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).

The Politics of Portfolio Management

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Image courtesy Pexels/Karola G.

By John De Goey, CFP, CIM

Special to Financial Independence Hub

The interplay between politics and economics has never been starker. We have an American President who is doing more to stick his nose into the affairs of those that are supposed to be at arms length than any of his predecessors ever dreamed.

Despite this, people who offer commentary on both the economy and capital markets (they are separate things) act as though what’s going on on Capitol Hill is so unremarkable that they conspicuously fail to work any acknowledgement of the dysfunction into their commentary.

Last week, I sat in on a webinar hosted by Jeff Schulze, CFA, who is managing director, head of economic and market strategy for Clearbridge Investments. In his presentation, Schulze noted that the S&P 500 is currently trading at 23 times forward earnings and that only the late 1990s saw a higher number. He added that there has been recent downward pressure on the federal funds rate and opined that the ‘one big beautiful bill’ will offer further fiscal stimulus down the road.

In a dashboard of 12 indicator variables, only one was flashing red (recession). Four were yellow (neutral) and seven were green (expansion).  He went on to opine that corporate profits don’t look recessionary. He concluded that a near-term recession is unlikely. I’m not disputing his economic evidence:  I’m simply noticing that there was not a word about political implications or developments. That silence strikes me as conspicuously odd.

There are many smart people who look closely at all manner of economic indicators who also look the other way regarding politics. As if they are not related. Why is that? They don’t talk about what’s going on Capitol Hill at all. The topic is taboo. It’s “polarizing.” Some even allege it’s beyond the purview of their mandate. I disagree.

EMH vs Active Management

The efficient market hypothesis (EMH) posits that capital markets do an excellent job of digesting all available information (from all fields of endeavour) quickly and accurately. By synthesizing information into a consistent worldview, EMH implies that no one can reliably ‘beat the market’ through security selection or timing strategies.

The economic forecast offered by Clearbridge seemed predicated on the assumption that what’s going on in Washington is normal, but it also seemed predicated on market inefficiency since Schulze made multiple references to the need for active management. If the market is efficient, then it is already reliably taking the dysfunction in Washington into account. If, on the other hand, it is inefficient, then the vagaries of an unpredictable President stand out as being meaningful and should be noted. So if the conduct of the President is a meaningful consideration, why wasn’t it mentioned by a guy who implicitly rejects EMH? Continue Reading…

Why Canadians Love Real Estate as an Investment Vehicle (Even When the Numbers Do Not Add Up)

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The Hard Truth about Canada’s most Popular Investment Myth: Why your “Sure Thing” Real Estate Strategy could be Costing you Hundreds of Thousands

Lowrie Financial: Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub 

It is hard to go to a Canadian dinner party without someone talking about real estate. Someone’s cottage has doubled in value. A friend just bought a second downtown investment condo. A neighbour is considering a rental property “for the kids.”

We hear it every day from clients. The idea of investing in real estate feels safe, powerful, and smart.

There is a cultural pull here that is almost irresistible:

  • Tangibility: You can touch it, walk through it, and renovate it.
  • Familiarity: Almost everyone you know owns a home.
  • Status: Whether it is a condo downtown, a cottage up north, or a rental property, real estate is a visible symbol of success.

That emotional resonance is powerful and real. But subtlety matters. Let us explore why the emotional weight is so strong, when it outpaces the facts, and why personal homes and even second properties should often be treated as lifestyle decisions rather than wise investment decisions.

Why Real Estate Investment feels Safe and Smart to Canadian Investors

Real estate triggers deeply comforting emotions.

You can see it, unlike stocks that live only on a statement. You can improve it, rent it, or decorate it, which gives you a sense of control. In markets such as Toronto and Vancouver, decades of rising prices reinforce the belief that it is a sure bet.

And of course, there are the stories. Everyone seems to know someone who made a fortune in property. Stories resonate far more than data.

It is like the comfort of holding cash. Cash feels safer than stocks, even though the evidence tells a different story.

Real Estate vs Stock Market Returns: The Data Reveals a Different Story

Here is where the evidence helps keep perspective in check. If you are considering purchasing direct real estate as an investment, the data suggests alternative approaches may deliver better long-term outcomes.

Canadian Stock Market vs Canadian Real Estate Performance

From 1990 to 2023, average Canadian home prices grew about 6.3 percent annually. Once we adjust for maintenance, property taxes, insurance, and transaction costs, which we can reasonably estimate at 2 percent of market value each year, the actual net return drops to about 4.5 percent annually. Meanwhile, the S&P/TSX Composite Index returned roughly 8 percent per year, compounded annually over the same period. Even within Canada, equities have historically outperformed housing as an investment.

Global Diversified Portfolio vs Canadian Real Estate Returns

A globally diversified equity portfolio, such as the MSCI World Index, has historically delivered around 8 percent annually (consistent with Canadian market returns) over long time horizons.  This not only outpaces Canadian housing returns but also provides diversification across thousands of companies in dozens of countries. Canadian housing, by contrast, is concentrated in one country and one asset.

Sneaky Hidden Costs and Investment Risks of Direct Real Estate Ownership

Even beyond the headline numbers, direct real estate ownership brings additional challenges:

  • Concentration risk: One property, in one city, on one street, is hardly diversified.
  • Illiquidity: Selling in a downturn can be difficult and slow.
  • Carrying costs: Maintenance, property taxes, insurance, and fees all erode returns.
  • Leverage risk: Mortgages magnify both gains and losses.

The Cap Rate Crisis: Why Canadian Investment Properties are Failing

Another critical but often overlooked factor in real estate investing is the capitalization rate, or cap rate.  This measures the cash flow you receive from a property after expenses, expressed as a percentage of its value.

Historically, investors earned returns from two sources: cash flow (rental income) and appreciation (price gains). But as property prices have risen much faster than rents over the past few years, cap rates have fallen dramatically. Many condos and residential investment properties now have cap rates that are very low, even close to zero. In some cases, especially when using leverage on a direct residential investment property, you get the pleasure of having negative monthly cash flow. Who wants an investment that requires you to put in more of your own money each month to keep it afloat?

That means the only way to make money is if the underlying property continues to appreciate. For a long time, that worked. But as Canadians have seen in recent years, property values can and do fall. Relying solely on appreciation is not a proper investment strategy. It is a gamble.

Real Estate as Lifestyle Choice vs Investment Strategy

There is an important distinction to be made here. Owning your personal home, or even a second property, is rarely a pure investment decision. It is primarily a lifestyle choice.

Your Primary Residence: A Home, Not an Investment Vehicle

Your home provides stability, belonging, and a sense of place. You live in it, you personalize it, and you may even raise a family in it. Its financial appreciation is a by-product, not the primary purpose.

Second Properties and Vacation Homes: When Lifestyle Meets Investment Confusion

Cottages, ski condos, or vacation homes can bring joy, relaxation, and family memories. When acquired with lifestyle purposes in mind, they can be meaningful. But if purchased purely for financial returns, they blur the line between lifestyle and investment and often fall short on performance expectations.

Investment Property Evaluation Framework: The Big Bet Test

Here is a simple framework to evaluate real estate as an investment:

  1. Diversification: Does this spread risk or concentrate it?
  2. Liquidity: Can you access your money if needed?
  3. Scalability: Can you expand without disproportionate risk?
  4. Taxation: Are the benefits what you expect?

A single rental property often fails on diversification, liquidity, and scalability. It is like putting half your portfolio into one stock, in one city, on one street.

REITs: The Smart Alternative to Direct Real Estate Investment

If you want exposure to real estate without its emotional and structural pitfalls, publicly traded Real Estate Investment Trusts (REITs) are an excellent alternative. Continue Reading…

Avoiding the big retirement mistakes

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By Mark Seed, myownadvisor

Special to Financial Independence Hub

In a few posts on my site over the years, I’ve shared some big retirement mistakes to avoid. This becomes even more important now that we’re entering a new chapter in our lives: semi-retirement / work on own terms.

Are we ready? Can we avoid some big investing and related retirement mistakes that experts share?

In that spirit as part of new pillar post I hope to update annually and anchor my progress around, here are some of the ways I hope to avoid some big retirement mistakes.

I certainly won’t be perfect but I’ll do my best based on this infographic and more below:

20-common-investing-mistakes - Visual Capitalist November 2023

Attribution/thanks to Visual Capitalist. @VisualCap

1. Expecting too much

I believe I/we have reasonable long-term return and inflation assumptions. Our projections include at the time of this post:

  • 5% annualized returns from a 90% equity/stock + 10% cash/cash equivalents portfolio (excluding my small workplace pension), and
  • 3% sustained inflation. 
  • Some go-go spending years from now until age 79/80 give or take.

I’ll link to my latest Financial Independence Budget update at the end of this post to support any planning assumptions you might have.

What are your key assumptions?

2. No investment goals / 3. Not diversifying

I think we should be good:

  1. We remain invested in our Canadian and U.S. individual stocks near-term, although I could see a near-term day in 2025 or 2026 whereby I sell off all remaining/handful of U.S. individual stocks we own and just put all ex-Canada stocks into a low-cost ETF like my favourite to date: XAW. I would however keep my existing 25 Canadian stocks for income and growth for now; to avoid capital gains in our taxable accounts.
  2. We are not focused on short-term returns since we remain 90% equities. That said, short-term, we are hopefully setting aside enough cash/cash equivalents in 2025 to draw down said cash in 2026 and 2027. Planning for 2028+ has not started yet but we have time to organize ourselves …
  3. We have our long-term drawdown plan: NRT which means a mix of living off dividends from our Non-Registered Accounts (N) with corporation withdrawals, drawing down our RRSPs (R) over time, and therefore leaving our TFSAs (T) until the end.

Our hybrid investing approach using a mix of stocks and ETFs is not going to change:

  1. We own a number of Canadian dividend-paying stocks (with some U.S. stocks for now) for income and growth.
  2. We own a few low-cost ETFs for extra diversification.

4. Focusing on the short-term

Fail!

I’m looking forward to the short term!

We are looking forward to our semi-retirement years and seeing what opportunities may appear in the coming years. I get what the infographic is saying though. 

5. Buying high and selling low

I can’t predict the future, can you?

I’m at a point in my investing life whereby if I have the money, sure, I will invest more but I don’t have to.

Besides, when you index invest, the best price is today’s price. The stock market is a forward looking tool.

“Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett

6. Trading too much

Nothing really to worry about here. I’m no longer 22-years-old and into penny stocks on this list!

Here are other ways to kill your retirement plan:

7. Paying too much in fees

No longer a problem via owning many individual stocks; no trading, I only do some periodic buying and we maintain low-cost ETFs for growth.

8. Focusing too much on taxes

In other articles on my site about investing mistakes, I’ve seen some expert concerns about dividend income in a taxable account and at the same time, I’ve seen the same experts say not to let the taxation tail wave the investing dog per se.

Mixed messages for sure.

When it comes to dividends, I continue to remain on record that dividends are not the be-all, end-all but work for us especially in our non-registered accounts in that:

  • any company that does not pay out a dividend, may alternatively provide other forms of shareholder returns: in the form of future capital gains, stock price increases, share buybacks, other.

This means dividends aren’t everything and never have been but they can be very good.

So I do like them. I will spend them. I hope to get more of them over time!

9. Not reviewing regularly

We review our portfolio every few months, in detail. We are good.

10. Misunderstanding risk

I like this one. I feel market volatility and risk while related are not the same.

Volatility:
  • Consider this like the price swings – how much an asset value fluctuates in price over time.
  • High volatility means prices swing up and down sharply, while low volatility suggests a smoother, more predictable up and down ride.

Risk:

  • Possibility of losing money over time, with many specific types of risk: stock market risk, credit risk and housing market risk and so on.
  • Risk can be framed as short-term or long-term, like “there is a risk of cash losing out to inflation over the next 2 years.”

Volatility isn’t the same as risk but they are related. Some stocks in some sectors might be highly volatile, like tech-stocks, but not all stocks nor all tech-stocks may carry the same risk.

11. Not knowing your performance

I monitor our portfolio performance often but I’ve largely given up on detailed benchmarking since it makes no sense to obsess over benchmarking if you are not meeting your objectives.

As long as you are meeting your goals, that’s good. That’s the priority.

Obsessing over a benchmark and feeling the need to meet an index because some expert said it was a good idea, is not.

12. Reacting to the media

Guilty.

I mean, recent tariff wars have been terrible for many reasons. While I have not yet adjusted my portfolio due these wars, I do find all the annexing of Canada rhetoric both very problematic and very concerning.

13. Forgetting about inflation

See above.

I use 3% higher spending per year in my projections.

Is that enough I wonder? You? Continue Reading…

Should investors be more concerned about the ongoing US Shutdown?

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By John De Goey, CFP, CIM

Special to Financial Independence Hub 

[Editor’s Note: this piece was written shortly before Friday’s meltdown of U.S. stocks following Trump’s announcement of still-higher Tariffs on China.]

One evening at midnight, as September turned to October, various elements of the U.S. government were shut down. This has happened before, most recently in 2018 under the same President, but this time, everything feels more ominous.

In fairness, markets were indifferent to the news and have even reached new highs since the announcement. My view is that this turn of events is yet another canary in the coal mine where authoritarianism is lurking just around the corner. The question for many investors is: “What does this mean for my portfolio”? So far, the answer is, “nothing at all.”

Worrisome that investors don’t seem worried

It has been said that financial markets climb a wall of worry. I have said on multiple occasions that one of my biggest worries is that people don’t seem worried: that optimism bias has led to lazy complacency. Stated differently, my perception is that there’s a degree of casual acceptance of macro-level circumstances that has taken hold among investors throughout the western world.

My concern about valuations has been reiterated on multiple occasions for many quarters, if not years. What I have not said explicitly until now is that there is a considerable political risk that is proceeding apace: concurrent with the valuation risk.

To my mind, this is a double uncertainty. The first question is when the bubble of multiple asset classes hitting all-time highs will burst. The second question is when Donald Trump will drop the mask and all pretense of adherence to democratic principles. He was elected a year ago next month.  In the nine and a half months since he has taken office, the destruction of centuries-old political norms has proceeded at a breakneck pace. Continue Reading…

How NOT to invest (Book Review)

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Amazon.ca

Special to Financial Independence Hub

 

Before reading Barry Ritholtz’s book How Not to Invest, I wondered if the “Not” in the title was a sign it would be filled with gimmicky ways of giving investment advice.

It isn’t.  Investing well is simple enough, but the world tries to push us towards many types of poor choices that lose us money.  The best advice is a list of the many things to avoid when investing.  This book gives readers the benefit of Ritholtz’s extensive experience with staying on the simple path to investing success.

The book is organized into four parts: Bad Ideas, Bad Numbers, Bad Behavior, and Good Advice.

Bad Ideas

Part of what makes it so easy to push investors toward bad ideas is that we believe secret ways to create wealth exist when, in fact, they don’t exist.  “We don’t like to admit it, but nobody knows anything about the future — not just you and me, but the so-called experts too.”

I’ve had the experience of getting people to agree that the future is unknown, and then they immediately ask what I think will happen with interest rates.  It’s hard to get people to really believe the future is unknown.  Ritholtz does an excellent job of going through some high-profile examples of the futility of forecasters.  Instead of searching for the right seer, he suggests having a “financial plan that is not dependent upon correctly guessing what will happen in the future.”  “Don’t predict what will happen, but rather, assess the range of possible outcomes — what could happen.”

So much of the information we see about investing is just noise.  Ian Cassel said “The maturation of every investor starts with absorbing almost everything and ends with filtering almost everything.”

It is freeing to admit we don’t know what will happen and to plan for a range of possible outcomes.  What too many people do is “Make predictions, then marry those forecasts.”  If they’re wrong, “This usually leads to catastrophic results.”

Bad Numbers

This part of the book starts with a good section on economic innumeracy that discusses denominator blindness, survivorship bias, mathematical models, and the fact that we respond better to anecdotes than data.

Part of what makes this book a pleasure to read is Ritholtz’s optimism.  Paul Volker once said “The only useful thing banks have invented in 20 years is the ATM,” but the author lists 20 useful financial innovations, including index funds, ETFs, low costs, fast trade clearing, and cash-sending apps.  The challenge for investors is to benefit from these innovations rather than lose money with them.

The author sees bull and bear markets as secular periods characterized by either high price-to-earnings (P/E) ratios or low P/E ratios.  I’m not sure how he thinks investors should use this information.  In my case, I use P/E levels to make modest formulaic adjustments to both my asset allocation and my expectations for future stock returns.

Sometimes people overestimate how much the news of the day will affect markets.  Some industries were devastated by Covid-19.  However, it turns out that these industries represent a small fraction of overall markets.  If in “mid-2020, the 30 most economically damaged industry categories were delisted, it would have shaved off just a few percentage points from the S&P 500.”

There is a winner-take-all tendency in many areas, including stocks.  “Just 1.3% of the public companies listed in the United States account for all the market gains during the last three decades.”  We can “find the best-performing stocks by buying them all” in an index fund.

“Simplicity beats complexity every time.  A portfolio of passive low-cost indexes should make up the core of your holdings.  If you want to do something more complicated, you need a compelling reason.”

Bad Behavior

“Bad behavior leads to bad investing outcomes.”  Ritholtz categorizes bad behaviour into ten areas, and he illustrates some of them in an amazing story about a billionaire family called the Belfers.  They lost money with Enron, Madoff, and then FTX!  “Has there ever been a greater, more unholy trifecta than this?”  Even billionaires make some terrible choices.

“If only we made better decisions, we would all be so much better off.”  If we could eliminate all investing mistakes for everyone, we might be better off on average, but there is a zero-sum aspect to investing mistakes.  Your loss is someone else’s gain.  The main overall benefit of eliminating all investing mistakes is that those employed exploiting such mistakes would move on to do something useful for society. Continue Reading…