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).

2021 returns for retirement ETF portfolios

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It is a common question from readers. How do I create reliable retirement income with ETFs? It is a simple answer if we consider the last 40 years. A simple mix of Canadian, U.S. and International stocks has provided the necessary growth component. Core bond funds have offered the required risk management. Stocks for offense. Bonds for defense. A typical balanced or balanced growth couch potato portfolio did the trick. Today, we’ll look at the 2021 returns for retirement ETF portfolios.

In early 2019 I posted the simple 7-ETF portfolio for retirees. Please have a read of that post for background on the ETFs, risk, and the retirement scenario.

Seek retirement and investment advice

You can self-direct your investments if you have the knowledge and you understand your risk tolerance level. But I’d suggest that you contact an experienced fee-for-service financial planner who has expertise in the retirement arena. With a fee-for-service advisor you will pay as you go. You can pay by the hour, or perhaps pay a flat fee for the evaluation and plan. You might then set off on your own to build the portfolio with all the right pieces in the right place.

I’d also suggest that you read my review of Retirement Income For Life: Spending More Without Saving More. That’s a wonderful staple read for retirees and retirement planners. The author, Frederick Vettese, was the chief actuary at Morneau Shepell.

Your retirement ETF will be one piece of the retirement funding plan. The following represents a model for consideration and evaluation.

The 7-ETF Portfolio for Canadian retirees

You may choose to go more aggressive or more conservative in your approach. And keep in mind the above is not advice, but ideas for consideration. That said, I do see it as a sensible conservative mix. You may decide to add more inflation protection by way of energy stocks or commodities.

And let’s cut to the retirement funding chase. Here’s the returns for the 7-ETF portfolio for retirees for 2021. Charts and tables are courtesy of portfoliovisualizer.com

Yup, that simple mix delivered a return of 13.8% in 2021. That is a very good return for a conservative mix that has a 45% bond allocation.

For risk and return benchmarks have a look at …

The ultimate asset allocation ETFs page.

Here’s the returns of the individual assets for 2021.

With inflation fears dominating the back half of 2021 the inflation-sensitive assets of the Canadian High Dividend VDY and REITs performed very well. Keep in mind that two of the assets are in U.S. Dollars. You can substitute and use Canadian Dollar holdings. See the original 7-ETF post.

At Questrade you will hold dual currency (U.S. and Canadian dollar) accounts. You can buy ETFs for free.

Vanguard VRIF ETF for retirement

Recently I also looked at Vanguard’s VRIF Retirement ETF. That retirement funding ETF delivered a very nice income increase for 2022.

Here’s the VRIF distribution scorecard

Distributions per share.

  • 2020 0.83
  • 2021 0.87 (4.5% increase)
  • 2022 0.94 (7.6% increase)

The portfolio income

Portfolio visualizer offers that the starting yield (2021) in the 7-ETF portfolio would be in the area of 2.8%. You will sell assets to create additional income.

Creating that retirement income

You may choose to ‘fund as you go’. While you will have portfolio income (from bonds and dividends) that is accumulating, you will likely have to sell assets to create the desired portfolio income. The basic idea of asset harvesting would be to keep the portfolio close to the original asset weighting. You do not have to be exact in this regard.

You may choose to sell assets monthly, quarterly, or you may even move the assets to a cash (ETF) at the beginning of the year to ensure that you have your retirement income for the year safely stored in cash. Of course, consider fees and taxes.

Retirement spend rate

Here’s an example of a 4.8% spend rate. That is to say, each year you would spend 4.8% of the initial total portfolio value. Each $100,000 would create $4,800 of income, before taxes, each year. A $1,000,000 portfolio would deliver $48,000 of annual income, before taxes.

The chart runs from January of 2015 to end of 2021. This is for demonstration purposes. I have not adjusted for inflation.

So the good news for this simple mix of ETFs is that you would have enjoyed a decent spend rate and the portfolio value would have increased by 17.4%. Of course it is favorable to have a buffer to weather the storms such as the great financial crisis that began in 2008, or the dot-com crash of the early 2000’s. An increasing portfolio value will offer that much-welcomed cushion.

The bonds and cash help in that regard as well – to protect against severe market corrections.

Sequence of returns risk

We need to manage the sequence of returns risk in retirement.

And keep in mind that we enter the retirement risk zone about 10 years previous to our retirement start date. We need to de-risk and prepare the portfolio well in advance.

And here is an interesting approach. You can remove sequence of returns risk (entirely) by going very conservative as you begin retirement. You would then increase your stock allocation (and growth potential) in retirement. That is called a retirement equity glidepath.

A portfolio spend rate example

Here’s an example with the 4.8% spend rate from the year 2000. That is a very unfortunate start date as 2000 is the first year of the dot-com crash. U.S. markets were down three years in a row. Canadian markets suffered as well.

We see that the Balanced Portfolio is still chugging along in 2021, while the all-equity global portfolio went to zero in 2017. We have to protect against an unfortunate start date.

Keep in mind that there are many periods when the most optimal option is an all-equity or equity-heavy portfolio that would provide greater retirement income. But with an aggressive portfolio you run the risk of retiring and running head first into a severe market correction. You don’t want to gamble and hope that you get lucky. Most retirement specialists would recommend a Balanced or Balanced Growth model. Continue Reading…

Now is a good time to decide whether your portfolio is too risky

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By Michael J. Wiener

Special to the Financial Independence Hub

Back in March 2020 after stock markets had crashed, I expressed my disgust with the chorus of voices saying that this was the time to re-evaluate your risk tolerance.  That advice was essentially telling people to sell stocks while they were low, which makes little sense.  After the crash it was too late to re-evaluate your risk tolerance.

I suggested “we should record videos of ourselves saying how we feel after stocks crashed” and watch this video after the stock market recovers.  Well, the stock market has long since recovered.  Now is a great time to recall how you felt back in March 2020.  Did you have any sleepless nights?

Now that markets are near record levels, it’s time to consider whether permanently lowering your allocation to stocks would be best for you in anticipation of future stock market crashes.  Unfortunately, this isn’t how people tend to think.  It’s while stock prices are low that they want to end the pain and sell, and it’s while stock prices are high that they feel most comfortable.

Michael J. Wiener runs the web site Michael James on Money, where he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007.  He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on Jan. 19, 2022 and is republished on the Hub with his permission.  

Perfect storm of challenges awaits Canadians this RRSP season, survey finds

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Photo credit Wes Tyrell

A “perfect storm” of challenges faces Canadian investors this RRSP season, according to a a national online study conducted on the Angus Reid Forum Panel for Co-operators, released Tuesday. Jan. 25.

After surveying financial professionals across the banking and wealth management sectors, the panel believes this  “perfect storm” can be attributed to the uncertainty of this past year and to DIY [Do It Yourself] investing strategies.

2022 is poised to be a unique RRSP season because of multiple unique market conditions, the study finds: 58 per cent agree that in the face of rising consumer debt, natural disasters (climate change), Omicron, and looming hikes in interest rates, we are approaching a “perfect storm” of challenges, a figure that jumps to 65 per cent in Quebec.

Key findings

  • 80 per cent percent of respondents say that when people experience financial mishaps or losses, many feel overcome with doubt, which leads to indecision and in-action.
  • 76 per cent hypothesize that for many Canadians living in urban centres, home ownership is increasingly feeling out of reach, and because of this, many are looking for DIY investment strategies.
  • 93 per cent say the majority of Canadians have unleveraged opportunities in that they haven’t maximized their RRSP planning and TFSAs.

“By initiating a much-needed national conversation around financial literacy, the hope is that more Canadians will feel empowered to seek counsel from a financial advisor and develop a strategic financial plan to help achieve their goals,” Co-operators said in a press release.

Conducted in January 2021, “Canadian Attitudes on RRSPs” was designed to examine the state of RRSPs, TFSAs and retirement planning strategies that Canadians are using to secure their financial futures – all from the perspective of industry professionals with their ears to the ground across the country.

Consumer confusion appears to be rampant when it comes to understanding the different roles of RRSPs and TFSAs. 90 per cent of financial professionals believe most Canadians” have a lot of confusion” about those two key retirement savings vehicles.

This is reflected in similar confusion about Saving versus Investing: 70 per cent say they see Canadians declining in their ability to differentiate between saving and investing.

The study also sees what it calls “unleveraged opportunities”: 93 per cent think the majority of Canadians haven’t yet maximized their opportunities with RRSP planning, TFSAs, and other programs.

A majority (85%) of  industry pros attribute the influence of today’s “culture of now” as hindering people from seeing retirement planning as a priority.

The venerable Registered Retirement Savings Plan (RRSP) also seems to be suffering from the challenge of an “old school image”: 57 per cent say too many Canadians today see RRSPs as “an investing tool of the past” that is no longer as attractive today.

Adding to the angst is the continuing decline of availability of Defined Pension [DB] plans offered by employers: 85 per cent think defined benefit pension plans are going extinct. They too are viewed as a thing of the past: something Canadians don’t expect to have when they retire.

No surprise then that Early Retirement is largely regarded as a myth:  92 per cent of advisors believe that because most Canadians aren’t saving enough for retirement, concepts like “early retirement” are becoming more elusive.

What’s holding Canadians back

When it comes to identifying the causes for Canadians holding back on retirement saving, the survey found financial losses generally contribute to indecision: 80 per cent of advisors say when Canadians experience financial mishaps or losses, many become overcome with doubt, which then leads to indecision and in-action. In addition, 73 per cent see a stigma of shame among many Canadians around financial mishaps or losses.

Just the fact they feel they are not saving added to their stress: 80 per cent see many Canadians feeling paralyzed from the stress of not having enough savings to meet their long-term needs. And many also feel pressure to be perceived as  “financially in-the-know.” 65 per cent think there is social pressure among Canadians to appear “financially savvy.” Continue Reading…

The True Liquidity of an ETF

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By Danielle Neziol, Vice President, BMO ETFs

(Sponsor Content)

One of the most common questions we get from investors is, “If a certain ETF doesn’t trade often, or it has a low ETF trading volume, will I be able to sell the ETF when I need to?” The quick answer is yes you can, and I’ll explain why.

This liquidity concern makes sense when we think about trading stocks. A stock which is thinly traded will be much less liquid than a large cap, blue chip stock. Therefore, the less liquid stock could be difficult to sell if there is not demand for it.

However, ETFs work differently than stocks in this way. The true liquidity of an ETF has three layers. These three layers are something we can’t easily see. In fact, most volume data available to investors online is only showing the tip of the liquidity iceberg.

1.) Natural Liquidity: Buyer/Seller

The first layer that most investors are familiar with is between the natural buyer and the natural seller, who get matched on the exchange. Think of this like going to Facebook Marketplace or Kijjiji to sell your car. These marketplaces will match a buyer with a seller. Both will agree on a predetermined price and the transaction is made. This layer of liquidity is mostly present among the largest and most liquid ETFs in the market (usually those with a billion or more in assets).

2.) Market Makers: Buyer/Market Maker/Seller

The second layer of liquidity uses market makers. Marker makers are dealers or brokers who hold an inventory of ETFs and will either buy ETFs or sell ETFs depending on supply and demand. A market maker is trade agnostic which means they are always willing to buy and sell; they make their money in trading volumes (earning commissions on each trade). This trading strategy would be like going to a car dealership to buy or sell a car. The dealer acts as a market maker, who will buy your car and sell to someone else, and they usually earn a spread on this transaction. Market makers are often who you will “meet” on the other end of your ETF trades and they play a huge part in a healthy and liquid ETF ecosystem!

3.) Creations & Redemptions: ETF Provider/Buyer or Seller/ETF Provider

The third layer of liquidity is called the Creation and Redemption Process. ETFs have this ability because they are open-ended funds. The process occurs when there is an imbalance in supply or demand for a specific ETF. If demand is high, there will be more creations. This means the ETF provider (for example, BMO ETFs) will create more shares of an ETF to match demand. This is simply done by purchasing the stocks that the ETF holds, turning it into an ETF, and then passing it on to the buyer. If supply is high and demand is low, there will be more redemptions. This means that the seller will send their ETF back to the ETF provider, the provider will disassemble it and sell the underlying stocks in the market, sending cash back to the ETF seller. Think of this trading strategy like ordering a car directly from the auto manufacturer; they will go and buy all the parts for the vehicle, build it, and deliver you the car. A redemption would be the opposite where a car would be sold back to the auto plant and disassembled and sold off for parts (this is of course not how things are done in the auto world but a good example to visualize the process!). This last layer of liquidity is important to understand because it demonstrates that an ETF is as liquid as its underlying holdings of stocks or bonds.

Because of these three layers of liquidity, an ETF can sometimes be more liquid than its underlying holdings. We typically see this in less liquid asset classes such as preferred shares and fixed income, where the ETF will be easier to trade than the underlying holdings. Therefore, the increased liquidity of an ETF is just another of the many benefits of using ETFs in your portfolio!

To watch our webinar on ETF Liquidity and Market Makers please visit www.etfmarketinsights.com to register or catch the replay on our YouTube channel www.youtube.com/etfmarketinsights ”

Danielle Neziol has been part of the BMO ETF Team for over five years working in ETF product development, strategy, and most recently in ETF education for direct investors. In the past she has been engaged with with the exchanges, capital markets desks, index providers and portfolio managers to bring ETFs to market and today she is focused mostly on applying her expertise in the ETF business to support and educate investors.

Behavioural Finance focus: Cost Savings tips to attain Financial Freedom

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Photo: Towfiqu barbhuiya on Unsplash with modifications by LowrieFinancial.com

By Steve Lowrie, CFA

Special to the Financial Independence Hub

As a personal financial advisor, I am often asked about “the secret” to attaining financial freedom. Not to go all metaphysical on you, but to improve your long-term outcomes, try looking inward. After all, you are among the few drivers you have much control over. One great way to sharpen your financial acumen is by combining behavioural finance with an evidence-based perspective. Together, these disciplines offer reams of insights on how tending to your own best practices is often the best-kept secret to enjoying wealth management success.

Finding your Behavioural Finance focus

Here’s how The Behavioral Investor author Daniel Crosby describes behavioural finance:

“Emotional centers of the brain that helped guide primitive behavior like avoiding attack are now shown by brain scans to be involved in processing information about financial risks. These brain areas are found in mammals the world over and are blunt instruments designed for quick reaction, not precise thinking. Rapid, decisive action may save a squirrel from an owl, but it certainly doesn’t help investors. In fact, a large body of research suggests that investors profit most when they do the least.”

As early as the 1970s, Nobel laureate Daniel Kahneman was a driving force behind the formation of behavioural finance (along with Nobel laureate Richard Thaler and the late Amos Tversky). In his landmark book, “Thinking, Fast and Slow”, Kahneman describes this same quick vs. precise thinking as System 1 vs. System 2 thinking:

“System 1 [thinking] operates automatically and quickly, with little or no effort and no sense of voluntary control. System 2 [thinking] allocates attention to the effortful mental activities that demand it, including complex computations.”

Long before the term “behavioural finance” was a thing, wise academics and practitioners alike were suggesting investors are best off avoiding their fast-thinking instincts in favor of slower-thinking resolve. As billionaire Warren Buffett said decades ago:

“Success in investing doesn’t correlate with I.Q. … Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Buffett is correct. And yet, from what I see every day, fast, reactionary thinking continues to dominate most investors’ actions. What else could explain the never-ending parade of people chasing after FOMO (fear of missing out) investment trends instead of following the simple investing strategies, an evidence-based mindset prescribes?

Your brain’s take on Wealth Management

What’s actually going on in our heads when we allow our instincts and emotions to overcome our higher reasoning? Wall Street Journal columnist Jason Zweig’s “Your Money & Your Brain” takes us on a fascinating tour inside the mechanics in our own heads.

For example, Zweig warns us:

“…the amygdala [in your brain] can flood your body with fear signals before you are consciously aware of being afraid … [and] the nucleus accumbens in your reflexive brain becomes intensely aroused when you anticipate a financial gain.”

In this related piece, “It’s the Little Things That Can Color an Investor’s Outlook,” Zweig describes how even seeing the same financial numbers in red vs. a neutral color can unwittingly change our feelings about the data. Additional “insidious influences” include whether we’re hungry or full, sleepy or awake, or experiencing a cloudy or sunny day.

These sorts of overcharged emotions and unconscious biases can steer you wrong when you’re deciding whether to buy, sell, or hold your investments. They can also knock you off course from your holistic financial planning.

Nudging your way to Cost Savings

By adding academic rigor to our thinking, behavioural finance improves our ability to identify and manage our behavioural weaknesses. We can then apply that knowledge toward not reacting to the quick tricks our brain plays on us. Better still, we can learn how to play tricks right back on our brain: turning otherwise adverse instincts to our advantage. Continue Reading…