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).

RBC launches new digital banking tools to help clients manage their money, every day

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Image from RBC/iStock

By Peter Tilton, Senior Vice President, Digital, RBC

 (Sponsor content)

As the banking landscape continues to evolve and more Canadians choose to bank digitally, it’s more important than ever to empower our clients with the tools they need to confidently manage their money and keep their accounts and information safe.

That’s why we’re continuing to add value while enhancing security for our clients through two new industry-leading digital capabilities.

The first – 2-Step Verification – is the newest security feature within the RBC Mobile app, providing added protection for clients who access their accounts digitally.

The second is the latest capability in our award-winning NOMI offering. With NOMI Forecast, clients can quickly get a seven-day view into their future cash flow and stay up-to-date on upcoming preauthorized payments from any deposit account.

Let’s take a closer look at what these two innovations offer Canadians.

More peace of mind with industry-leading digital security tools

With more options than ever to access our accounts online and through our mobile devices, having the peace of mind that our personal and financial information is protected is critical.

With our new 2-Step Verification we are further enhancing the security features available to our clients by adding new safeguards around identification and authentication.

Embedded directly within RBC’s Mobile app, 2-Step Verification enables clients to set-up their mobile device as their primary channel for their online and mobile accounts. This means when they log into their account from another source, such as their laptop or tablet, they will receive a prompt within the app to verify the session.

With the verification process happening directly in the app, clients no longer need to go through the hassle of manually entering a security code received via email or text. With the press of a single button, they can continue with their banking needs knowing their information and accounts are protected. Since no security code is used, there is no threat of a code being intercepted.

Our new 2-Step Verification is just one of the industry-leading digital security tools our clients can access:

  • With our card lock option within the RBC Mobile app, clients can quickly and easily lock their card if they’ve misplaced it. This eliminates having to cancel a card only to find it later, while reducing the chance that it’s misused if it doesn’t show up.
  • With ID Verification, clients have the ability to digitally verify their identities when opening an account remotely or in-branch. This creates a more seamless account open process for our clients, while further protecting their identity and accounts.
  • Our fraud monitoring and Digital Banking Security Guarantee means our clients can be confident they will be protected when banking online or through the mobile app.*

Leveraging AI for forecasting to bring next-generation digital advice to clients

The financial challenges many Canadians faced as a result of the pandemic have put an added spotlight on our daily finances. We’ve also heard directly from our clients that they want to feel supported with digital tools and personalized insights to help them stay on top of their finances. Continue Reading…

MoneySense Retired Money: Is it too late to jump aboard the Energy bandwagon?

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My latest MoneySense column is something I might better have written early in 2021, rather than late in the year. It’s about the the resurgence of the energy sector: not alternative energies like solar or wind but good old-fashioned oil (black gold), natural gas and even coal.

You can find the full column by clicking on the highlighted text: Are Energy stocks a good buy now? 

As I admit there, readers would have been better served by heeding the advice of  MoneySense colleague Dale Roberts, who was early identifying this trend a year ago when he mentioned this Canadian energy ETF back in October 2020. (iShares S&P/TSX Capped Energy Index ETF: XEG/TSX.)

In fact, I did buy a little of it, only to see it fall back later in 2020, and I foolishly sold for tax-loss selling purposes.  But as the column relates, I did repurchase it, as well as BMO’s Equal WeightedOil & Gas ETF (ZEO/TSX) and a few more besides.

Until this year, I was happy to pick up whatever energy plays exist in the “Core” ETF investments. Besides, most Canadians should have healthy exposure to energy just by virtue of owning standard Canadian equity ETFs or even balanced funds. After all, Vanguard’s FTSE Canada All Cap Index ETF (VCN/TSX] is 12.3% in energy, just a tad below the index’s 12.6%.

By contrast, the S&P 500 index has only a tiny 2.33% in Energy. In fact, south of the border, Energy is the smallest of the 11 sectors, which are topped by Information Technology a 27.6%.  However, Energy stocks have well outpaced the S&P500, generating a total return of 42% in 2021, as of October 1st, compared with just 18.4% for the broad index.

Performance chasing or start of multi-year bull market?

So loading up on Energy seemingly this late in the game would be a futile exercise in performance chasing, some would argue. Who knows, but personally I was persuaded by the repeated public utterances of Ninepoint’s Eric Nuttall [notably and repeatedly in the Financial Post] that this may be merely the confirmed start of a multi-year bull run in Energy. Accordingly, earlier in the year I took a modest flyer on Nutall’s NinePoint Energy ETF [NNRG/Neo exchange]. His focus is Canadian mid-cap energy stocks, although there is a small 7.8% weighting to US energy stocks. Continue Reading…

Sector ETFs deliver diversified returns

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By Kevin Prins, BMO ETFs

(Sponsor Content)

More and more investors are converting to Exchange Traded Funds (ETFs) over picking stocks individually. But what is it that’s so appealing? Why are more investors considering ETFs over individual stock picking? With the growth of the ETF market, you can access precise strategies that reflect how you want to invest, while at the same time reducing single security or concentration risk with strategies such as “high-dividend ETFs” “clean energy ETFs” “commodity ETFs” and “tech ETFs.”

Essentially, an ETF is a bundle of securities that tracks an index, sector, commodity, bond, or other asset, and is traded on the exchange like an individual stock. So, by buying an ETF, you end up gaining exposure to a whole basket of stocks, commodities, or bonds.

But what makes them more popular is that they are easy to use, as a single ticket solution on the exchange, just liking buying a single stock.

Most individual stock-pickers don’t add value

Consider that academics — who have conducted a lot of research on the subject of stock picking — have found that investors can reduce market risk by diversifying across securities, typically starting at 20 holdings.1

In fact, they’ve concluded that while talented stock pickers can add value, the majority do not. According to S&P Dow Jones, as of the end of December 2020, 75% of large cap fund managers underperformed the S&P 500 over a five-year basis and 60% underperformed over a one-year basis. 2

So, if stock pickers aren’t the most consistent way to generate market returns, what is?

ETFs provide exposure that captures the returns of all the securities in its targeted market. With a variety of ETFs, you can gain exposure to a diversified group of securities across industries and sectors.

This diversified exposure allows you to track entire industries that are set to see growth, like, for instance, tech ETFs and clean energy ETFs. Continue Reading…

The six phases of financial independence [Revisited]

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub

I’ve recently updated this post to include more links to related content. I hope you enjoy it. 

The term “financial independence” has many meanings to many people.

To some, it means not working at all.

To others, financial independence covers all needs and many wants.

To others still, it means the ability to work on your own terms.

Where do I stand on this subject?

This post will tell you in my six phases to financial independence.

Retirement should not be the goal, financial independence should be

Is retirement your goal?

To stop working altogether?

While I think that’s fine I feel the traditional model of retirement is outdated and quite frankly, not very useful.

As humans, even our lizard brains are smart enough to know we need a sense of purpose to feel fulfilled.  Working for decades, saving money for decades, only to come to an abrupt end of any working career might work for some people but it’s not something I aspire to do.

With people living longer, and more diverse needs of our society expanding, the opportunities to contribute and give back are growing as well. To that end, I never really aspire to fully “retire” – cease to work.

Benefits of financial independence (FI)

In the coming years, I hope to realize my desired level of financial independence.

We believe the realization of FI will bring about some key benefits:

  1. The opportunity to regain more control of our most valuable commodity: time.
  2. Enhanced opportunities to learn and grow.
  3. Spend extra money on things that add value to your life, like experiences or entrepreneurship.

Whether it’s establishing a three-day work week, spending more time as a painter, snowboarder, or photographer, or whatever you desire – financial independence delivers a dose of freedom that’s hard to come by otherwise.

More succinctly: financial independence funds time for passions.

FI concepts explained elsewhere

There are many takes on what FI means to others.

There is no right or wrong folks – only models and various assumptions at play.

For kicks, here are some select examples I found from authors and bloggers I follow.

  • JL Collins, author of The Simple Path to Wealth, popularized the concept of “F-you money”. This is not necessarily financially independent large sums of money but rather, enough money to buy a modest level of time and freedom for something else. I suspect that money threshold varies for everyone.
  • Various bloggers subscribe to a “4% rule”* whereby you might be able to live off your investments for ~ 30 years, increasing your portfolio withdraws with the rate of inflation.

Recall the rule:

*Based on research conducted by certified financial planner William Bengen who looked at various stock market returns and investment scenarios over many decades. The “rule” states that if you begin by withdrawing 4% of your nest egg’s value during your first year of retirement, assuming a 50/50 equity/bond asset mix, and then adjust subsequent withdrawals for inflation, you’ll avoid running out of money for 30 years. Bengen’s math noted you can always withdraw more than 4% of your portfolio in your retirement years however doing so dramatically increases your chances of exhausting your capital sooner than later.

In some ways, the 4% rule remains a decent rule of thumb.

Are there levels of FI?

For some bloggers, the answer is “yes”:

  • Half FI – saved up 50% of your end goal (e.g., $500,000 of $1M).
  • Lean FI – saved up >50% of your end goal; income that pays for life’s essentials like food, shelter and clothing (but nothing else is covered).
  • Flex FI – saved up closer to 80% of your end goal (e.g., $800,000 of $1M). This provides financial flexibility to cover most retirement spending including some discretionary expenses.
  • Financial Independence (FI) – saved up 100% of your end goal, you have ~ 25 times your annual expenses saved up whereby you could withdraw 4% (or more in good markets) for 30+ years (i.e., the 4% rule).
  • Fat FI – saved up at or > 120% of your end goal (in this case $1.2M for this example), such that your annual withdrawal rate could be closer to 3% (vs. 4%) therefore making your retirement spending plan almost bulletproof.

There is this concept about “Slow FI” that I like from The Fioneers. The concept of “Slow FI” arose because, using the Fioneers’ wording while “there were many positive things that could come with a decision to pursue FIRE, but I still felt that some aspects of it were at odds with my desire to live my best life now (YOLO).”

They went on to state, because “our physical health is not guaranteed, and we could irreparably damage our mental health if we don’t attend to it.”

Well said.

My six phases of financial independence

With a similar line of thinking related to Slow FI, since we all have only one life to live, we should try and embrace happiness in everything we do today and not wait until “retirement” to find it.

After reviewing these ideas above, among others, I thought it would be good to share what I believe are the six key phases of any FI journey – including my own.

Phase 1 – FI awakening. This is where there is an awareness or at least an initial desire to achieve FI even if you don’t know exactly how or when you might get there.

FI awakening might consider self-reflection questions or thoughts like the following:

  • I would love to retire early or retire eventually…
  • I can never seem to get off this credit card treadmill…
  • I wish I had some extra money to travel…
  • Wouldn’t it be nice to buy X guilt-free?

(I had my awakening just before I decided to become My Own Advisor, triggered by the financial crisis of 2008-2009.)

Phase 2 – FI understanding. This is the phase where people are getting themselves organized; they start to diligently educate themselves on what their personal FI journey might be.

In this phase, they might set goals or get a better handle on what goes into their financial plan. Even if your plan is not perfect, it’s a start.

They might start asking some deeper questions like:

  • Why is money important to me?
  • What is my money for?
  • How do I know I’m doing it right?

I would say it took me until my mid-30s to get my financial life in order through more financial education and improved financial literacy. It was a process that took a couple of years although I’m always continuously learning and improving. I don’t pretend to know it all.) Continue Reading…

How much is your Home Country Bias costing you?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Investors around the globe are known to invest ‘too much’ of their portfolio in their home country. It is called a home bias. Canadian investors are guilty of that home bias. Many estimates suggest that Canadians hold about 60% of their portfolio assets in Canada.

Meanwhile Canadian stock markets represent only about 3% of the global total. That home bias increases portfolio concentration risk (in one country and in just a few sectors). There has also been a cost; lower returns due to the underperformance of the Canadian market vs the U.S. market and at times the International developed markets. It is an important consideration. What is the cost or your Canadian home bias?

As a backgrounder, in 2019 I suggested that you say goodbye to your Canadian home bias.

I recently posed the question on Twitter:

Please feel free to jump on that tweet as well and offer your home bias. Don’t be shy, we are all guilty, for the most part. If you read through that thread you’ll see that investors offered that they were largely overweight Canada. Most are holding 50% to 70% Canadian stocks.

From the table in that tweet, you can see the drastic underperformance of Canadian stocks vs U.S. stocks over the last 3-, 5-, 10-years or more.

Canadian vs U.S. stocks

And here’s the returns comparison in chart form. The charts and tables are courtesy of Portfolio Visualizer.

 

And the returns over various time frames, in table format.

For the above comparison, we use the TSX 60 ETF, ticker XIU that you’ll find suggested for core Canadian stocks on the ETF Model Portfolio page.

It appears that there may have been no home bias opportunity cost if you had been invested from the year 2000. Keep in mind that is a static start date measuring the investments (with dividend reinvestment) from the year 2000. The picture will change when we start adding monies ($1,000 per month) on a regular basis.

There is then a meaningful outperformance for the U.S. stocks.

Incredibly, the U.S. stock portfolio generated 46% more money to create retirement income. The TWRR stands for time weighted returns. MWRR refers to the money weighted returns, taking into account the effect of the regular contributions.

The above chart simply shows the outperformance of U.S. stocks vs Canadian stocks. That’s not to suggest that an investor should go all-in on U.S. stocks — though U.S. investors are also known to suffer from an extreme case of investor home bias.

We should not forget the lost decade for U.S. stocks. That was a period when U.S. stocks delivered no real return (inflation adjusted) for a decade or more. And that period begins at the start date for our above charts.

The home bias is of consideration for Canadians, Americans and investors around the globe.

What’s the right mix?

I don’t think you have to be perfect in this regard. And perhaps there is no perfect geographic allocation. But we certainly want a nice mix of Canadian, U.S. and International stocks. We’ll usually add bonds as well when we enter the retirement risk zone, and also in retirement.

U.S. markets certainly fill the holes of the Canadian stock market. And the U.S. multi-nationals that dominate the S&P 500 do offer significant international exposure. That said, an investor should seek greater diversification by way of international developed and developing nations outside of North America.

In the Advanced Spud (couch potato portfolio) section for MoneySense, I offered that investors might seek equal representation from developed and developing markets. There are favourable growth patterns and favourable demographics within the developing markets. As they say: demographics is destiny.

As always, this is not advice, but ideas for consideration.

Global stocks vs U.S. stocks

Here’s global stocks (the rest of the developed world) vs the U.S. market from 1996.

We see global stocks outperforming towards the end of the financial crisis (2008-2009) and then the U.S. market takes over.

We can also see the drastic difference in returns with regular investments. The U.S. stock market and U. S. companies continue to be global leaders with incredible growth prospects. You can’t blame investors for wanting to overweight the U.S. market.

The global cap weighted index

Many portfolio managers would suggest that the most passive investment approach would be to follow the global cap weighting index. That simply takes into account the value of each stock market relative to the total global markets. The stock markets with greater value receive a greater weight.

Here’s the current weighting by way of Vanguard’s (U.S. dollar) Global ETF – VT.

Within that global mix Canada is less than 3%

The U.S. market dominates the global markets. It has largely earned that position by way of earnings and revenue growth, but keep in mind that the global cap weighting method will reward momentum (and hence emotion and unbridled enthusiasm). That momentum ‘got it wrong’ in the late 1990s for U.S. stocks. Is the enthusiasm for U.S. stocks misplaced in 2021? Perhaps partially ‘wrong’? Continue Reading…