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).

How to correct a Business Deficit

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Image via Pexels

By Jim McKinley

Special to the Financial Independence Hub

You want your business to succeed and generate a profit; however, an unexpected expense or change in the economic climate can lead to a deficit.

In fact, an estimated 70% of small businesses have outstanding debt, and businesses in Toronto, Canada, are no exception. While it may cause you to worry about your business’s future, you can proactively take steps to get your business out of debt.

Small Business Grants

Search for grants for small businesses, which provide money you won’t need to repay. The process of finding the right grant, especially one that you qualify for, may seem tedious, but you can find them.

Before beginning the grant application process, you should have created a business plan. Make sure it includes a detailed description of your business with clear objectives. You can use this plan to show you’re serious about your business. Besides applying for grants, you can use your plan to intrigue prospective investors.

As you’re searching for grants, look for ones specific to your business type. Some examples of grants for Canadians include the Amber Grant and Cartier Women’s Initiative Award.

After finding grants that you qualify for, you’ll need to complete an application that highlights the business’s best attributes and usually include your comprehensive business plan.

Small Business Loans

If you’re merely going through a hard time at the moment, consider a small business loan. In most cases, lenders only extend these loans to companies that have been in business for at least two years.

You’ll also need to have a decent credit score to qualify. Additionally, the lender will want to see your personal and business income taxes as well as income and balance statements. The lender may also ask to see your business plan.

Carefully analyze your Budget

Know your company’s finances. Review where your major spending is and determine if you could reduce or eliminate any of it. Continue Reading…

Risk Management: A Four-Letter Word?

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By Noah Solomon

Special to the Financial Independence Hub

Since the global financial crisis of 2008, markets have for the most part been a one-way train. Even the precipitous decline of the Covid-crash of early 2020 was erased so quickly that several months later it seemed like little more than a bad dream.

In such a favourable and long-lasting environment, risk management has increasingly become regarded as a four-letter word. Any attempt to mitigate risk and protect investors from large losses has been a money losing proposition. It has been a drag on returns and has done little to reduce volatility. Simply stated, risk management isn’t of much use when there has been no risk to manage.

Defining a Bubble: Like Catching Water in a Net

There is no universally accepted definition of a bubble. Identifying one is part art and part science and can only be done with certainty in hindsight once a bubble has become a matter of record.

Parabolic gains in markets in and of themselves may or may not signal a bubble. Similarly, situations where valuations stand significantly higher than their long-term historical averages cannot be conclusively classified as bubbles.

Further complicating matters, bubbles tend to be accompanied (if not caused) by a broad-based mindset among investors, which by definition is difficult, if not impossible to measure or define.

Behavioral Characteristics of Bubbles: Zero Fear & Speculative Frenzy

One of the most common and powerful characteristics of bubbles is a widespread belief that stocks can only go up. Aided and abetted by historical precedent, many investors have become emboldened by growing faith in a perpetual Fed “put,” whereby the central bank will move aggressively to support (and even reverse) any significant decline in markets.

Relatedly, this complacency has led to a surge in speculative madness during which a growing number of investors have piled into riskier assets, causing parabolic gains. One does not have to look far to see several signs of such behaviour, including:

  • Meme stock madness: GameStop and AMC, two companies in declining industries which respectively rocketed up 120x and 38x from their post-pandemic lows to their 2021 highs.
  • Crypto craziness: Dogecoin, which was originally conceived as a parody, went up nearly 300x to a market cap of $90 billion, spurred by tweets from Elon Musk.
  • Electric vehicle ecstasy: Hertz’s stock surged by simply announcing that it would purchase a fleet of Teslas. Similarly, Avis tripled in a day based on the mere suggestion that it might follow suit!

The Daunting and Consistent Math of Bubbles: It’s A Long Way Down

In the world of statistics, a 2 sigma event refers to something that occurs only 5% of the time. Using this framework, a market that is 2 sigmas above its long-term trend can be considered to be in bubble territory (or at the very least quite frothy). Using the same logic, a market that stands at 2 sigmas below its long-term trajectory can be thought of as mouth-wateringly cheap (or at least as somewhat of a bargain).

Founded in 1977, Boston-based Grantham Mayo Van Otterloo (GMO) is an investment management firm with roughly $75 billion in assets under management. It is well-known for its strong track record of asset allocation. The firm successfully identified and navigated both the tech bubble of the late 1990s and the real estate/financial bubble of 2006-7.

GMO analyzed the available data over financial history across all asset classes and identified more than 300 2 sigma observations. In developed equity markets, every single one of these observations over the past 100 years has fully deflated with prices falling back to their long-term trends. This pattern strongly suggests that:

  1. The higher markets go, the lower their expected future returns.
  2. The higher markets go, the longer and greater pain investors will have to endure to get back to trend.

Importantly, if you think that the recent decline in stock prices presents a golden opportunity to scoop up cheap assets, the fact that the S&P 500 currently stands about 40% above its long-term trend should be cause for sober second thought. This prospective downside is corroborated by Warren Buffett’s favourite valuation gauge, otherwise known as the Buffett Indicator, which is the ratio of the total value of the U.S. stock market to GDP. The indicator currently stands at 193%, which is approximately 50% above its historical average.

Make Mine a Triple

Using the 2 sigma definition of a bubble, in early 2021 it looked as if we might have a standard bubble. However, as the year progressed, the 2 sigma deviation progressed into an even rarer 3 sigma anomaly, which comes with an associated increase in potential pain.

Adding to concerns, real estate assets have arguably joined the bubble-party in stocks. Houses in the U.S. stand at the highest multiple of family incomes ever: even ahead of levels that prevailed prior to the housing bubble of 2006-2007. Alarmingly, this lofty multiple is lower than the corresponding level in other countries (Australia, the UK, China, and our very own Canada). Continue Reading…

Get started on your investing journey

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RBC/Getty Images

By Michael Walker,

Vice-President & Head, Mutual Funds Distribution & RBC Financial Planning, RBC

 (Sponsor Content)

Whether you’re investing to build up a nest egg for retirement, to buy your first home or for a special vacation, finding the right investing solutions can play a big role in helping you achieve your financial goals.

If you’re just starting on your investing journey, however, I know that taking that first step can feel overwhelming.

To help get you started, I’ve responded below to four of the most common questions I hear about investing:

  • Do I have enough money to get started?

You don’t need to have a lot of money to start investing. It’s important to start early, however, as even small amounts of money can grow into big investments with the power of compounding.

As a simple way to think of this, compounding enables your investment to generate earnings and then those earnings are reinvested. In other words, compounding helps you grow earnings on your earnings.

The basic idea is to start investing with an amount you’re comfortable with and increase that amount over time. Once you’ve decided how much you can invest, consider setting up an auto-deposit that automatically moves that money from your chequing account into your investment account on a regular basis. This could be weekly, bi-weekly, monthly: whatever works for you and your finances. Then, as your available funds increase, you can increase the amount you deposit.

In this way, you’re benefiting from paying yourself first and the money you’re depositing will be in your investment account before you can even miss it.  

  • How do I decide which investing options are right for me?

Finding the right investing solutions starts with understanding your investing style. Here are some questions you can ask yourself, to help determine that style:

  • Why do I want to invest? How does this fit into my overall financial goals?
  • Do I want to make my own investing decisions and do I have the time to manage my own investments?
  • Am I comfortable with virtual investing, knowing there are professionals managing my investments in the background?
  • Do I want advice and support from an advisor, and if so, how much?
  • Do I want to combine doing some investing on my own with working with an advisor?  

Once you understand your investing style it will be much easier to determine the investing options that suit you best. Continue Reading…

New Harvest Monthly Income ETF aims to beat inflation by combining 5 different “Best Ideas”

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Canadian retirees and would-be retirees who feel starved of high monthly income and are pressed by surging inflation may find relief in a unique new “Best Ideas” fund-of-funds Income ETF that began trading on Feb. 16th.

Harvest Portfolios Group Inc. announced on Wednesday the completion of the initial offering of Class A Units of the Harvest Diversified Monthly Income ETF, which is now trading under the ticker symbol HDIF [TSX.]

In a press release, Harvest president and CEO Michael Kovacs said the new ETF targets a high initial annual yield of 8.5% by accessing “five proven Harvest Equity Income ETFs efficiently in one single ETF.”  In a backgrounder  on its website, Harvest noted the inflation-busting 8.5% compares to a 4.5% Canadian inflation rate that ended 2021, and to the TSX’s 2.6% annual yield and S&P500’s 1.5%.

As outlined in a prospectus filed Feb. 4th with all provincial securities regulatory authorities in all Canadian provinces and territories, the innovative new ETF brings together five different Harvest “Best Ideas” in generating income, and is designed to provide Canadian investors access to a core diversified monthly income solution.

The portfolio is comprised of more than 90 large global companies diversified across these 5 equally weighted sectors: Healthcare, Technology, Global Brands, Utilities, and US Banks. The five underlying ETFs are illustrated below: There is no additional management fee apart from the MERs of the underlying Harvest ETFs. Because it’s a new fund and because of the leverage component, there is not yet an estimate of what the final MER might be. But it should be  in the ballpark of some blend of the MERs of the underlying funds: Referring to the tickers below, here are the Management Fees and MERs of the component Harvest ETFs, as of June 30, 2021:

HHL 0.85%/0.99%

HTA 0.85%/0.99%

HBF 0.75%/0.96%

HUBL 0.75%/0.99%

HUTL 0.50%/0.79%

 

The net result is a collection of global stocks that are allocated in the following sectors (a comparable geographical breakout is not yet available):


In addition to high monthly cash distributions the fund provides the opportunity for capital appreciation by investing, on a levered basis, in a portfolio of ETFs that engage in covered call strategies.  Harvest says the maximum aggregate exposure of the ETF to cash borrowing will not generally exceed approximately 33% of the ETF’s net asset value.

For additional information, visit www.harvestportfolios.com

What to do — or NOT do — during the next Bear Market

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Photo credit Lowrie Financial/Canva

By Steve Lowrie, CFA

Special to the Financial Independence Hub 

If you won a round-trip ticket on a backward-moving time machine, what period would you visit? One I’d probably skip would be April 2018. Why bother, since the market climate wasn’t all that different from today? Consider this commentary:

“U.S. stock markets ended in the red on Thursday with all three major indexes declined broadly. Thursday’s earnings results failed to live up to investor’s [sic] expectations despite remain[ing] strong. Moreover, a spike in the yield of 10-year Treasury Note also panicked investors. However, the markets shed some of its losses in the final hour of trading …” blah blah blah.
— Nasdaq Stock Market News for April 20, 2018

Sound familiar? While we now know no bear market materialized, some investors were questioning whether it was time to get out, while the gettin’ seemed good. To explain why market-timing is always a bad idea, I published a post then, to review the timeless tenets of evidence-based investing.

Returning to early February 2022, we are once again seeing some volatility in bond and stock markets. Not surprising, given the strong equity returns over the past 18 months and the fact that most central banks have indicated they will be raising interest rates to tackle inflation.

Will the bear awaken this time? Maybe yes, maybe no. Either way, my advice isn’t going to change, so let’s revisit what I wrote back then.

But first, let’s talk about you. What sort of investor are you?

I enjoyed a recent post from “The Psychology of Money” author Morgan Housel, who pointed out that it’s misleading to “lump everyone into one category called ‘investors’ and view them as playing on the same field called ‘markets’”.

Two people can have vastly differing time horizons, goals, and objectives. When you multiply this by millions of market participants, you see how inaccurate it is to paint everyone with the exact same “investor” brush.

So, let’s be clear: Are you investing to complete your long-term, multi-generational financial journey? If so, we write our posts for you. And for you, Housel hit the nail on the head with this observation, with which I fully agree:

“Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.”

If you are a short-term trader, I wish you all the best in your market activities. However, you probably won’t find my pointers all that helpful. You may prefer Reddit instead.

In that context (if you’re still here), let’s look back at my thoughts from April 2018 …

As we write this piece in April 2018, overall market temperatures have been relatively mild for quite a while. Many newer investors have yet to weather a perfect market storm, and even those who have may have forgotten how panic-inducing they can be. But a bear market could be on the horizon.

To help you prepare for the next market downturn, or respond if you’re reading this during one, here are 10 timely actions you can take when financial markets are tanking to get your through to market recovery. Frankly, these tips are valid during any stage of the financial markets.

  1. Don’t panic (or pretend not to). It’s easy to believe you’re immune from panic when the financial sun is shining, but it’s hard to avoid indulging in it during a bear market crisis. If you’re entertaining seemingly logical excuses to bail out during a steep or sustained market downturn, remember: it’s highly likely your behavioral biases are doing the talking. Even if you only pretend to be calm, that’s fine, as long as it prevents you from acting on your fears before you see the light at the end of the tunnel with market recovery.

Every time someone says, ‘There is a lot of cash on the sidelines,’ a tiny part of my soul dies. There are no sidelines.” – Cliff Asness, AQR Capital Management

  1. Redirect your energy. No matter how logical it may be to sit on your hands during market downturns, your “fight or flight” instincts can trick you into acting anyway. Fortunately, there are productive moves you can make during a bear market instead – such as all 10 actions here – to satisfy the itch to act without overhauling your investments at potentially the worst possible time.

My advice to a prospective active do-it-yourself investor is to learn to golf. You’ll get a little exercise, some fresh air and time with your friends. Sure, green fees can be steep, but not as steep as the hit your portfolio will take if you become an active do-it-yourself investor.” – Terrance Odean, behavioral finance professor

  1. Remember evidence based investing. One way to ignore your self-doubts during market crises is to follow what decades of practical and academic evidence have taught us about investing: capital markets’ long-term trajectories have been upward. Thus, if you sell when markets are down, you’re far more likely to lock in permanent losses than come out ahead. Trust evidence based investing principles.

Do the math. Expect catastrophes. Whatever happens, stay the course.” – William Bernstein, MD, PhD, financial theorist and neurologist

  1. Manage your exposure to breaking bear market news. There’s a difference between following current events versus fixating on them. In today’s multitasking, multimedia world, it’s easier than ever to be inundated by late-breaking news. When you become mired in the minutiae, it’s hard to retain your long-term perspective.

Choosing what to ignore – turning off constant market updates, tuning out pundits purveying the latest Armageddon – is critical to maintaining a long-term focus.” – Jason Zweig, The Wall Street Journal

  1. Revisit your carefully crafted investment plans (or make some). Even if you yearn to go by gut feel during a financial crisis, remember: You promised yourself you wouldn’t do that. When did you promise? When you planned your personalized investment portfolio, carefully allocated to various sources of expected returns, globally diversified to dampen the risks involved, and sensibly executed with low-cost funds managed in an evidence-based manner. What if you’ve not yet made these sorts of plans or established this kind of portfolio? Then these are actions we encourage you to take at your earliest convenience. Continue Reading…