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).

Determining your Financial Independence number

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By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

Passionate readers of this site have long understood I’ve never been fully convinced about the “retire early” element in the Financial Independence Retire Early (FIRE) movement.

I mean really, what 30- or 40-something is never going to work for any money ever again??

(Answer = you know it.)

Surely some of them will hustle a blog, a course, a book, a podcast or other at some point. The list goes on.

Such FIRE-seekers and very early retirees are not likely misleading people on purpose: some are just simply entrepreneurs …

Forget “RE”, “FI” is the worthy goal

While I couldn’t care less about the retire early part of FIRE, I am working towards the FI part and have been doing so for at least a decade now.

I think most people should absolutely strive for FI instead of early retirement. (See this 2019 blog, Strive for Financial Independence, not Early Retirement).

How much do you need to save for any comfortable retirement?

“It depends.”

According to Fidelity, to be on track for a healthy retirement:

  • You should have x1 your annual salary saved up for retirement by age 30.
  • You should have x3 your annual salary saved up for retirement by age 40.
  • You should have x6 your annual salary saved up for retirement by age 50.
  • You should have x8 your annual salary saved up for retirement by age 60.
  • You should have x10 your annual salary saved up for retirement by age 67.

As a 40-something, according to the pros we should have at least x3-x6 of our annual savings in the bank.

I’m glad I don’t listen to Fidelity. We’re beyond that milestone and we’ll be better off financially (sooner) because of it.

Here in Canada, MoneySense did some similar work on this a while back:

 

MoneySense - how much is enough

Do you really need this much? $1 million or $1.5 million? More?

“It depends.”

I can’t tell you unfortunately: since that answer comes with a complex set of income needs and wants and everyone’s spending goals are very, very different.

I can say with a rather firm set of certainty that if any Canadian or U.S. citizen that amasses this much portfolio value by age 65 and has modest spending needs they will be far better off financially than most.

Our FI number

For years, I’ve pegged our FI number to be around the $1 million portfolio value mark not including any home equity (and our soon-to-be debt-free home: we have to live somewhere!), excluding our workplace pensions, and excluding any future government pensions such as Canada Pension Plan or Old Age Security.

I largely arrived at this number by using a rather standard FI formula.

Financial Independence means:

  1. earning enough passive income from my assets such that my asset-producing passive income is > general expenses, and/or
  2. amassing a portfolio value such that reasonable withdrawals will be > general expenses for many decades on end.

What are reasonable withdrawals???

You could argue the birth of any reasonable and therefore any safe portfolio withdrawal formula was originated by U.S. financial advisor William Bengen.

4% rule

You can read about his genesis for the 4% rule and why it still makes sense by reading this blog from earlier this year: Why the 4% Rule is (still) a decent rule of thumb.

Following Bengen and largely reinforcing his work, three professors at Trinity University published a paper about safe retirement withdrawal rates.

Those professors looked at stock and bond data from the mid-1920s through to the mid-1970s and their conclusion was that essentially over any 30-year investment period in that range, a retiree could safely withdraw 4% of their total assets per year without much fear (meaning barely any fear) of running out of money. Only in a handful of cases, the very worst cases in any 30-year period, would the portfolio go to absolute zero.

So, let’s look at that context when it comes to our goals:

If we managed to enter retirement with our desired $1 million goal of invested assets (along with no debt of course), then we could reasonably expect to assume we could withdraw $40,000 per year for our living expenses from that portfolio with very little fear of running out of money.

Henceforth, the study by those three professors from Trinity University, The Trinity Study, have set the framework for a gazillion FI number crunching exercises to this day and likely the same number into the future …

Determining your FI number 

Here are some options to crunch your math. Continue Reading…

Do you have enough tech in your portfolio?

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

And perhaps that headline could read: do you have enough growth in your portfolio? Of course tech is where they keep much of the growth these days. And certainly those tech companies have been driving the returns of the S&P 500 and other US stock index funds. For investors who create their own stock portfolio, it’s a reasonable question to ask. Do you have enough tech in your portfolio?

For our accounts we use a mix of individual stocks and ETFs. But for the US allocation it’s all stocks. I had wondered if I was missing out. While I love my dividends and dividend growth, in the end it will all come down to total returns. The most optimal arrangement for retirement funding might be a nice mix of generous and growing dividends and that growth component. We can make our own home-made dividends.

Benchmarking our techs against the Nasdaq 100

I ran our tech basket of 4 companies against the Nasdaq 100. You can read about that exercise in my recent Seeking Alpha post. And yes, I’m going to give away the ending.

Here’s … My tech basket has more growth than the Nasdaq 100.

Apologies for the brag, but that’s how we do it on Seeking Alpha. 🙂

The 4 companies are Apple, Microsoft, Qualcomm and Texas Instruments. As you might expect the tech monsters of Apple and Microsoft are the main drivers of those returns. That said, the tech 4 does not keep up with the fabled FAANG stocks. The group includes Amazon, Netflix and Google (Alphabet) in addition to Apple and Microsoft.

That one ticket portfolio has you covered

If you hold a one ticket asset allocation portfolio, you’ve got tech. Those tech giants dominate the S&P 500 or US total market ETFs that are held by the one ticket ETFs. And in Canada Shopify holds the greatest weight in the TSX 60 or TSX composite ETFs. There are other Canadian tech companies contributing, but the US is certainly the land of tech giants and tech growth.

Tech is now 11.2% of the TSX 60 ETF.

Related post – Why index investing works. Continue Reading…

Investing ― not Speculating ― in Growth

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Image courtesy Franklin Templeton; iStock

By John P. Remmert, Franklin Global Growth Fund

(Sponsor Content)

 

Growth stocks attract a lot of attention, especially when momentum markets take share prices to heartpounding new heights. But as growth investors ourselves, we think many investors may be missing the point.

A single-minded focus on momentum is little more than speculation. If you want to invest in growth, rather than simply speculate, sustainable earnings are the key to unlocking value.

Stocks are the longest-duration assets in the capital markets. It may be several years until a stock’s value is fully realized, and as the COVID-19 pandemic has starkly reminded us, a lot can change in the meantime. We think it’s important to develop a mindset with a long time horizon and we seek to own the stocks of attractive companies that will benefit from the secular shifts that we think will shape the fortunes of businesses for many years to come.

Technology crosses all sectors

Technology is increasingly at the core of every business, not just those in the technology sector. If anything, the COVID-19 pandemic has simply sped up adoption of existing trends like ecommerce, machine learning and big data analytics. Health care, especially drug discovery, has surged forward with the rise of machine learning, like the biotech company we’ve owned for years that is now at the cutting edge of COVID-19 drug treatments with an antibody therapy that could help reduce symptoms in severely ill patients.

Within the information technology sector itself, we have invested in many US companies, as they tend to be global leaders with good corporate governance. But when we look at the pervasiveness of technology in other sectors, we find great opportunities in other countries and regions, like the South American stock we bought 10 years ago when ecommerce was non-existent; today the company is a market leader in ecommerce and has developed its own payment and shipping services to facilitate transactions.  Or the education company in China that was able to quickly move their business online when the pandemic hit, because they had been methodically investing in their online offering for years.

Supply chain links surprisingly strong

Although the pandemic and global trade tensions have put supply chains in the spotlight, in the long run, globalization still produces the best products at the cheapest price for the consumer. Continue Reading…

Should investors “go defensive” in uncertain times?

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Lowrie Financial: Richard Clark, Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Lately, the wisdom of having adequate cash reserves has been painfully hitting home for many investors. Sometimes, it has spurred attempts to fix the issue as soon as possible by “going defensive.” During this year’s booms and busts, investors have been asking me:

“With all the bad news, stock markets seem overpriced.
Should I sell some of my stocks and use the proceeds to become more defensive?”

Market-timing by any other name

You probably don’t remember, but back in 2018, we used a modest market downturn to remind everyone how important it is to have enough liquid cash to ride out market storms.  Today, let’s tackle how to create those comforting reserves to begin with.

There’s never a bad time to build more cash reserves or similar safe harbour holdings if your investment plan calls for it.  However, I would not advise reducing your position in stocks and going to cash simply because markets seem too hot to handle.  This is just another form of market-timing. 

Whether the strategy is successful depends more on random luck than evidence-based reason.

Here’s a powerful new video from Dartmouth Professor Ken French (the “French” in the Fama/French 5-Factor Model) with several reasons why this sort of market-timing is so difficult.  He concludes, “Most investors shouldn’t try to time the market.  When they do, they’re simply spending resources to move away from a better portfolio.”

 

 

Deliberately defensive investing

So, how can you shore up your cash reserves?  If you happen to receive a windfall of cash next week, congratulations!  Problem solved.  More realistically, you’ll need to extract the reserves out of your carefully structured portfolio, while keeping its overall asset allocation intact. Continue Reading…

Yes, you can retire up to 30% wealthier

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Questrade touched a nerve with financial advisors with a series of commercials highlighting how lower investment fees over time potentially means you can retire up to 30% wealthier.

Financial advisor extraordinaire Jason Pereira acknowledged that Questrade was right to go after do-nothing advisors who collect fat commissions, but he claimed the 30% wealthier promise was unrealistic and borderline illegal.

Mr. Pereira’s argument is a good one. Advisors like him (and others who put a client’s best interests ahead of their own) can add tremendous value for clients, but not in the way you might think.

The old school notion of a financial advisor is of someone who adds value through their stock-picking prowess. But that argument falls flat when you see the evidence that the vast majority of actively managed funds fail to beat their benchmarks.

Indeed, investors are better off buying the entire market as cheaply as possible using index funds or ETFs.

PWL Capital’s Ben Felix once told me, “investing has been solved … The way for advisors to add value is on planning, behaviour, and transformation.”

With that in mind, I can get behind the idea that financial advisors with this mindset do have a net positive impact for their clients, even after fees.

Which brings me to the point of this article. Canadians have $1.6 trillion invested in mutual funds, most of which are of the expensive, actively managed variety. Those actively managed funds aren’t adding value: the vast majority will underperform their benchmark. Furthermore, most bank-advised clients aren’t getting value in other ways: financial planning, goal setting and prioritization, behavioural coaching, etc.

Traditional advisors are still selling (and charging for) investment expertise, but failing miserably at delivering excess returns while offering little-to-no value for things that would truly make a difference for their clients.

The easy answer is to pair a fee-only advisor with a low-cost investment solution (either a self-directed portfolio of globally diversified ETFs, or through an automated portfolio with a robo advisor). This way, you get the planning, coaching, and behavioural nudges you need to succeed financially, plus the benefit of lowering your investment fees. Win-win.

But the sad reality is that financial inertia is powerful and it’s easier to keep your investments at your bank, along with your chequing, savings, and mortgage. I get it.

Retire up to 30% wealthier without moving your investments

What if I told you that you can still retire up to 30% wealthier without moving your investments to a robo advisor or a DIY investment solution? The answer is sitting right there on the product shelf at your bank: yet rarely if ever talked about by your financial advisor.

I’m talking about index funds. That’s right. Every big bank has a suite of index mutual funds available to investors. These funds charge between one-sixth to one-half the cost of the actively managed mutual funds that are typically sold to Canadian investors.

I’ve monitored and tracked the performance of big bank index funds and their actively managed mutual fund cousins for more than 10 years, and in every single case (when comparing to identical benchmarks), the lower cost index funds outperform the active funds.

So, all you need to do is walk into your bank branch, sit down with your advisor, and ask (no, demand) to move your portfolio from actively managed mutual funds to their index fund equivalents.

Below, I’ll show you the exact index funds to buy to build a 60/40 balanced, globally diversified portfolio of index funds at each of Canada’s five big banks. I’ll compare those index funds to the commonly sold actively managed “balanced” mutual fund.

RBC Index Funds

If you’re an RBC client, chances are you have the RBC Balanced Fund (RBF272) in your investment portfolio. The fund has nearly $5 billion in assets under management and comes with a fee (MER) of 2.16%. Returns have been decent, with a 10-year average annual return of 5.3%. Continue Reading…

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