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).

Stickhandling your investing amid fear and greed

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“The fishing was good; it was the catching that was bad.”
— A.K. Best, fishing author.

“Stock markets are swimming in the face of two major investor emotions. They are fear and greed.” — Adrian Mastracci, fiduciary portfolio manager.

All you have to do is rewind to the 2020 investment results. Especially those recorded during the months of February, March and April. They brought new meaning to volatility, in both directions.

Mention 2020 and practically every investor is glad it is in the rear view mirror. Tread carefully as those pesky markets are not known to march to your wishes.

Accordingly, I attempt to highlight some basic ideas that help in portfolio construction. Focus on expanding your knowledge, say of at least three strategies that improve your nest egg.

Each day now brings a new crowd of market optimists and pessimists. Along with various assortments of buyers and sellers. Just playback the last two weeks.

Be aware of the implications in both camps. Successful investing is about stickhandling one’s comfort zone between fear and greed.

Rules to live by

So, rule number one. No knee-jerk reactions please. Regardless of whether you’re buying or selling.

Rule number two. Markets operate on logic. Do you?

If you succeeded with these two rules, step aside and breathe. If not, rewind to rule one. The bigger question is why would you want to?

Some investors may seek to calm their fears by preserving capital. Others prefer to chase their greed by hitching onto growth wagons du jour.

A few more pessimistic data releases could drive the markets lower. Conversely, a few more ounces of optimism could propel investor confidence to higher levels. Continue Reading…

Not another GameStop explainer

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The internet was all atwitter about the stock market the last two weeks, more specifically about the performance of GameStop stock, short-selling, hedge funds, and Robinhood (a free stock trading app in the U.S.). Financial journalists, pundits, and amateur investors all offered their hot takes on this ‘Reddit-fuelled’ market frenzy. My inbox also lit up with friends and blog readers wondering just what the heck was going on.

Many of these explainers were bad or flat-out wrong: a reminder that not everyone needs to have an opinion on the news of the day. The GameStop story is a fun distraction from the mundane stay-at-home routine. The stock is up 8000% over the last six months, causing short-selling hedge funds to take a huge bath on their trade.

Meanwhile, passive investors like me watch from the sideline with great amusement.

 

Rob Carrick summed up the story nicely when he said:

“But if you’re wondering what the GameStop story means to your future investing, the answer is nothing. Enjoy the show – but don’t take notes.”

If you’re simply curious about what exactly happened with GameStop stock and how it affected Wall Street hedge funds who were betting against the company, watch Preet Banerjee’s excellent explainer on the GameStop short squeeze:

And what exactly is Robinhood’s role in the GameStop saga? Vox explains why the popular stock trading app restricted trading on GameStop, Blackberry, AMC, and other supposed ‘meme-stocks’. Robinhood now faces a class-action lawsuit saying it manipulated the market by restricting trades.

Think the GameStop short-squeeze is the greatest ever? Not even close. Of Dollars and Data blogger Nick Magguilli tells the story of Piggly Wiggly and how one man took on Wall Street all alone.

[Added by editor: Yesterday, Gamestop shares had fallen to US$90, after a high of as much as US483 last week. See also Washington Post story on Feb. 2 entitled Game Over, describing how some first-time traders are reeling from the losses.]

Wealthsimple Trade

Here in Canada, our only zero-commission trading platform is Wealthsimple Trade. They took a different approach than Robinhood – rather than gamifying stock and option trading (only to restrict those trades due to ‘volatility concerns’), Wealthsimple allowed its users to trade GameStop and other meme stocks freely.

They sent out an education email with a useful explainer and warning about trading volatile stocks. They also included pop-up warnings to users through the app when they searched for GameStop and other volatile stocks.

Wealthsimple Trade became the number one app on Apple’s App Store this week as the company saw a 50% increase in sign-ups. My Wealthsimple Trade review was the number one visited article on the blog this week.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on Jan. 30, 2021 and is republished here with his permission.

The pros and cons of RRSPs: What you need to know

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By Allan Small

Special to the Financial Independence Hub

If there is one thing COVID-19 has not impacted, it’s RRSP season. March 1, 2021 is the deadline for contributing to an RRSP for the 2020 tax year. The question is, should you?

The basics: Anyone who files an income tax return can contribute 18% of earned income to a maximum of $27,230 for the 2020 tax year. If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the Pension Adjustment (PA). Unused contribution room can be carried forward to use in the future.

Generally speaking, RRSPs make sense for anyone who wants and can afford to invest for the long term. Here’s why:

Pros

  • Contributions are tax deductible.
  • Earnings grow tax-sheltered within the plan.
  • You can defer tax on investment earnings and contributions to the future. This is particularly useful if you are a high-income earner and your marginal tax rate is likely to be lower in the coming years.
  • RRSPs can hold a wide range of qualified investments. For example, you can hold GICs, savings bonds, Treasury bills, bonds, mutual funds, Exchange Traded Funds (ETFs), equities (both Canadian and foreign), and income trusts in an RRSP.

Deciding what to hold in your RRSP really comes down to the same factors you have to consider when making any type of investment: your comfort level with risk, your investment objectives and your time horizon. For example, if your goal is to grow your wealth over time and market volatility doesn’t keep you up at night, then you may want to consider growth investments such ETFs, mutual funds and stocks. If you want income, then income-generating and interest-paying investments are worth looking into.

All of this said, RRSPs do have their drawbacks.

Cons

  • While you can withdraw funds from an RRSP before you retire, you will have to pay a withholding tax and you also have to report that money as taxable income to the Canada Revenue Agency.
  • The Government of Canada controls the amount of money that must be withdrawn annually once the RRSP matures. When you convert the RRSP to an Registered Retirement Income Fund, which must be done when you turn 71, you are required to withdraw a minimum amount each year starting at age 72 even if you don’t need the money.

RRSPs work best for people who can use a tax deduction and can afford to put money away for the future. Another consideration: Is your income in retirement (and therefore the marginal tax rate you’ll have to pay) going to be equal to or greater than it is during the years you can contribute to an RRSP? If this is the case, you won’t be achieving any tax savings by contributing to an RRSP. However, you could still benefit from deferring tax. The question then becomes, do you pay the income tax now or later? Continue Reading…

MoneySense: 2 articles on how Canadians can play the cryptocurrency mania

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MoneySense.ca has just published two online articles on investing in Bitcoin and other cryptocurrencies. One is by me. Click on highlighted headline for full column: How to invest in Cryptocurrency (without losing your shirt.)

The other is from regular Hub contributor Dale Roberts of Cutthecrapinvesting. His MoneySense piece can be found here: Should you invest in Cryptocurrency?

My piece is the first time I’ve publicly written about crypto, although the Hub has long covered it, both positively and not so positively. Try, for example, this primer published here way back in July 2017.

The MoneySense piece recaps my personal experiments with Bitcoin and Bitcoin funds, as well as Ethereum and Ethereum Funds, going back to the fall of 2020. I sat out the original 2017 boom.

It seems to me that investors should regard this as a new asset class that should probably not exceed a few per cent of a diversified portfolio. Certainly, institutional acceptance of crypto and attention from hedge fund billionaires like Paul Tudor Jones seems to have ignited the new euphoria, buoyed in part over the frustration of minuscule interest rates and inflationary forces unleashed by endless money printing by central banks in the US and the rest of the world.

Based on the recommendation of Profit Unlimited’s Paul Mampilly, my first try was to put several thousand dollars into each of the Grayscale Bitcoin Trust [GBTC/OTC] and Grayscale Ethereum Trust  [ETHE/OTC], which I currently hold in a non-registered account.

I soon realized I wanted to hold these experimental positions in registered portfolios (RRSPs and TFSAs) so that the next time I got a double or triple — if indeed they materialized rather than comparable losses — I could book the gains with no immediate tax consequences. I soon discovered the closed-end funds of Toronto-based 3iQ Digital Asset Management:  first I tried The Bitcoin Fund [QBTC/TSX] andThe Ether Fund [QETH.U/TSX], can be held in registered accounts like RRSPs and TFSAs.

My third experiment was when Mampilly started to recommend his readers move from the Ethereum tracking ETHE to actual native ethereal or ETH (which some call Shitcoin, or poor man’s Bitcoin). He suggested buying actual “native” crypto from places like Coinbase and RobinHood, convenient for his mostly American subscribers but less so for Canadians. Continue Reading…

How will you react to the 50% Incorrection?

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

Words are important.  Not only because of what they say, but also what they imply without saying.  The finance business is full of such words and phrases.

Today, we’ll look at one of my (ahem) “favourites” – the word “correction.” Within the field of finance, a correction is when the stock market drops by 10% or more.  A more precise term might be a drop of more than 10%, but less than 20%, because a drop exceeding 20% is no longer a correction, it is a bear market.  Got that?

The finance industry presumes markets always rise

Here’s the thing about industry Bullshift.  The presumed direction, when speaking about the future, is pretty much always up. Every prognostication from everyone who does a prognostication for every asset class under all circumstances is that ‘the market’ (whatever index or asset class is being discussed) will go up this year.  I have literally never seen a major industry player predict a year-over-year drawdown in any asset class: ever.

As people must surely know, most financial predictions are made about the stock market.  The data on the subject is quite clear: markets the world over go down about 3 times every 10 years.   Many prognosticators hedge their predictions by allowing that, of course, a ‘healthy correction’ of about 10% could happen at any time and for almost any reason, including no discernable reason whatsoever.

An ‘Incorrection of Epic Proportions?’

My question to you is about symmetry and consistency.  If a drop of 10% or more is a “correction, it must logically follow that a gain of 10% or more is an “incorrection.” Who decides what is correct or incorrect, anyway?
Continue Reading…