Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

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…

The History of Shiny New Toys: Are U.S. Tech valuations stretched?

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Just as I thought it was going alright
I found out I’m wrong when I thought I was right
It’s always the same, it’s just a shame, that’s all
I could say day and you’d say night
Tell me it’s black when I know that it’s white
Always the same, it’s just a shame, and that’s all

— That’s All, by Genesis

Shutterstock/Outcome

By Noah Solomon

Special to Financial Independence Hub

As we enter 2025, the general consensus is that stocks are set to deliver another year of decent returns. Most strategists contend that we will be in a goldilocks environment characterized by positive readings on economic growth, profits, inflation, and rates.

This sentiment is particularly evident in the current valuation level of the S&P 500 Index. Regardless of which metric one uses, the index is extremely elevated relative to its historical range. Interestingly, U.S. stocks are an outlier when compared to other major markets (including Canada), which are trading at valuations that are in line with historical averages.

 

The Best of Times and the Worst of Times

Unfortunately, the history books are quite clear about what can happen to markets that attain peak valuations. The four largest debacles in the history of modern markets were all preceded by peak valuations.

  • In 1929, the U.S stock market traded at the highest PE multiple in its history up to that time. This lofty multiple presaged the worst 10 years in the history of the U.S. stock market.
  • In 1989, the Japanese stock market was trading at 65 times earnings. The aggregate value of Japanese stocks exceeded that of U.S. stocks despite the fact that the U.S. economy was three times the size of its Japanese counterpart. Soon after, things went from sensational to miserable, with Japanese stocks suffering a particularly prolonged and steep decline.
  • In early 2000, the S&P 500 Index, aided and abetted by a tremendous bubble in technology, media, and telecom stocks, reached the highest multiple in its history. Not long thereafter, the index suffered a peak trough decline of roughly 50% over the next few years.
  • In early 2008, the S&P 500 stood at its highest valuation in history, with the exception of the multiples that preceded the Great Depression and the tech wreck. The ensuing debacle brought the global economy to the brink of collapse and required an unprecedented amount of monetary stimulus and government bailouts.

The bottom line is that markets have historically been a very poor predictor of the future. At times when asset prices were most convinced of heaven, they could not have been more wrong. The loftiest valuations have not merely been followed by tough times, but by the worst of times. Time and gain, peak multiples have foreshadowed the worst results, which brings to mind one of my favorite quotes from John Kenneth Galbraith:

“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”

The Common Feature

There is one common feature to these sorrowful tales of peak multiples which ended in tears. In each case, peak valuations followed a prolonged period of near-perfect environments characterized by strong economic and profit growth unmarred by any obvious clouds on the horizon.

  • The years preceding the Great Depression entailed an economy that had not merely been growing but booming.
  • Prior to 1989, the Japanese economy enjoyed decades of torrid growth, prompting some economists and strategists to predict that it would eventually eclipse the U.S. economy.
  • In early 2008, the U.S. economy was being propelled by a real estate bubble underpinned by an “it can only go up” mindset and a related explosion in lax credit and lending standards.

The S&P 500 Index currently stands at its highest multiple in the postwar era, save for the late 1990s tech bubble. Optimists justify this development by pointing to what they believe to be a rosy future with respect to the U.S. economy, earnings, inflation, and interest rates. Sound familiar?

I’m not saying that highly elevated multiples necessarily foreshadow imminent doom. However, when juxtaposing the current valuation of the S&P 500 with historical experience, one should consider becoming more defensive. As famous philosopher George Santayana stated, “Those who cannot remember the past are condemned to repeat it.”

Driving without Airbags or Seatbelts

The underlying cause of the aforementioned market crashes is not merely economies and profits that were contracting, but that asset prices were priced for exactly the opposite. This left markets woefully exposed when the proverbial music stopped.

Think of market risk like you think about driving a car. If you are driving a car with airbags and you are wearing a seatbelt, then chances are you will emerge with minimal or no injuries if you get into an accident. However, if your car has no airbags and you are not wearing a seatbelt, then the chances that you will sustain serious injuries (or worse) are materially higher. Similarly, when multiples are at or below average levels and profits hit a rough patch, the resulting carnage in asset prices tends to be muted. Conversely, if any financial bumps in the road occur when valuations lie significantly higher than historical averages, then the ensuing losses will be much more severe. Also, even if you manage to complete your journey without any mishaps, it’s not clear that having no airbags and not wearing a seatbelt made your ride much more enjoyable or comfortable than if this had not been the case. Continue Reading…

Tawcan: My 5 highest-conviction stock holdings

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By Bob Lai, Tawcan

Special to Financial Independence Hub

My five highest conviction positions
Image from Unsplash courtesy of Tawcan.com

Long-time readers will know that we hold both individual dividend stocks and index ETFs in our dividend portfolio. We are doing a hybrid investing strategy to capture the best of both worlds: holding individual stocks allows us to dictate which companies we want to hold (usually because we like the long term outlook) and holding index ETFs allows us to geographical and sector diversification. At the end of the day, we care about ‘total return.”

Holding individual dividend stocks requires more research and knowledge, but that’s part of the fun of being a DIY investor.

It’s always good to understand the financial numbers of a company that you plan to invest in. One can read through all the annual and quarterly reports, compare the different financial metrics, and even do technical analysis to determine whether it makes sense to invest your money or not.

However, if you start getting into the very nitty and gritty details, it’s easy to get stuck in the ‘analysis-paralysis’ loop.

Therefore, I believe it’s always important to step back and look at the big picture. Some questions I like to ask include the following:

  • Is the company producing products that you or other consumers rely on daily? And will it continue to do so in the future?
  • Is it difficult to replace these products with cheaper equivalents?
  • Does the company have fundamental advantages over its competitors?
  • Do I believe the company can continue to excuse its core strategy for the next 10 years or more?
  • Am I comfortable with holding this stock for at least a decade or more?
While getting into a stock at a good price is important, sometimes investors arbitrarily create a target price without any valid reasons, wouldn’t move from this target, and completely miss investing in a solid company because the share price never hit the target price.

For example, imagine in March 2021 you wanted to initiate a position in National Bank because you missed the opportunity during the COVID-19 pandemic downturn. Due to the historical price during the downturn, you arbitrarily set a target price of $80 and an absolute ceiling price of $85.

You then convinced yourself that no matter what, you wouldn’t buy a single National Bank share unless the price was at $80 or below.

During 2021, National Bank’s share price never fell within your price target so you completely missed the boat on a solid Canadian bank.

Let’s say you continued with the desire to initiate a position in National Bank and kept your $80 price target and $85 ceiling price. Again, the share price never fell below $80. It got close a few times during 2022 (~$83), but because you were so set on your target price and refused to pay $3 over your target price, you didn’t initiate a position.

National Bank 5yrs

Fast forward to 2024, and you are still waiting on the sidelines because the share price never hit below $80 and the share price has climbed to above $110 since.

A missed opportunity because of this arbitrarily set price target?

Yup, I think so.

Again, this is why I think it’s more important for us DYI investors to step back and look at the big picture. Sometimes you may need to ignore the price target. If a company is solid with a great future outlook, you may need to ignore a few dollars of share price difference during your initial entry. After all, you can always dollar cost average in the future.

With that in mind, I thought it’d be interesting to list my five highest-conviction positions in our dividend portfolio. 

My five highest conviction positions

Please note that everything in this post is purely my personal opinion and is not buying and selling recommendations. Please always make buying and selling decisions on your own after doing your own research..

#1.) Apple

I have written a lot about Apple in the past and I continue to like Apple long term. If you look at Apple’s history, it’s easy to point out that the company went through some identity crisis in the ‘90s and early 2000s. But things have changed since the launch of the iPad and the company has completely transformed around the launch of the iPhone.

Apple is one of the most recognizable brands in the world. Years ago Apple used to be seen as a pure hardware company but it has transformed itself into a services company and perhaps can now be considered as a consumer staples company. The beauty of Apple is the strong ecosystem that Apple has built around its different products. Once you’re in the ecosystem, it gets increasingly difficult to get out of it.

For example, many people I know started their Apple journey with an iPhone. AirPods were next on the shopping list to pair with their phones. They then purchased an Apple Watch for ease of accessibility and AirTags to track their devices.  It wouldn’t come as a surprise for these users to have multiple iPads and MacBook laptops too. Before they know it, they are tightly integrated within the Apple ecosystem.

Although we own an iMac at home, we are probably the outliers as the typical Apple users because we don’t own any other Apple products. I do see the attraction for owning iPhones and other Apple products for the tightly integrated ecosystems though (for example, I see the attraction for AirTags but they don’t make sense for Android users).

Apple has never been a company that comes out with a first-to-market product. It always takes its time to study the market and launch with a high-quality product that’s been perfected. Although some people argue that Vision Pro is a very niche product that not many consumers will purchase, I think it has some unique usage cases and I can see future Vision Pros gaining popularity, just as what happened to Apple Watch.

Therefore, I’m convinced that Apple will continue to do well in the future and have no concern with adding more Apple shares to our portfolio.

#2.) Visa 

Visa is yet another well-recognized global brand that facilitates electronic fund transfers throughout the world, most commonly through Visa-branded credit cards, debit cards, and prepaid cards.

As one of the largest payment processors in the world, Visa has a nearly impenetrable moat. Yes, Visa does have competitors like MasterCard, AmericanExpress, and even lesser ones like Paypal and new Fintech companies, but Visa is in a well-established position to fend off these competitors.

Because of the wide moat, it is well-positioned for future growth in developing countries. In addition, Visa is a company that doesn’t have to worry about inflation because people will continue to use Visa-branded products regardless of the inflation rate. This is also true whether there’s a recession or a bull market (yes consumers can cut back on their spending but Visa can combat this by increasing transaction fees on merchants).

  1. When a transaction is completed using a Visa card, the merchant is required to pay an interchange fee
  2. To access Visa’s electronic payment network, merchants and financial institutions need to pay Visa service fees
  3. When transactions are processed, Visa charges processing fees.
  4. When there are international transactions, which is common nowadays, Visa charges international transaction fees
Visa Income Statement visualized

As you can see from the visualized Visa income statement above, we’re talking about billions of dollars from each of these income streams. Visa also enjoys a very high profit margin.

I don’t see Visa going away anytime soon. If anything, I strongly believe the cashless interactions will only increase moving forward and Visa is in a strong position to capture any future growth.

#3.)  Royal Bank

I can’t have a high-conviction-position post without mentioning one of the Canadian banks. Royal Bank is the largest bank in Canada by market capitalization serving over 20 million clients with more than 100,000 employees worldwide. Recently Royal Bank completed the acquisition of HSBC Canada to expand its Canadian client base further.

Although many see Royal Bank as a Canadian bank, over the years, the company has been expanding outside of Canada, with operations in over 30 countries.

If we disregard all the financial metrics and analyze Royal Bank from a 30,000 foot view, Royal Bank’s large client base is extremely attractive.

Why? Continue Reading…

Why you should focus on Lower-Risk Investments in your TFSA

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Here’s a Look at the Best Investments to Hold in a TFSA – and Why

Image via Deposit Photos

We recently had a question from a member of Pat McKeough’s Inner Circle that asked:

“Pat, I hold Intel in a non-registered account with a capital loss showing and am thinking of transferring it to my TFSA “in kind” with no tax penalty. Is Intel a suitable stock to hold in a TFSA?”

We’re not tax experts, so you might want to consider talking to an expert, especially if there are large funds involved.

However, transferring shares in kind into a TFSA does trigger a capital gain or loss for income tax purposes.

If the investment is in a capital gains position, you will have to declare it as a capital gain on your income tax return. But if there is a capital loss, you will not be able to declare the loss for tax purposes. This is because the government still sees you as the beneficial owner of the security.

Note that if you sell the shares in a non-registered account, you can deduct your loss against capital gains. For example, if he were to sell his Intel shares in 2023, he’d get to deduct the loss against his 2023 capital gains.

If you still have capital losses left over, you can carry them back up to three years (2022, 2021 and 2020), or forward indefinitely to offset future capital gains.

Hold Lower-Risk Investments in a TFSA

We think it is best to hold lower-risk investments (such as blue-chip stocks we see as buys like Intel) in your TFSA. That’s because you don’t want to suffer big losses in these accounts. If you do, you can’t use those losses to offset capital gains, as is the case with taxable (non-registered) accounts. You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls. Continue Reading…