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 protect against Inflation

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It is probably the greatest (and potentially dangerous) misconception in the investing landscape, that stocks protect you from inflation. That’s simply not true. While stocks have a long term history of besting inflation, they can fail in many periods, short and extended. Stock markets do not always work as an inflation hedge. And Vanguard suggests that their effectiveness will wane as the types of stocks that can work against inflation no longer have strong representation in the broad market stock indices. We’ll show you how to protect against inflation on the Sunday Reads.

Let’s cut to the chase. It’s something I’ve known for quite some time and I’m more than happy to see Vanguard beat the drum. If you want to protect your portfolio from inflation or stagflation (its evil stag cousin) own commodities.

When you own commodities or a commodities index fund or ETF, you own the raw materials that make the products, foods and energy needed to sustain life and society as we know it.

Source: Investopedia

Stocks don’t work

Let’s get this out of the way first, shall we, from this Vanguard post, the potency of commodities as an inflation hedge …

And that’s during a period when we’ve mostly had muted inflation. Stocks don’t like unexpected inflation, like the kind we’re having in 2021. That is, inflation above recent trends and expected trends.

If we go back to the stagflation period of the 1970’s and into the early 1980’s it’s a complete mess for stock investors. Have a look at MoneyChimp and be sure to hit that inflation button. This shows a negative real (inflation adjusted) return from 1968 through 1982, for US stocks. In real dollar terms, $1.00 became 94 cents.

Global stocks did not perform much better. And surprisingly neither did the Canadian stock market that was more commodities and energy-concentrated for the period.

Here’s global stocks for the period showing no return premium vs inflation. The chart is courtesy of ReSolve Asset Management.

And in this post on the Permanent Portfolio, you’ll see that even the traditional stock and bond balanced portfolio failed for an extended period during stagflation. There are other periods of ‘don’t work’ for the balanced portfolio (and for different reasons) within that chart.

Commodities hedge is strong and consistent

While stocks are not a consistent hedge for inflation, commodities have been, historically. And once again, this is during a period of mostly muted inflation, save for a few periods of unexpected inflation. Luckily for investors, that inflation has been transitory in the last few decades.

From that Vanguard post …

Over the last three decades, commodities have had a statistically significant and largely consistent positive inflation beta, or predicted reaction to a unit of inflation. The research, led by Sue Wang, Ph.D., an assistant portfolio manager in Vanguard Quantitative Equity Group, found that over the last decade, commodities’ inflation beta has fluctuated largely between 7 and 9. This suggests that a 1% rise in unexpected inflation would produce a 7% to 9% rise in commodities.

Here’s a great chart that shows gold, commodities and REITs as inflation hedges in periods of meaningful inflation. The orange bar is the commodities index.

While gold was the most explosive during the bulk of the period of stagflation, we see that a commodities basket is more reliable. Admittedly, gold can fall down as an inflation hedge in certain periods. That said, there are other reasons for holding gold as a hedge against declining real bond yields and as a form of disaster insurance and a long term hedge against ongoing currency debasement.

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Lance Roberts from RIA Advisors

In the above chart we see gold working in all of the stock market failures for the period shown. Again, most notably during stagflation.

I like to also hold some gold and gold stocks on the side in addition to commodities baskets. Readers will also know that I am also investing in bitcoin – that new gold or digital gold. Continue Reading…

Retired Money: Can retired Boomers afford to be the BOMAD to their kids?

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My latest MoneySense Retired Money column looks at the question of whether almost-retired or already-retired Baby Boomer parents should provide financial assistance to their Millennial children seeking to get their first steps on the increasingly expensive housing ladder.

That is, is it wise for parents to cut into their own Retirement savings in order to become the BOMAD: the Bank of Mum and Dad?

It’s been said that 50 to 75% of millennials expect to tap the BOMAD for help coming up with a down payment.Click on the highlighted headline to retrieve the whole column: Should you help your adult children to buy Real Estate?

A couple of the column’s sources arose after I appeared on Patrick Francey’s The Everyday Millionaire podcast.

Francey is a seasoned entrepreneur and real estate investor who is CEO of REIN of the Real Estate Investment Network (REIN). These days, most REIN members who have at least one “door” (real estate investment property above and beyond a principal residence) are almost by definition millionaires. I appeared despite the fact our family owns no investment real estate, apart from REIT ETFs in a purely electronic portfolio: “clicks instead of bricks,” as I explained on the show.

REIN’s Patrick Francey, host of The Everyday Millionaire podcast

Interestingly, while he has helped his own kids with housing, Francey does not necessarily think parents should provide financial assistance to kids trying to break into the housing market: not if it jeopardizes their own retirement, and not if it means the kids will miss out on the character-building exercise of doing it on their own.

A similar stance came from retired mortgage broker and author Calum Ross, who also recently appeared on the podcast. Ross, of Toronto-based The Mortgage Management Group, has some experience with BOMAD as it relates to his two daughters.   “As a divorced Dad, BOMAD was restructured and now runs as a privately held entity BOD [Bank of Dad.],” Ross quips.

Ross says his parenting priorities are identical to how his parents raised him: 1) I taught them to be thoughtful, 2) I raised them with a work ethic, and 3) I taught them to save money and not spend it.

Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management, says BOMAD may be a great deal for the kids but Mum and Dad need to first ensure they have sufficient funding to see them through their retirement years. “Ensure that they can incur all expenses, health costs, effects of inflation, rising costs of providing for in-home services, a retirement home facility and rehabilitation costs of the current home.” Continue Reading…

Canadian Financial Summit 2021

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The Canadian Financial Summit is back once again this fall with a terrific line-up of 35+ personal finance experts, including yours truly, to tackle the burning financial questions facing us today.

You’ll hear from PWL Capital’s Ben Felix, Millionaire Teacher Andrew Hallam, The Globe and Mail’s Rob Carrick, consumer advocate Ellen Roseman, along with long-time personal finance bloggers Barry Choi, Tom Drake, Mark Seed, Bob Lai, , Stephen Weyman and Jonathan Chevreau.

Topics discussed in this year’s online Summit include:

  • Buy back your family time with FIRE
  • How much does it cost to travel FOREVER?
  • How to take a tax holiday by working outside of Canada
  • Want an Unlimited TFSA? Try moving to these countries with territorial taxation
  • Are dividend stocks in a bubble?
  • The risks of investing in cryptocurrency
  • Should I have Bitcoin in my Portfolio?
  • Maximize the New Aeroplan and Post-Covid travel plans
  • Don’t let FOMO ruin your investment returns
  • Maximize Work From Home tax tips in a Post-Covid World
  • Will the Canadian Housing bubble finally pop?
  • How to setup a corporation, invest within it, and then pay yourself
  • The BEST ETFs in Canada
  • Why self-made dividends are better than ordinary dividends in every way!

I was happy to chat with co-host Kyle Prevost earlier this summer when we filmed our session about how not to let FOMO (fear of missing out) ruin your investment returns. It’s a topic at the forefront over the past 18 months as cryptocurrencies and meme stocks soared by triple and quadruple digits. Continue Reading…

Vanguard Canada launches two actively managed global mutual funds

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Vanguard Investments Canada Inc. has announced the launch of two new globally diversified and actively managed mutual funds it describes as being “low cost”: Vanguard Global Credit Bond Fund [VIC500] and Vanguard Global Equity Fund [VIC600.] complement the firm’s current line-up of 37 ETFs and four mutual funds.

Management fees will be 0.40 and 0.55% respectively. Asked whether this means payment of trailer commissions to financial advisors, Vanguard Canada spokesperson Matthew Gierasimczuk told the Hub: “No. Vanguard doesn’t pay trailing commissions in any of our markets since we have a longstanding belief it leads to a conflict of interest for investors.” The funds are available through most wealth advisors and also on Questrade and Qtrade, he added.

In a news release issued on Sept. 13, Vanguard Investments Canada Inc. Managing Director and Head Kathy Bock said:

“Within an uncertain investing climate, Canadian investors and their advisors are looking for quality, long-term and high-performing investment products, at a low-cost … These mutual funds provide that and reflect our deep 45-year history in active management with proven portfolio manager expertise that can help investors achieve success.”

Globally, The Vanguard Group, Inc. manages over USD $8.1 trillion in assets and is one of the world’s largest active managers with USD $1.7 trillion in global actively managed assets under management.

“Since introducing our mutual funds three years ago, Canadians have embraced our differentiated approach to active management, providing investors with access to skilled global investment managers with a long-term view,” said Tim Huver, Head of Intermediary Sales, Vanguard Investments Canada Inc. “These two global funds can act as a core holiding or complement to an investor’s equity or fixed income portfolios.”

Vanguard Global Credit Bond Fund seeks to provide a moderate and sustainable level of current income by investing primarily in non-government fixed income securities of issuers located anywhere in the world. The fund will have a management fee of 0.40%. The fund will be sub-advised by The Vanguard’ Group Inc.’s Fixed Income Group, a global team of more than 185 tenured and dedicated professionals overseeing USD $2.1 trillion in total assets. For 40 years, Vanguard Fixed Income Group has been distinguished in the industry by its deep investment capabilities, disciplined security selection process, rigorous risk management techniques and strong long-term performance.

Vanguard Global Equity Fund seeks to provide long-term capital appreciation by investing primarily in equity securities of companies located anywhere around the world. The fund will be sub-advised by Baillie Gifford Overseas Limited and Marathon Asset Management Limited. These sub-advisors have worked with Vanguard for decades and collectively manage over USD $500 billion in assets under management. The maximum management fee for the fund will be 0.55%.


			

	
	


				


	

		
				

			Inflation and the 5% Solution
		

		
		

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https://advisor.wellington-altus.ca/standupadvisors


By John de Goey, CFP, CIM


Special to the Financial Independence Hub


One thing that many economic historians often overlook is that one’s worldview is shaped by life experiences.  That includes matters like love, marriage and divorce, money and savings and attitudes toward political risk – to name a few.  If our values, likes and dislikes are shaped by our experiences, it stands to reason that our perceptions of what the future might hold could be largely informed by what we have already experienced.  That’s especially true of the things we experience in our formative years.


In the summer of 2021, for the first time in over a generation, there’s been some talk of inflation being a going concern.    Inflation was wrestled to the ground in the 1980s and hasn’t been heard from since – until now.  As the debate rages about the degree to which we should be concerned (if at all) about inflation coming back in a meaningful way, it is noteworthy that while there are credible economists on both sides of the debate, virtually everyone in the “inflation will be a problem” camp is at least 70 years old.  Stated differently, those people who experienced inflation in their adult lives are concerned and those who did not are not.


Transitory inflation?


For about 30 years now, the goal of central banks in the west has been one of price stability, which they define as inflation at 2%, give or take 1%.  Basically, anything between 1% and 3% is okay.  Now, we’ve experienced inflation above 3% for a couple of quarters and people naturally wonder what that might mean.  Central Bankers have been assuring us that the uptick is “transitory,” that it is just a situation where awful data from the early days of the COVID crisis is working its way through the system.  Nothing to see here.  Move along.


Although I am technically old enough to remember inflation, I never had to deal with it personally or directly.  I was a teenager when my parents built the family home on their property in 1979.  I heard about their astronomical, double-digit mortgage rates, but never had to experience anything of the sort as the payor.  My sense is that young people – especially millennials – cannot relate to anything close to what I’m about to say: the inflation rates, and therefore the mortgage rates and interest rates you have experienced throughout your entire lives, may not be around for much longer.  Furthermore, if that is true, the consequences could be enormous.


5% constitutes “Real inflation”


As mentioned, there are competing views on inflation.  I have not come down on either side, but I enjoy the exchange of ideas.  If the doves are right and the inflation we’re seeing now is little more than a passing phase, there’s not much to say because little will change.  If, however, real inflation is coming sooner than later and for longer than just a phase, we need to prepare.  What constitutes ‘real inflation’, you may ask.  My guess is something like 5%.  At that level, no one can pretend that the inflation rate is not a concern and does not need to be dealt with.  For this discussion to be meaningful, inflation needs to be at least 2% above the high end of the traditional range and to stay there for at least a year.  At that point, both the logic behind it being transitory and the facile dismissal of it being above the target by an inconsequential amount disappear.  At that level, something needs to give. Continue Reading…