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).

4 Investing lessons from 2020

Posted By |
Lowrie Financial/Unsplash
By Steve Lowrie, CFA
Special to the Financial Independence Hub
Sometimes, it takes years for key investment lessons to play out to the point we get to say, “See? Told you so.” 
Not so in 2020. Now that this excruciating year is behind us, we can at last appreciate the remarkable crash course it offered in nearly every principle inherent to successful long-term, goal-focused investing.

Where to begin?  Let’s start with the power of planning.

Lesson #1: Planning beats reacting

“Short-term thinking repeated again and again doesn’t lead to long-term thinking.” — Seth Godin

You were there, so you probably remember:  Major global stock markets declined from near all-time highs in mid-February to a low on March 23rd (34% in 33 days).

Few of us saw that coming.  Fewer still might have guessed things would so abruptly reverse, to end 2020 with new highs, well into positive territory.  The U.S. stock market reached new heights last summer, even as the pandemic and its economic devastations raged on.  The Canadian stock market reached a new high recently on January 7, 2021.  Europe and other global stock markets still have a way to go.

The lifetime lesson here, and my key, repeated observation for 2020, is simply this:

The economy can’t be forecast, and the market cannot be timed.  Instead, have a long-term plan and stick to it during dramatic turning points.

Planning as opposed to reacting: this is your and my investment policy in a nutshell, once again demonstrating its enduring value.  Consider these points:

Much ado about nothing:  The velocity and trajectory of the equity market recovery nearly mirrored the violence of the February/March decline.  For those who like to relate letters of the alphabet to economic or market performance charts, the 2020 stock market chart was a pretty pronounced V.

Patience is a virtue:  In volatile markets, it’s tempting to “wait for the pullback” once a market recovery is underway, and/or wait for the economic picture to clear before investing.  Either or both formulas are more likely to underperform compared to simply sticking with your disciplined plan.

Lesson #2:  In investing, “shiny and new” often isn’t

“Modern portfolio management tools give today’s investors control over their own savings, insight into fees and performance, and the luxury of watching their money vanish in real-time when markets plunge.” — Tim Shufelt, The Globe and Mail

The most significant behavioural mistakes investors make (individuals and institutions alike) are panicking in a down market or getting caught up in the allure of a hot market fad.  While both can be severely hazardous to your financial health, my experience is that chasing hot new trends is often the most damaging.

Today’s trends may be new, but the lesson is all too familiar:  A hot new investment trend is wonderful and exciting … until it’s not.

For example, reading today’s financial news, I sometimes wonder if I have been asleep for the past 20 years, like Rip Van Winkle.  Have I just woken up in the tech boom of the late 1990s, when there was more than an average number of hopeful investors trying to score big on the latest tricks of the trade?  If you’ve been around as long as I have, you know that didn’t end well.  A lot of investment portfolios were left woefully deflated once that bubble burst.

From the adventures of day-trading brokerage accounts, to chasing the latest hot IPO, to piling into large technology companies (regardless of their bloated valuations), the similarities between then and now are uncanny.  Today, we could add record-busting bitcoins and blank-check SPACs to the mix.

Then and now, rising markets often tempt the uninitiated to abandon their well-diversified portfolios to chase after the “easy” money.  Then and now, your best move remains the same: stay diversified.  Concentrated bets on hot trends generate wildly unpredictable outcomes, which makes them far closer to being dicey gambles than sturdy investments.

Put another way, if investing were a school, the markets charge a steep tuition to those who don’t heed their history lessons.  I wonder if 2021 could be an expensive year for those chasing the latest hype?

Lesson #3:  Be selective in your media diet

“Wow. If I’d only followed CNBC’s advice, I’d have a million dollars today … provided I started with $100 million dollars. How do they do it!?” — Jon Stewart, The Daily Show

This is a topic for deeper discussion, but it’s worth including in our 2020 reflections:  Investors should remember that popular and social media is much better at hyping extreme news than offering calmer views. Continue Reading…

How the one-ticket Asset Allocation ETFs performed in 2020

Posted By |
easy peasy lemon squeezy - Dictionary.com

By Dale Roberts

Special to the Financial Independence Hub

The one-ticket ETF portfolios are game changers in Canada. You can get a more comprehensive and ‘complete’ portfolio by way of entering one ticker symbol. The fees are incredibly low, in the area of .20%. Yes, that’s about one-tenth of the cost of a traditional mutual fund in Canada. Of course most Canadians should ditch their mutual funds and head on over to their one-ticket ETF of choice. The performance has been very strong. Today we’ll look at the performance of the one-ticket ETFs for 2020.

A one-ticket ETF portfolio will give you access to Canadian, US and International stocks. The stock market risks and volatility are managed by way of bond ETFs. Those bonds (depending on the ETF provider) can be by way of Canadian, US and International bonds.

Remember, stocks are the unruly and unpredictable toddlers, while the bonds are the adult in the room. We might also manage risks by way of cash, gold stocks and gold ETFs that hold physical gold, plus bitcoin and a basket of commodities and currencies. Personally, I am in the camp of managing the risks beyond the bond ETFs. You may choose to top up your one=ticket ETF; that is a personal choice.

One ticket ETFs are managed portfolios

When you invest in a one-ticket ETF you are accessing a managed portfolio. Your job is to add the monies. The ETF provider will buy the stocks and bonds and will rebalance the portfolio on a regular schedule. Easy peasy. That’s why most Canadians will not or do not need an advisor or broker. Especially if you are in the accumulation stage and are simply filling up your RRSP and TFSA accounts.

It’s so simple and effective. When you do need financial planning you can pay as you go by way of a fee for service financial planner. You don’t have to fork over a percentage of your investment wealth every week. In fact, IMHO, most Canadians should not allow perpetual access to their pockets.

The one-ticket ETF providers

The most famous and adopted one-ticket portfolios are offered by Vanguard. The following post will also help you learn how to choose the right ETF portfolio at the right level of risk. Here’s which Vanguard One Ticket ETF should you invest in? The following links are my reviews of each offering.

You might also look at the BMO One Ticket ETFs.

There are also the Horizons One Ticket ETFs and the iShares One Ticket ETFs.

And new to the fold is the TD One Click Portfolios offered by TD Bank. The TD portfolios were launched in August so they will not be part of our full year 2020 evaluation.

If you have any questions about which one ticket might be right for you, please use that contact form. I’m happy to help. No charge.

The one ticket returns for 2020

Even though we experienced the first modern day pandemic, returns for investment assets in 2020 was very strong. Here’s the 2020 year in review. In that post you can see the breakdown of returns for stocks and bonds in 2020. Continue Reading…

Lessons learned in diversification: reducing my Canadian home country bias

Posted By |

By Mark Seed, myownadvisor

Special to the Financial Independence Hub
Many financial advisors, analysts and investing gurus alike argue in favour diversification.

That said, there are some experts who claim owning about 30-40 individual stocks, in various industry sectors, will provide modest diversification to mitigate portfolio risk.

You can find some of those expert opinions on how many stocks are enough in this post.

Dedicated readers of this site will know I’m a fan of portfolio diversification myself, since I adhere to some personal rules of thumb when it comes to my DIY portfolio. Here are some of those rules of thumb:

  • I strive to keep no more than 5% value in any one individual stock.
  • I’m working on increasing my weighting in low-cost ETFs over time, more specifically, owning more of the U.S. market since I’ve had a long-standing bias to Canadian dividend payers in my portfolio.

You can always review some of my current holdings on this standing page here.

Why diversification?

Portfolio diversification aims to lower the volatility of my portfolio because not all asset categories, industries, nor individual stocks will move together perfectly in sync. By owning a large number of equity investments in different industries and companies, and countries, those assets may rise and fall differently; smoothing out the returns of my portfolio as a whole.

“There is a close logical connection between the concept of a safety margin and the principle of diversification.” – Benjamin Graham

As I contemplate semi-retirement in the coming years, this is what I’m considering for cash on hand to support any bearish equity markets or to ride out unfavourable market returns.

Diversification: applying some knowledge and lessons learned

With 2020 in the rear-view mirror, and a trying investing year for many to say the least (!), I decided to make a few portfolio changes so I could embrace diversification more while simplifying my portfolio as those needs for capital preservation draw nearer.

Today’s post outlines some of those changes, by account, and why.

1.)TFSA

I’ve admittedly been wrestling a bit for what to invest in, inside this account for the current 2021 contribution year.

I know I need some more U.S. and international exposure even with the recent comeback in many of my Canadian stocks since the market calamity began in March 2020.

In looking at my sector allocation to the oil and gas industry, I decided to cut complete ties in late-2020 with Inter Pipeline (IPL) after their dividend cut of 72% earlier in the year. You can see some of that dividend news I reported in this previous dividend income update.

I will use that money, along with new TFSA contribution room in 2021 to invest in some all-world ETF XAW amongst other investments.

XAW will provide far less yield inside my TFSA going-forward, which will impact the income generation machine that is my TFSA, but more importantly I think this fund will provide some much needed total return growth from ex-Canada.

XAW iShares December 2020

2.) RRSP

In a taxable account, Canadian dividend paying stocks earn favourable tax treatment thanks to the dividend tax credit. So, I keep those stocks there and see no reason to change that approach. Continue Reading…

Fear the GIC Refugee renaissance

Posted By |

By John DeGoey, CFP, CIM

Special to the Financial Independence Hub

When I started in the business in September of 1993, it was a great time for new client acquisition.  The reason is simple: there were so many new clients to be had – in the form of first-time investors.  As interest rates plummeted from their all-time highs in the early 1980s, the fulcrum began to shift.  Specifically, as the risk-free rate (anything that could be attained on a guaranteed basis) dropped, people became increasingly willing to absorb risk.

Starting around 1982, the long-term macro trend that continues to this day began.  That year marked the cyclical high in long-term interest rates (in the mid to high teens!) along with a multi-generation low in price/earnings ratios (well into the single digit range!).  For nearly 40 years, interest rates have been seeing a secular decline, while market valuations the world over have been creeping up.  The correlation is predictable.  As rates drop, people are prepared to take on increasingly large amounts of risk in their quest for financial reward.  Totally understandable.

Rates are essentially at Zero

Now that rates are essentially at zero throughout the developed world, the trend has become acute.  The question that people might now be asking themselves is: will people stay out of traditional income investments for the foreseeable future?  Continue Reading…

How to use your TFSA account

Posted By |

 

By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

It’s the new year and you may have a couple of questions on how to use your TFSA account. The Tax Free Savings Account is one of the greatest additions to your investor tool kit. It is true to its name in that the monies grow completely tax free. When you take the monies out for spending there are no tax implications. We need only keep track of our contribution limits.

Out of the gate it’s important to know the contribution allowances. The program was launched in 2009 (the brainchild of then federal Finance Minister Jim Flaherty). The initial contribution limit was $5,000. There is also an inflation adjustment mechanism and that is why you will see the TFSA limits increase over time.

TFFA Limits History

  • The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.
  • The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
  • The annual TFSA dollar limit for the year 2015 was $10,000.
  • The annual TFSA dollar limit for the year 2016 and 2018 was $5,500.
  • The annual TFSA dollar limit for the year 2019 was $6,000.
  • The annual TFSA dollar limit for the year 2020 was $6,000.
  • The annual TFSA dollar limit for the year 2021 is $6,000.

The total contribution allowance to date is $75,500 for 2021. You can carry forward any unused contribution space. Keep in mind that the eligibility for TFSA is based on age of majority. You would have had to have been 18 years of age or older in 2009 to qualify for that full amount. You would also have to be in possession of a Social Insurance card/number.

If you reached age of majority in 2018, that would be your first year of eligibility. To date your contribution limit would be …

Starting the TFSA in 2018

2018 – $5,500, 2019 – $6000, 2020 – $6,000, 2021 – $6,000 for a total of $23,500.

Of course we have to wait for January 1 or later to use that $6,000 for 2021.

Remember if you go over, you will be penalized by 1% per month, for the amount that you have overcontributed. Check with CRA for your contribution eligibility.

Reader question on over contribution

“Ooops, I over contributed in December of 2020.” If you recently jumped the gun and overcontributed by $6000 you would be charged 1% per month, meaning a $60 penalty. Thing is you earned another $6,000 in contribution space on January 1, 2021. You would only face one month of over contribution. You might as well sit tight. You would not be able to have that contribution reversed, even if you quickly move that money out of the TFSA account. If you move the monies in and out there will be no benefit, but you could created fees if it is stocks or ETFs.

If you ever make a more costly (but honest) mistake on over contribution, you can take that up with CRA and your financial institution. It’s possible that you might get some help from your institution or from the CRA. Good luck.

Calculating your TFSA after removing amounts

The formula or rule is quite simple. If you remove $12,000 in one year, you would add that full amount to next year’s contribution allowance. And of course that contribution allowance would also include that calendar year’s new room. For example if you took out $12,000 in calendar year 2020, you would add that $12,000 to the $6,000 allowance for 2021. Your 2021 contribution allowance would be $18,000.

Yes, you get to keep any contribution room gains you made in your TFSA if you sell. You lock in that space. Those investment gains can boost your total TFSA contribution room above the calendar year totals.

This event may be considered if you were looking to use or gift some monies next year. You might sell now and lock in that TFSA space. Obviously, if you’ve been investing those monies, your account is likely or should be at an all-time high.

Please note that if it is a stock or bond or ETF or mutual fund, the trade has to settle within the calendar year. Check with your discount brokerage or advisor on timing and settlement details.

Saving or Investing for your TFSA?

I am a big fan of using your TFSA for investing. There’s the potential or likelihood of much greater gains and hence much greater tax savings when you invest your TFSA dollars.

Also consider that interest rates are sooooo low you might have very modest ‘gains’ with any savings account. The benefit of the TFSA for savings is more muted in a low interest rate environment.

But of course, 2020 proved to many the importance of that emergency fund. You might hold an emergency fund that is 6 months of total spending needs as a starting point. Here’s my personal finance book, OK it’s a blog post …

Oh look, I just found $888,000 in your coffee.

And it can make sense to hold some cash as a portfolio asset. After all it’s an obvious hedge for any deflationary environment. The spending power of cash will increase in any deflationary period.

On that cash front you might consider EQ Bank where you can earn 1.5% in a savings account and 2.3% in registered account such as that TFSA. You may choose to hold some TFSA amounts in savings and some in higher growth investments.

On the investment front you might consider a one-ticket (all in one) ETF portfolio such as those from Horizons, iShares, BMO Smartfolio, Vanguard or the TD One Click Portfolios.

You may decide to build your own ETF Portfolio.

On the mutual fund front you might have a read of this post from Jonathan Chevreau on the top mutual funds in Canada. I am a big fan of those funds from Mawer.

Beneficiary form – successor holder

Ensure that you fill out a beneficiary form for all of your registered accounts. For taxable accounts you might consider joint accounts. Continue Reading…