greatly to this phenomenon.  See my thoughts on the Cantillon Effect in a previous blog for more on why that is.  For better or worse, Freeland, Trudeau and to some extent, even Carney are looking to craft a made in Canada policy response.  Their perception is that the COVID-induced slowdown coupled with shockingly low rates has created a once in a lifetime opportunity to be bold.

To that end, the Prime Minister prorogued the federal legislature and, along with his newly-minted Minister of Finance, indicated that when the House resumed sitting, the Throne Speech would put major emphasis on the economy transitioning to a modern economy that is far greener than anything that has ever been seen in Canada previously.  Parenthetically, this transition would also take pains to address growing inequality.  Remember that the Trudeau government was first elected in 2015 with a mandate to look out for and champion ‘people in the middle class and those working hard to join it’.

Continue Reading…

Vanguard’s VRIF: Your new single-ticket Retirement Income Solution

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Two years ago, Vanguard launched a suite of asset allocation ETFs that changed the game for DIY investors in their accumulation years. These balanced ETFs provide low-cost, global diversification, and automatic rebalancing with just one fund.

On Wednesday (Sept 16), Vanguard announced another evolution in the asset allocation ETF space with a new product aimed at retirees in the decumulation phase. The Vanguard Retirement Income ETF Portfolio, or VRIF, uses global diversification and a total return approach to provide steady monthly income at a target payout rate of 4% per year.

ETF TSX Symbol Management fee Target annual payout
Vanguard Retirement Income ETF Portfolio VRIF 0.29% 4%

Saving for retirement is by far the number one objective for investors and Vanguard believes that space is well covered with their now flagship products like VEQT, VGRO, and VBAL. An investor in his or her accumulation phase could simply move down the risk ladder, switching from VEQT to VGRO to VBAL as they get closer to retirement age.

But what to do with your ETF portfolio in retirement? It’s a question I get every time I mention the benefits of investing in asset allocation ETFs. Prior to today, the answer was to sell ETF units as necessary to meet your spending needs or rely on smaller, quarterly distributions of around 2% per year.

With VRIF, investors get a predictable monthly income stream (targeted at 4% per year) to help meet their regular spending needs and not have to worry about rebalancing and/or selling ETF units.

Indeed, you could think of VRIF as the retirement equivalent of VBAL.

Vanguard Retirement Income ETF Portfolio (VRIF)

VRIF is a single-ticket income solution. It’s a wrapper containing eight underlying Vanguard ETFs that offer global exposure to more than 29,000 individual equity and fixed income securities.

Related: Top ETFs and Model Portfolios in Canada

Here’s a look under the hood of VRIF:

Asset class ETF Weight
Canadian equity VCN 9.0%
Canadian aggregate fixed income VAB 2.0%
Canadian corporate fixed income VCB 24.0%
Emerging markets equity VEE 1.0%
U.S. fixed income (CAD-hedged) VBU 2.0%
U.S. equity VUN 18.0%
Developed ex North America equity VIU 22.0%
Global ex U.S. fixed income (CAD-hedged) VBG 22.0%

Here is the geographic breakdown of VRIF’s holdings:

  • Canada – 35%
  • United States – 20%
  • Developed ex North America – 44%
  • Emerging markets – 1%

VRIF focuses on a total return approach using an approximate asset allocation of 50% equity and 50% fixed income. This approach allows the portfolio to payout from capital appreciation in years when the portfolio yields fall below the target.

A total-return approach is more tax-friendly because VRIF can distribute from capital appreciation. In that case, only the difference between the cost basis and the sale price is taxed. Meanwhile, the full dividend distribution from underlying securities is taxable.

Vanguard highlights the transparency of VRIF and its underlying holdings, saying because its building blocks are clear, you always know what you’re investing in and why, adding that regular monitoring and rebalancing helps maintain exposures across key sub asset classes and risk levels.

VRIF’s 0.29% management fee (before taxes) is roughly one-third the cost of any comparable monthly income mutual fund in Canada. Costs matter, especially to retirees with sizeable portfolios who are looking to keep more of their returns and protect their investment base. Continue Reading…

Q&A: The case for Gold

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By Michael Kovacs

(Sponsor Content)

The case for gold is still strong.

Gold has had a record run this year with the price passing through US $2,000 per ounce. That has pushed the S&P TSX Global Gold Index is up 48.98% [1], year-to-date, making it a top performing group on the Toronto Stock Exchange. By comparison, the S&P/TSX composite index was down 2.68%.

Gold’s resurgence after a nine-year bear market began early last year. Rising uncertainty about the staying power of the global recovery combined with interest rate reductions led to concerns about a weakening US dollar and a resurgence of inflation.

The impact of the Covid-19 pandemic has accelerated these trends. Global growth has fallen sharply and central banks have undertaken even more aggressive interest rate cuts to stimulate growth. The yields on bonds have fallen with some sovereign issues now in negative territory. The US dollar, which is used to price gold, has also declined against a basket of currencies.

Harvest Portfolios Group launched the Harvest Global Gold Giants Index ETF (TSX: HGGG) in January, 2019 to position itself to take advantage of a rebound in gold’s fortunes. The strategy behind HGGG could not have foreseen the pandemic, but the ETF’s performance has proved it is well positioned to thrive with this added challenge.

In a Q&A, Harvest President and CEO Michael Kovacs [MK below] revisits the blueprint underpinning the ETF and explains why the outlook for gold continues to be positive. He also discusses how the ETF aligns with the core Harvest philosophy of owning strong businesses.

Financial Independence Hub: Did you expect gold to be this strong in 2020?

MK:  We were looking at a weakening economic cycle, but we could not have anticipated the pandemic; what happened this year is beyond anyone’s imagination.

We launched the ETF as a defensive investment because the economic cycle was pretty long in the tooth. We were not gold bugs, but had watched the market for some time, especially gold company shares.

How do you see the outlook for gold?

Gold may have got a bit over-priced in the short term, but over the next 12-to-18 months it should touch U.S. $3,000 an ounce, which is 50% higher than it is now. Why? The pandemic has created a whole new ballgame.

It ties into the massive amounts of stimulus injected into the global economy by governments and central banks.  As a result of the pandemic, governments are budgeting with wartime percentages of debt. These levels will devalue currencies and could bring back inflationary pressures. That’s good for gold.

Warren Buffett recently bought his first gold holding, a stake in American Barrick. What does that say?

It was an unusual move considering that Buffett is a long-time value investor with a dislike for gold. He prefers assets that have cash flows or pay dividends. But he didn’t buy bullion, he bought the second most valuable gold company in the world, a great gold producer with great assets. It has a growing cash flow and pays a dividend. So, it’s a logical place for Berkshire Hathaway to diversify.

How will the Harvest Global Gold Giants Index ETF benefit from these trends?

When we launched the ETF, gold had been in a bear market for eight years. The industry had consolidated, share prices were low and we saw considerable value. At that point, average production costs for the model portfolio were U.S. $800 per ounce and most of the target companies were cash flow positive. We believed that if gold rose there would be a lot of upside potential. That is what has happened and will continue if gold prices rise. Continue Reading…