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).

Innovation & Crypto ETFs: A Wild Ride

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By Danielle Neziol, Vice President, BMO ETFs

(Sponsor Content)

In 2021, the Canadian ETF market once again showed its ability to innovate as the first jurisdiction to allow crypto-currency ETFs.

This reaffirms one of the core benefits of ETFs, as access to vehicles for harder-to-trade asset classes, where — just like gold and other commodities — ETFs have brought cryptocurrencies to the mainstream by providing efficient trading over the exchange.

We’ve now seen the listing of over 30 tickers across providers, with over $5 billion in assets.1 Starting in February 2021, and quickly followed by further products, Purpose Bitcoin ETF (ticker: BTCC) captured global attention and earned outsized trading volumes. For investors who can stomach the volatility, crypto-currencies via an ETF have provided another portfolio tool, with the benefit of low correlation to traditional asset classes.

A small crypto allocation can have meaningful impact on returns

Crypto-currencies provide quite a ride, from the sell-off in the summer, to the rapid rise in the fall, and now a further correction late in the year, they have experienced volatility of around 70% standard deviation since market entry, showing that a small allocation can still have a meaningful impact to portfolio returns.

Another ETF trend where we are seeing volatility right now is within innovation stocks. After a gangbuster run for innovation in 2020, many of these stocks reversed course, moving into correction territory by the end of 2021. This is due to several factors: the market rotated into value and out of growth, rising interest rates and yields added pressure on growth stocks’ future cash flows, and inflation fears pushed investors towards more defensive industries. Continue Reading…

Inflation and the new ways of diversification

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Photo Credit: CCL Private Capital Ltd.”

By Duane Ledgister, vice president, Connor Clark & Lunn Private Capital

Special to the Financial Independence Hub

Inflation has moved to its highest level in decades, with higher prices resulting from strong economic growth led by pent-up demand for goods and record levels of government spending.

At the same time, strong demand is leading to supply shortages. When we look at the components of inflation, we see recent price increases are largest in industries hurt the most during the pandemic, such as energy. These industries are cyclical and are pulling inflation readings higher as prices recover after a period of decline.

Higher prices in the short term are expected to be tempered as supply adjusts and demand returns to more normal levels, and while policy actions such as higher spending and larger debt levels have increased short-term inflation, the same forces are deflationary long-term. This is because more money goes to paying down debt as opposed to future investment. The caveat is that higher debt levels encourage policymakers to allow inflation to move higher than it has been in recent cycles. Accordingly, inflation will be higher but not at the disruptive levels we saw in the 70s and 80s.

Impact of inflation on your investment allocation

Now is a good time to consider its effect on different asset classes that make up a portfolio. Real diversification is much more involved today than you would have been told before.

Stocks can generally do well in a period of moderate inflation, whereas fixed income is hurt the most. Alternative asset classes — which most investors have little exposure to, and should begin evaluating — also have some natural protection from inflation.

Equities

Moderate inflation is a double-edged sword for stocks: increasing corporate cash flows while decreasing the real value of investment returns. Companies with high valuations tend to underperform as their valuations are based on future earnings growth long into the future. In a period of higher inflation, these future earnings are now worth less today. Companies with lower valuations, called value stocks, do better in a period of above-average inflation. Strategically it makes sense to hold both growth and value styles within your equity allocation.

Fixed Income

The bond allocation of a portfolio is the one that is hardest hit by inflation, because most bond coupon payments do not increase with inflation, and bond yields tend to rise when inflation is moving higher. The result is both a temporary decline in the price of bonds and lower long-term real return. The negative effects of rising inflation and yields can be managed by holding short-term bonds and higher coupon bonds. The former is less sensitive to changes in inflation and yields. This protects capital when inflation is rising. The latter have more income to offset price declines.

Having a view of the economic backdrop and managing a bond portfolio’s sensitivity to changes in yields and inflation is important to delivering risk-adjusted returns, particularly true when inflation is on the rise.

Alternatives

This is where real diversification can pay off. The alternative asset classes in a portfolio are attractive since they generate strong levels of income relative to traditional equities and bonds. They also tend to be the least sensitive to risks in the broader economy, including inflation. Private market investments (real estate, infrastructure, and private loans) should have natural inflation stabilizers. For real estate, rental income tends to rise with inflation and infrastructure contracts may have ongoing inflation adjustments. Finally, private loans income rises as yields and inflation move higher. Continue Reading…

Ukraine invasion underlines investors’ need for super diversification

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It’s scary times for everyone, investors included. As this site focuses on Financial Independence, I’ll try in this blog to direct readers to some useful sources of financial advice.

We’ll start with MoneySense, since in my role as Investing Editor at Large, I’m on top of much of the investing content there.

First, I’d point to Allan Small’s article that appeared over the weekend: The Meaning of market swings and why you should care. Allan recaps current trends in rising inflation and rising interest rates, noting that geopolitical uncertainties can create buying opportunities on certain stocks:

“The key is to make sure your portfolio is diversified. It’s the best — and cheapest — strategy to protect your portfolio in any environment. Balance it with different sectors of the economy.”

Second, Dale Robert’s weekly market wrap for MoneySense always has plenty of good insights into up-to-the-minute market action. His February 27th instalment of Making Sense of the Markets is particularly instructive. Hub readers will be familiar with Dale’s own site, Cutthecrapinvesting, as we regularly republish Dale’s blogs here on the Hub (with his kind permission, of course!).

Here’s Dale’s recent blog on the Ukraine situation. Here’s an excerpt:

“Even a few weeks ago it was easy to predict what would help investors make their portfolios more battle-hardened. Gold and energy certainly rose to the unfortunate occasion.”

Ever since Covid hit, Dale has been furnishing sound investment ideas, often ahead of the rest of the financial blogosphere. For example, he was one of the earliest to sound the alarm that Covid would be a serious problem for investors. He was also early in recommending energy plays like Eric Nuttall’s Nine Point Energy Fund (NNRG) and inflation-fighting recommendations like the Purpose Real Assets ETF (PRA.) That’s one reason why we included Dale as a panelist in MoneySense’s yearly ETF All-Stars feature: the 2022 edition will be out this spring, albeit under the direction of a new writer, Bryan Borzykowski.

No one ever made a dime panicking

How am I responding to the financial aspect of this crisis? Well, as Mad Money’s Jim Cramer often reminds readers in such times, “No one ever made a dime panicking.” Just yesterday, The Successful Investor publisher Patrick McKeough reminded Hub readers that short-term investment decisions all too often sabotage long term returns.

Patrick has been hugely consistent over the years with the following three-fold guidelines, which are as relevant during this Ukraine crisis as in they are in sunnier times:

1.) Invest mainly in well-established, dividend-paying companies;

2.) Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);

3.) Downplay or avoid stocks in the broker/media limelight.

In his Inner Circle Advice bulletin issued after Tuesday’s market rout, McKeough titled one section “Putin goes for broke” while urging investors to stay the course if they adhere to the three points above:”In the past third of a century, Russia has gone from dictatorship to fledgling democracy and back to dictatorship. If his Ukraine venture goes awry, it could be the end of the Putin era and the start of a new try at western-style government for Russia.

“Meanwhile, we advise sticking with your portfolio if your investments are in tune with our Successful Investor directives. Now, though, is a good time to re-emphasize that recent IPOs tend to be a poor investment choice, on average. But that’s especially so in a market situation like this one, in which volatility is likely to be above average for some time.”

Some other newsletters to which I subscribe recapped historical market action in advance and during prior outbreaks of war and invasions; generally they found that investors who “bought the invasion” eventually did well.

On the other hand, in an article in the Globe & Mail this Monday, veteran commentator Gordon Pape suggested it wouldn’t hurt to raise cash where you have significant capital gains: while they’re still gains. You can find the article, albeit paywalled, by clicking on this highlighted headline: Investors should take these steps to protect their portfolios from  the Russia-Ukraine conflict.  Pape also warned, as have many pundits, that if Russia does get away with its Ukraine invasion, it may embolden China to make a similar move on Taiwan.  Continue Reading…

Short-term Investment Decisions can hurt your Long-Term Portfolio Returns

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While short-term investment decisions can look like the best way to profit in the stock market, we feel that a better strategy by far is to buy top-quality stocks: stocks that will gradually accumulate stock market profits over decades.

And because you’re investing for a long period of time, short market fluctuations will have very little effect on long-term gains. That makes for a less stressful term 30 (not to mention successful) investment strategy.

Short-term investment decisions can lead to premature selling

There is no denying the immediate appeal of taking a fast profit. However, most successful investors find over long periods that much of their profit comes from a handful of their best investments: stocks that went up much more than they ever expected. If you are too quick to take profits, you’ll wind up selling your best picks when they are just beginning to rise.

Even the best short-term investment decisions will cause you to miss out on the benefits of compounding

Compound interest — earning interest on interest — can have an enormous ballooning effect on the value of an investment over the long term, and lift the overall returns on your portfolio.

This compounding principle applies to equity investments like stocks, not just to fixed-return, interest-paying investments like bonds. When you earn a return on past returns (including reinvested dividends), the value of your investment will grow more quickly. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

Additionally, you can’t expect to earn an outsized return on a risky investment in your portfolio indefinitely. Instead, focus on making steady gains over time with mostly conservative, dividend-paying stocks.

Making short-term investment decisions that cause you to miss out on big gains

To succeed as an investor, you need to get used to the idea that short-term declines come along unpredictably. And just as important, you need to be careful that those short-term fluctuations don’t prompt you to make ill-advised short-term investment decisions—decisions like getting out of the market in anticipation of a further decline and then missing out on a big rebound.

Before making short-term investment decisions, remember that the highest long-term returns will come from following our three-part Successful Investor approach

  1. Invest mainly in well-established, dividend-paying companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

Bonus tip: Short selling is one of the short-term investment decisions that we think will cost you money

Short selling stocks involves selling borrowed shares in hopes of a drop in price. We advise against this strategy, mainly because of the perennial drawbacks of short selling. Continue Reading…

Have some savings? Want to pay less tax? How to contribute to your RRSP and lower your tax payments

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By Elke Rubach    

Special to the Financial Independence Hub     

Tick-tock, tick-tock. The March 1 deadline for RRSP contributions that can be claimed against your 2021 income tax return is tomorrow. If you’re among the thousands of Canadians who haven’t put money into their RRSP this year, you still have time to take advantage of this government-sponsored, tax-deferred retirement savings plan.

Whether you’re a last-minute RRSP contributor or one who invests towards retirement regularly, it’s important to take a strategic and disciplined approach to how you fund and invest in your RRSP. Here are some pointers to consider in 2022 and beyond.

Thinking of borrowing? Think about your strategy

With interest rates still staying low by historical standards, it may seem like a good idea to borrow money to invest in an RRSP. It can be if you proceed with a well-considered strategy. As a starting point make sure you have a plan for repaying the loan as quickly as possible while committing to your investment for the long-term. It’s also important to choose investments most likely to yield a return that’s higher than the interest rate on your loan.

Consider tapping into your TFSA

Instead of borrowing, you may want to consider transferring some money from your TFSA into your RRSP. This allows you to get the tax deferral from your RRSP contribution without triggering tax on the money you’re taking out of your TFSA. At the same time, TFSA rules allow you to re-contribute the following year the amount you withdrew. Just as you would if you were borrowing, make sure you have a plan for repaying your TFSA.

Don’t miss out on employer matching

Take full advantage of company-sponsored programs that match RRSP contributions. In addition to the regular contributions deducted from your pay, ask your employer to direct any bonuses coming your way straight to your RRSP. At some companies, it’s standard practice to pay bonuses in February as a way to help employees maximize RRSP matching benefits. Accept the help and put that hard-earned bonus towards your retirement.

Mind the investments in your RRSP

When it comes to investments, don’t just set it and forget it. Keep an eye on the investments inside your RRSP and review your asset allocation regularly with your financial advisor to make sure it continues to align with your goals and risk profile. Continue Reading…