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).

5 steps to take to retire before 40

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By Veronica Baxter

Special to the Financial Independence Hub

So you think you want to retire early? Here are five proven steps to take to make that happen, if by “retiring” you mean no longer working.

Step #1:  Work Wisely

Notice that this does not say work hard, or work 80 hours a week. To work wisely means to choose a job or a career that is lucrative and that you get some satisfaction from. You don’t have to love or even enjoy your job but you do have to tolerate it and feel a sense of self-respect in being paid to do it.

If you are still in school there are career services where you can seek counseling about what sort of careers pay well that you might be able to do and feel satisfied doing. Oddly enough, right now our economy needs more tradespeople because the boomers brought their children up to expect to go to college and get a white-collar job. As a result, there are fewer workers in trades such as plumbing, electrical, carpentry, and these people are in high demand.

Whatever you choose to do, ideally, you want to be your own boss eventually. That way you have control over the quality and quantity of work and you also have control over business expenses, which you can then keep to a minimum. Then if you can grow your business and eventually have employees work for you, you can multiply your earnings by however many people work for you. Then, eventually training someone to supervise the work means you can step back and… perhaps retire!

Whatever you decide to do, craft a 2-year plan, a 5-year plan, a 10-year plan, and a 20-year plan. These plans should include training or education goals, financial goals, and a vision of what your work life looks like at every stage. Revisit these plans in an annual self-audit to keep yourself on track, and revise them if necessary. You’ve heard of the phrase, “fail to plan, plan to fail”? Well, it’s true. Harness your imagination and dream big. Reach for the stars, you may get the moon.

Step #2:  Pay Yourself First

This is crucial. When you craft your household budget, the first expense you must pay is into your savings or retirement account. What percentage of your income you put aside is up to you, but first, you will need an emergency fund of 6-8 months’ living expenses, then you will need to put money aside for retirement.

There are online calculators that can help you figure out how much you will need to live off the income from investments, or, you can seek the advice of a financial planner to help you figure out how much to set aside and to select the right investment vehicle for your goals. Keep in mind that if you plan to retire before age 40, you will need investment vehicles in addition to traditional tax-deferred retirement plans because you will be too young to withdraw from those.

Step #3:  Live Below Your Means

Whatever percentage of your income you decide to set aside, you should figure out how to live comfortably on 80% of the remainder. Why? Because having what you perceive as “extra” money at the end of the month gives you a mental boost like nothing else. When you feel like you are in control of your finances and you have more than enough money to do what you need to do, you are activating the law of attraction.

What do you do with that “extra” money? Take a small portion and treat yourself in some small way to reward yourself for being frugal, then invest the rest in your business or deposit it in your investment accounts.

Step #4:  Maintain Good Credit

It is crucial that you pay all bills in full and on time. Take out and use credit cards, especially if there is some sort of reward for use such as cashback or airline miles, but pay them off every month. Get a car loan. Continue Reading…

8 Creative Financing options for the New Normal

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Companies of all sizes are taking a closer look at budgets and shifting resources around to power through the financial strain of the COVID-19 pandemic. Some are even turning to unconventional methods to finance operations. The ability to solve problems in creative ways is a common trait of innovators and entrepreneurs and will become crucial to staying afloat as we navigate tricky economic situations.

So what are some creative financing options for businesses looking for funds? We asked eight thought leaders to join the conversation and share their innovative methods for financing business operations.

Make products available Online

Selling digital items or services is a great way to gain income without much work. If you are a company with a following on social media, switching to have some products online could benefit both the customers and you. You can also help others sell their services for a cut of the profit. — Andrew Roderick, Credit Repair

Debt Financing

To get through the new normal, companies might consider debt financing options. Based on the type of loan you are seeking, debt financing can be either long term or short term, so this type of loan can be used for whatever your business might need to survive the new normal. — Kimberly Kriewald, AVANA Capital

Equity Financing

Equity financing is a way to raise funds by selling ownership in your company, proving to be a viable option for businesses looking to get creative with their finances. In exchange for money from investors, you give them a portion of ownership and control in your business. The investors may be angel investors, venture capitalists, or even a family member or friend. — Rex Murphey, Montauk Services

Consider a Line of Credit

The only type of financing businesses should consider is a line of credit if you have a profitable business. Continue Reading…

Connecting Dots

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

The distinction between solid analysis and wonky forecasts can be tiny.  As a Portfolio Manager who has spent more than his fair share of time dealing with the media, I am highly mindful of the need for the fifth estate to look for controversy as clickbait.  As the saying goes, opinions are like noses – everybody has one.  The question this begs is “just how credible are the opinions we’re hearing these days”?

Theme 1: Worst is over for Covid-19 storm

There are two themes that I have been hearing a fair bit these days.  The dominant (but by no means universally-held) view in the financial media seems to be the storm has passed, the worst is over, and markets have already resumed an upward trajectory.  The other theme is that, with protests throughout the U.S., and increased sensitivity to Black Lives Matter, a massive bout of unemployment and record-breaking outbreaks of COVID-19, Donald Trump’s chances of re-election are teetering between slim and none.

Theme 2: If Biden wins, expect scaleback of Trump tax cuts

What I find interesting is that so few commentators have taken the time to link those two presumptive trends.  I say that because there’s a strong first-derivative consensus that should Joe Biden become President of the U.S., he will almost certainly repeal or at least significantly scale back the Trump tax cuts – and likely institute a wealth tax on the ultra-rich to boot.  If those things happen, pretty much everyone thinks it’ll be bad for the American stock market.

My question, therefore, is: “how do so many intelligent, forward-looking people think we can have strong capital markets when it looks increasingly probable that Biden will win in November?”  I have gone on record a number of times to say I think markets are dangerously overvalued.  That remains my position.  What is adding to my concern in July, 2020, is that we’re less than four months away for a Presidential election and the presumptive Democratic nominee is toying with a double-digit lead in the polls… and that no serious commentator thinks the American economy will not take a hit if the lead translates into a victory.  My sense, therefore, is that a number of financial commentators are opining that WANT Trump to win even though most of them don’t think he’ll be able to pull it off.  Analysts seem to be talking with their hearts; not their heads.

John De Goey, CIM, CFP, FP Canada™ Fellow, is a Portfolio Manager with Winnipeg-based Wellington-Altus Private Wealth Inc. John works from the Toronto office. This blog originally appeared on the firm’s “Newswire” site on July 10, 2020 and is republished on the Hub with permission.

How (and When) to Rebalance your portfolio

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Setting up the initial asset allocation for your investment portfolio is fairly straightforward. The challenge is knowing how and when to rebalance your portfolio. Stock and bond prices move up and down, and you periodically add new money – all of which can throw off your initial targets.

Let’s say you’re an index investor like me and use one of the Canadian Couch Potato’s model portfolios – TD’s e-Series funds. An initial investment of $50,000 might have a target asset allocation that looks something like this:

Fund Value Allocation Change
Canadian Index $12,500 25% —
U.S. Index $12,500 25% —
International Index $12,500 25% —
Canadian Bond Index $12,500 25% —

The key to maintaining this target asset mix is to periodically rebalance your portfolio. Why? Because your well-constructed portfolio will quickly get out of alignment as you add new money to your investments and as individual funds start to fluctuate with the movements of the market.

Indeed, different asset classes produce different returns over time, so naturally your portfolio’s asset allocation changes. At the end of one year, it wouldn’t be surprising to see your nice, clean four-fund portfolio look more like this:

Fund Value Allocation Change
Canadian Index $11,680 21.5% (6.6%)
U.S. Index $15,625 28.9% +25%
International Index $14,187 26.2% +13.5%
Canadian Bond Index $12,725 23.4% +1.8%

Do you see how each of the funds has drifted away from its initial asset allocation? Now you need a rebalancing strategy to get your portfolio back into alignment.

Rebalance your portfolio by date or by threshold?

Some investors prefer to rebalance according to a calendar: making monthly, quarterly, or annual adjustments. Other investors prefer to rebalance whenever an investment exceeds (or drops below) a specific threshold.

In our example, that could mean when one of the funds dips below 20 per cent, or rises above 30 per cent of the portfolio’s overall asset allocation.

Don’t overdo it. There is no optimal frequency or threshold when selecting a rebalancing strategy. However, you can’t reasonably expect to keep your portfolio in exact alignment with your target asset allocation at all times. Rebalance your portfolio too often and your costs increase (commissions, taxes, time) without any of the corresponding benefits.

According to research by Vanguard, annual or semi-annual monitoring with rebalancing at 5 per cent thresholds is likely to produce a reasonable balance between controlling risk and minimizing costs for most investors.

Rebalance by adding new money

One other consideration is when you’re adding new money to your portfolio on a regular basis. For me, since I’m in the accumulation phase and investing regularly, I simply add new money to the fund that’s lagging behind its target asset allocation.

For instance, our kids’ RESP money is invested in three TD e-Series funds. Each month I contribute $416.66 into the RESP portfolio and then I need to decide how to allocate it – which fund gets the money?

 

Rebalancing TD e-Series Funds

My target asset mix is to have one-third in each of the Canadian, U.S., and International index funds. As you can see, I’ve done a really good job keeping this portfolio’s asset allocation in-line.

How? I always add new money to the fund that’s lagging behind in market value. So my next $416.66 contribution will likely go into the International index fund.

It’s interesting to note that the U.S. index fund has the lowest book value and least number of units held. I haven’t had to add much new money to this fund because the U.S. market has been on fire; increasing 65 per cent since I’ve held it, versus just 8 per cent each for the International and Canadian index funds.

One big household investment portfolio

Wouldn’t all this asset allocation business be easier if we only had one investment portfolio to manage? Unfortunately, many of us are dealing with multiple accounts, from RRSPs, to TFSAs, and even non-registered accounts. Some also have locked-in retirement accounts from previous jobs with investments that need to be managed.

The best advice with respect to asset allocation across multiple investment accounts is to treat your accounts as one big household portfolio. Continue Reading…

Choice overload, decision fatigue, and your investments

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

Let’s face it; pandemics can be exhausting. Earlier this year, you may not have loved your daily routines, but at least you were familiar with them; they took little energy to implement. Then, along came the coronavirus. Suddenly, many of even our simplest tasks required rigorous rethinking. You are not alone if you ended up feeling overwhelmed by what behavioural psychologists call decision fatigue.  

On Investing and Jelly Jars

Decision fatigue isn’t just for troubled times. It can happen whenever you’re faced with too many choices, whether we’re talking about your life’s savings or free jars of jam. 

What does jam have to do with being a successful investor? 

In a landmark 2000 study, a pair of academics tested the widespread belief that more choices were more motivating for most of us. Offering free samples of a variety of jams in a high-end grocery store, they found that patrons who could sample up to 6 flavours were far more likely to subsequently purchase a jam than those who could sample up to 24 flavours. 

Since then, other academics have published a litany of similar studies, all substantiating this important finding: Choice overload creates decision fatigue, which can generate poorer outcomes.

Simplifying the Menu

Your financial decisions are not immune from choice overload. For example, in the U.S., employees typically decide how to invest their employer-sponsored retirement plan contributions by selecting from a menu of funds that can range from lean to large. Through the years, multiple studies have looked at how to optimize these menus. Two academics from The Wharton School of the University of Pennsylvania published one study in 2016. This article summarized the results (emphasis ours): 

“Decreasing a blizzard of options to a more manageable list reduced participants’ self-defeating buying and selling, cut the expenses the average participant paid and, in typical cases, could increase the size of the account over a 20-year period by $9,400 per participant … Moreover, participants’ portfolios were less risky after streamlining than before.”

Continue Reading…

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