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).

No one saw it coming in 1929 either

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The Roaring 20s

By John De Goey, CIM, CFP

Special to the Financial Independence Hub

Stock market bubbles are not as rare as many people think. They occurred throughout history, with multiple generations seeing large swaths of accumulated wealth evaporate in short order.  With very few exceptions, the shellshocked investors are left to survey the carnage while trying to discern what happened and why they didn’t see it coming.

There are behavioural explanations for this. They include herding (following the herd), optimism bias (my industry always says the markets will rise), recency bias (where people put too much emphasis on things that are top of mind and current), and confirmation bias (where people simply look for information that supports their own pre-existing views). There are others. It’s as if large swaths of people want to be collectively deluded into thinking the warning signs are not to be believed or – worse still – they simply refuse to acknowledge the signs at all.

Investing in a go-go market feels good until it doesn’t

If one were to choose a catch phrase for these people, it might be this – “if it feels good, do it.”  Investing in a go-go market certainly feels good. Until the day when it doesn’t. Warning people to take shelter before the pending storm is a bit of a fool’s errand, however. When times are good, people like to believe things will stay that way indefinitely.

Irving Fisher was unquestionably one of the greatest American economists of all time, but in the summer of 1929, he opined that markets had reached a state of permanently high elevation. In other words, he recognized the warning signs, but chose to dismiss and/or ignore them. The hallmarks of people getting overly optimistic about future returns were all around him and stories of shoeshine boys providing stock tips were just the tip of the iceberg for irrational investor exuberance.  Over ninety years later, little seems to have changed in how people can be duped into what amounts to a form of mass psychosis.

Jeremy Grantham is a Wall Street maven who manages billions of dollars for a firm he co-founded, GMO Capital. When asked where we are now in the market cycle, he suggested we are near a top. Grantham recently said: “Bubbles are unbelievably easy to see; it’s knowing when the bust will come that is trickier. You see it when the markets are on the front pages instead of the financial pages, when the news is full of stories of people getting cheated, when new coins are being created every month. The scale of these things is so much bigger than in 1929 or in 2000.”

Bitcoin, real estate and meme stocks

I’m just wondering, but has anyone noticed stories about bitcoin or real estate prices or the crazy trading activity in Gamestop?  Are those stories consistent with what’s been in the financial press – or do you think they seem a bit disconnected from reality?

The American stock market is in the stratosphere these days and pretty much all the rosy narratives noted about it are based in the United States. There are several metrics that demonstrate this. Warren Buffett’s favourite test is to compare total market capitalization to national GDP. The so-called “Buffett Indicator” now stands at over 200%, which is one of the highest readings of all time. In 1929, it took 22 years for stocks to recover to record highs, so the current reading certainly ought to provide pause, as another massive global downturn seems possible, if not likely. The stakes are enormous. Continue Reading…

10 ways to get Funding for your Start-Up

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What is one way to get funded as a start-up?

To help start-up owners get their projects funded, we asked business owners and investors this question for their best suggestions. From crowdfunding to generating user donations, there are several tips that may help you fund your start-up to scale your business and reach new goals.

Here are 10 pieces of advice for funding a start-up:

  • Seek Specific Funding
  • Know Your Price
  • Establish Key Partnerships
  • Join a Business Accelerator
  • Look Into Crowdfunding
  • Save for Self-Funding
  • Build a Customer Base
  • Reach Out to Your Network
  • Go to the Bank
  • Get User Donations

Seek Specific Funding

When researching the right path for getting funding for your start-up, consider seeking out sector-specific funding that is relevant to your business. Many lenders in the industry specialize in funding specific sectors in order to offer maximized support. Here at AVANA Capital, we actually specialize in the Renewable Energy sector. Our renewable energy lending products include pre-development, development, equipment, construction, and mini-perm financing, as well as distressed debt acquisition. — Allan J. Switalski, AVANA Capital

Know your Price

Funding is an incredibly important yet challenging part of being a founder. We mostly self-funded Kegelbell’s $160,000 that got us to market, including product testing, mold building, and FDA registration. Shortly thereafter, we took a few smaller investments as convertible notes that helped get us to where we are now. Today, we’re in the process of fundraising a larger amount that will help take Kegelbell to the next level. All that to say, I’ve run the spectrum in the world of start-up finances, and one thing I’ll definitely note is that you need to know your “ask.” Prepare and practice ahead of time and always have a success-oriented mindset. — Stephanie Schull, Kegelbell

Establish Key Partnerships

Get funding for your business through strategic partnerships. Especially for business owners with limited experience within the industry, particularly manufacturing-related industries, it makes sense to develop strategic partnerships with the best manufacturing and distribution companies to help secure the success of your business venture. With some stake in the game, these strategic partnerships are almost certain to win out when compared to other approaches. While not related to funding, in digital PR, we rely heavily on strategic partners to help grow companys’ online footprints. — Rronniba Pemberton, Markitors

Join a Business Accelerator

A great way to get funding for your start-up, especially if it’s a tech-heavy business, is to try a business accelerator or incubator. These are located across the country, mainly near colleges with business programs. Continue Reading…

How to respond to rising Stock markets

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By Michael J. Wiener

Special to the Financial Independence Hub
As stock markets rise to ever larger price-to-earnings (P/E) ratios, the odds of a market crash grow.  However, we can’t know when such a crash might come, so I’m not interested in trying to time a sell-off of all my stocks.  Stocks remain the best bet for future returns, but how much higher can P/E ratios go before this is no longer true?

When we examine the relationship between Robert Shiller’s Cyclically-Adjusted Price-Earnings (CAPE) ratio to the following decade of stock returns, the correlation is quite weak; the result is closer to a cloud than a straight line.  The most we can say is that when the CAPE is high, future expected stock returns appear to be somewhat lower.  There is logic to the idea that P/E ratios will likely return to some form of normalcy in the future, but this may take a very long time.  In the interim, stocks remain the best bet for future returns.

But at what P/E level can we decide that stocks are no longer a good bet?  Shiller’s U.S. CAPE is at 38 as I write this.  The highest it’s been in the last 150 years is about 45 in the year 2000.  What if the CAPE gets to 45 or higher?  At some point, the future of stocks won’t look very bright.

A few months ago I adjusted my investment spreadsheet to assume that my portfolio’s CAPE (a blended figure based on my allocation across Canadian, U.S., and international stock markets) would drop to 20 by the time I reach age 100.  I kept the assumption that corporate earnings would keep growing at an average rate of 4% above inflation each year.  The effect of this assumed slow reduction of the CAPE is that I would get lower stock returns for the rest of my life, and the amount I can safely spend in retirement is lower.  For more about the details of how I calculate my retirement spending level and portfolio allocation, see my glidepath article.

No major change in Asset Allocation

So, this change has me spending a little less money each month, but it didn’t change my asset allocation.  A minor technicality is that because I use a fixed income allocation of 5 years worth of my safe retirement spending level, this change would have had me lower my fixed income allocation.  I added some calculations to prevent this slight shift to stocks.  It would have been ironic if spending less because I’m worried about high stock prices had led me to own more stocks. Continue Reading…

Finance Tools every Business needs to Optimize Accounting Processes

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By Emily Roberts

For the Financial Independence Hub

Without robust accounting procedures in place, companies would go bust almost immediately. They would fail to comply with laws and managerial procedures and ultimately face business closure because of their ignorance and neglect.

In one form or another, poor financial management is often the bane of entrepreneurs and a source of constant regret for them as well. Do not make the same mistakes. Maximize the efficiency of the firm by streamlining your accounting processes. Keep track of your income and expenditures, but also do so in the most competent fashion possible. Otherwise, your company will be undertaking a series of needless fiscal risks.

Fortunately, finance tools can be utilized here, helping businesses to invest in their future with clarity and precision. Keep reading to discover which finance tools can play an important supporting role in your daily accounting processes.

Payroll Software

Late payments can affect staff morale, hampering their work ethics and affinity for your firm. If these problems are left unaddressed, then wronged employees may even launch legal proceedings to get what they are owed.

The question of compensating your staff fairly and on time should never be a roll of the dice. Instead, you should implement payroll software solutions, which can calculate any employee-related expenses accurately and automatically. Additionally, this technology can store all the payment information related to your employees securely, keeping personal records safe.

Payroll software is highly efficient, but it works best when other programs and features complement it. For instance, you should consider adopting state-of-the-art cybersecurity measures also. When sensitive company data is highly encrypted, you can prevent numerous calamities, such as criminals hacking your databases. Workers will also know and appreciate that you take their well-being seriously enough to invest in it further and implement additional measures.

Pension Software

Whether it is budgets or forecasting annual performance metrics, accounting is frequently about anticipating the future. Therefore, you should devote a sizeable portion of your time and resources to your firm’s pension schemes.

Make good use of tried and tested pension administration software for a completely web-based solution to these matters. Employers, trustees, and members can all access these services via their computers or smart technologies. An organization’s pension scheme process can also be fully automated with the right software, enhancing business productivity in unison. Ultimately, administering pension benefits has never been more straightforward.

Further advantages may follow from utilizing pension software also. After all, workers like to know they are being looked after. Invest in their future in this capacity, and you may build staff satisfaction, retain experienced workers, and create a more vibrant work culture.

Tax Software

Tax can be challenging to manage, especially when individual circumstances change what is required here. Tax mistakes can soon become overwhelming and spiral into much worse situations should they be left unaddressed.

Unfortunately, many business owners frequently make mistakes themselves with their business tax arrangements. The common errors of judgment involve registering their business as the wrong type of entity, poorly managing their records, and failing to pay themselves a reasonable salary after all their expenses. In these situations, the pressure can build and render entrepreneurs delirious and miserable. Continue Reading…

Reframing the RRSP advantage

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I’ve read a lot of bad takes on RRSP contributions and tax rates over the years. One that stands out is the argument that you should avoid RRSP contributions entirely, and focus instead on investing in your TFSA and (gasp) your non-registered account. This idea tends to come from wealthy retired folks who are upset that their minimum mandatory RRIF withdrawals lead to higher taxes and potential OAS clawbacks. They also seem to forget about the tax deduction generated from their RRSP contributions and the tax-sheltered growth they enjoyed for many years leading up to retirement.

I’m hoping to dispel the notion of an RRSP disadvantage by reframing the way we think about RRSP contributions, RRIF withdrawals, and tax rates. Here’s what I’m thinking:

Most reasonable RRSP versus TFSA comparisons say that it’s best for high income earners to prioritize their RRSP contributions first, while lower income earners should prioritize their TFSA contributions first.

The advantage goes to the RRSP when you can contribute at a higher marginal tax rate and then withdraw at a lower marginal tax rate, while the advantage goes to the TFSA when you contribute at a lower rate and withdraw (tax free) at a higher rate.

If your tax rate in your contribution years is the same as in your withdrawal years then there’s no advantage to prioritizing either account. They’re mirror images of each other.

Related: The next tax bracket myth

This comparison focuses on marginal tax rates. But is this the correct way to frame the discussion?

Marginal Tax Rate vs. Average Tax Rate

Isn’t it fair to say that an RRSP contribution always gives the contributor a tax deduction based on their top marginal tax rate (assuming the deduction is claimed that year)?

But when you look at retirement withdrawals, shouldn’t we focus on the average tax rate and not the marginal tax rate?

An example is Mr. Jones, an Alberta resident with a salary of $97,000 – giving him a marginal tax rate of 30.50% and an average tax rate of 23.59%

Alberta MTR $97k

If Mr. Jones contributes $10,000 to his RRSP he will reduce his taxable income to $87,000 and get tax relief of $3,050 ($10,000 x 30.5%).

RRSP deduction

Fast forward to retirement, where Mr. Jones has taxable income of $60,000 from various income sources, including a defined benefit pension, CPP, OAS, and his $10,000 minimum mandatory RRIF withdrawal.

The range of income in each tax bracket can be quite broad. With $60,000 in taxable income, Mr. Jones is still at a 30.5% marginal tax rate, but his average tax rate is just 19.33%. That’s right, he pays just $11,596 in taxes for the year.

Alberta MTR $60k

Conventional thinking about RRSPs and marginal tax rates would tell us that Mr. Jones should be indifferent about contributing to an RRSP in his working years because he’ll end up in the same marginal tax bracket in retirement.

But when we consider all of our retirement income sources, why do we treat the RRSP/RRIF withdrawals as the last dollars of income taken (at the top marginal rate) instead of, say, income from CPP or OAS or from a defined benefit pension? Why would Mr. Jones’ $10,000 RRIF withdrawal be taxed at 30.5% when it’s his average tax rate that matters? Continue Reading…