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).

Does your Balanced Portfolio need a Remix?

By Michael Greenberg and Wylie Tollette

(Sponsor Content)

The 60% stocks and 40% bond (60/40) balanced portfolio ― or 70/30 depending on your risk tolerance and time horizon ― has helped many investors build wealth over the past 20 years. It’s a simple recipe for success that has relied on four basic market expectations:

1.) Positive longer-term returns for stocks, driven by underlying economic growth

2.) Falling ― but still positive ― yields on bonds, particularly sovereign bonds

3.) Low and contained inflation

4.) Negative correlations between stocks and bonds (move in opposite directions), particularly during recessions

This last expectation has been especially important. When equity markets are under stress, central banks traditionally have been able to reduce short-term interest rates, increasing the value of nominal bonds. Investor flight to safe-haven assets and quantitative easing (QE) programs initiated by central banks also provide a price boost to the asset class. This helps offset the decline in equities and provides portfolio managers with “dry powder” to reinvest in newly cheap stocks.

But the world has changed. With sovereign bond yields approaching zero in many countries, does this basic equation still hold?

Four Strong (Head)Winds

Today, the 60/40 portfolio faces four formidable headwinds:

  1. Low bond yields – for the past 35 years, yields have fallen and stayed near historic lows. Investors have offset those declines by increasing equity risk; but in a balanced portfolio, more risk means more volatility.
  2. Reduced negative correlation impact – with such low yields, the sought-after negative correlation between bonds and stocks may diminish.
  3. Waning disinflation –increasing pressures on inflation from aggressive monetary and fiscal stimulus, increased protectionism/nationalism, and supply chain disruption/re-shoring could lead to higher yields, which would hurt bond prices.
  4. Limited monetary tools — near-zero/negative interest rates and bloated balance sheets mean less ammunition for central banks to fight the next economic downturn. A move to heavier fiscal policy and resulting increased government bond issuance would also hurt bond prices.

The Real Price of Risk

At this point, taking on more risk may not be worth the incremental return. If your cash flow is negative, you won’t be able to rely on equity risk to carry the load. To fund those cash flows, you would need to sell securities periodically, which introduces timing risk. At the worst, you could be forced to sell a long-term asset during a bad short-term stretch in the markets.

Evolve, don’t abandon

Do these changing conditions mean the trusty 60/40 portfolio should be completely scrapped? We don’t think so. Here are some ways to bring your balanced portfolio up to speed:

  • Adjust your return expectations. Yes, the contribution to returns from bonds will be much lower. On the other hand, we think there is likely a cap on how far and fast yields could rise. That will limit the downside. We suggest a long-term return of 4-5% is a reasonable expectation for a 60/40 portfolio (excluding potential value add from dynamic asset allocation and active security selection).
    . Continue Reading…

4 ways for a Small Business to thrive

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By Sia Hasan

Special to the Financial Independence Hub

Building a company from scratch and being your own boss are the dreams of many. However, it is small businesses that have it the hardest, and you’ll need to bring your A game in order to survive the first year of operation. There are many ways that a small business may stack the deck in its favor, however. Here are the tips you need to know in order to keep your business from going under.

Maintaining Cash Flow

Businesses strive to make money, but a business owner must also cover his or her overhead expenses in order to stay in business. Therefore, one needs to maintain one’s cash flow in order to continue to compete. This is especially pertinent when it comes to invoices, as invoices can be great for consumers while being a detriment to smaller businesses.

An invoice factoring company can help you maintain cash flow by buying your invoices from you at a slight loss in exchange for immediate payment. While this isn’t much an issue for established, successful companies, small businesses can benefit tremendously from this practice.

Reducing Costs

Another important way to strengthen your cash flow is to simply reduce the costs of some of your necessary experiences. In some cases, you can outright eliminate expenses, as well. For instance, you can try to find better prices within your supply chain, or you can even buy directly from manufacturers in order to cut costs. In such cases, you need to be sure that you’re not losing too much in terms of quality or reliability, however. Continue Reading…

The unintended consequences of ESG paternalism

By Cory Clark

Special to the Financial Independence Hub

As a parent, it can be hard to let your children make their own decisions. Particularly when you question the wisdom of the decisions they may make. At some point however, you have to let children make their own decisions. As they mature, that’s what they deserve, and it’s entirely possible they’ll make the right decision for them, even if it’s not the decision you would have made. One of the unintended consequences of overprotectiveness is that as soon as that child gets the chance, they fly the coop and stay as far away from their overbearing parents as they can. “Local college? No thanks.”

Last month, the U.S. Department of Labor [DoL henceforth] became a helicopter parent and pushed its proverbial children out the door when it issued new proposed rulemaking related to ESG [Environmental, social and corporate governance] investments within retirement plans. “Financial Factors in Selecting Plan Investments” seeks to codify harsh guidance on ESG investments within retirement plans, which will very likely have a chilling effect on the availability of such investment options to retirement plan participants.

The proposed rule is paternalistic to both plan fiduciaries and plan participants. With respect to plan fiduciaries, the DOL takes the unusual step of supplanting industry experts’ professional judgment in favor of their own. But perhaps the more damaging effect of the proposed rule is that it tosses aside the participant’s personal choice related to the values underlying their retirement investments. The Department has in essence said to America’s retirement plan participants, “we know better than you, and as long as you live under our roof…” This positioning can bring about a very predictable response, stop living under that roof and unlock your personal choice. Ironically, the Department issued a second proposed rule the very same month which shows participants the door.

The second proposed rule issued by the DoL, “Improving Investment Advice for Workers & Retirees,” officially reinstated ERISA’s 1975 definition of fiduciary, but made some critical adjustments to its interpretation such that rollover recommendations will be considered a fiduciary act and subject to an annual retrospective review. The proposed exemption would allow otherwise prohibited rollover recommendations, provided that the recommendation is given under an impartial standard of conduct.

DALBAR finds EST investments attractive in DC pensions

A recent DALBAR study shows that ESG investments are an attractant to defined contribution plan participation. It’s only natural that the inverse would also be true; the absence of ESG investments within a plan can be an incentive to invest elsewhere or not invest at all. This incentive is only going to get stronger as the younger generations, who have a greater preference for ESG, begin to make up a greater proportion of the retirement plan market. Continue Reading…

Should I change my investments during an election?

LowrieFinancial.com
By Steve Lowrie, CFA
Special to the Financial Independence Hub
Back during the Clinton/Trump U.S. presidential election four years ago, I ended up fielding a lot of questions from investors of all political bents. Many investors wondered whether they should adjust their portfolio in response to the change of the guards. At the time, I had this to say: 
  • Post pubBack during the Clinton/Trump U.S. presidential election four years ago, I ended up fielding a lot of questions from investors of all political bents. Many investors wondered whether they should adjust their portfolio in response to the change of the guards. At the time, I had this to say: 

“If you want to skip reading my more detailed explanation, the answer is: No. Even when political news is strongly felt, there will likely never be a good time to shift your investments — neither in reaction nor as a defence. First, no matter how certain one or another outcome may seem, how the market is going to respond to the news remains essentially unknown. Second, by the time you’ve heard the news, it’s already priced into the market anyway.”

Fast-forward to 2020. To say the least, a few things have changed!  But my advice remains the same: From one election to the next, other factors have exhibited a far greater impact on investment returns than which person or party holds the U.S. presidency. Whether leadership is more or less conservative, largely efficient markets have usually figured out a way to shift and grow, either way.

As we can see in this interactive chart from Dimensional Fund Advisors, these results are well-documented. They also make a lot of sense, given something called “stage-one and stage-two thinking.”

Thinking in Stages

Stage-one and stage-two thinking are terms popularized by economist Thomas Sowell in his book, “Applied Economics: Thinking Beyond Stage One.” Basically, before acting on an event’s initial (stage one) anticipated results, it’s best to engage in stage-two thinking, by first asking a very simple question:

“And then what will happen?”

By asking this question again and again, you can more objectively consider what Sowell refers to as the “long-run repercussions to decisions and policies.”

Who will next occupy the various seats of power around the globe, and what might the results be? Stage-two thinking helps us see past the usual proliferation of stage-one predictions that call for anything from financial ruin to unprecedented prosperity.

As financial author Larry Swedroe describes in a US News & World Report interview, “Stage one thinking occurs when something bad happens, you catastrophize and assume things will continue to get worse … Stage two thinking can help you move beyond catastrophizing … [so you can] consider why everything may not be as bad as it seems. Think about previous similar circumstances to disprove your catastrophic fears.”

Timeles lessons in terminal uncertainty

In the 2020 U.S. presidential race, we’re seeing prime examples of both dire and exuberant financial forecasts, presumably premised on who wins the election. The truth is, nobody has a clue what all the combined market-moving forces have in store for us in the near term, because nobody can know the answer to Sowell’s convoluted market-moving question: And then what will happen? Continue Reading…

11 tips successful investors use to find TSX Blue-chip stocks

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TSX blue-chip stocks are well-established companies with attractive business prospects on the Toronto Stock Exchange, like Bank of Montreal (TSE: BMO), RioCan Real Estate Investment Trust (TSX: REI.UN), and Enbridge (TSE: ENB).

Well-established firms have the asset size and the financial clout — including solid balance sheets and strong earnings and cash flow — to weather market downturns or changing industry conditions.

The best TSX blue-chip stocks have strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in ever-changing marketplaces. Blue-chip investments should always be prominent, if not dominant firms, in their industry.


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Because of this, blue-chip companies can give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of moderate p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

We feel most investors should hold the bulk of their investment portfolios in TSX blue-chip stock investments. All these stocks should offer good “value”: that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above average-growth prospects, compared to alternative investments.

11 tips for picking the best TSX blue chip stocks:

1.) Review the company’s finances going back 5 to 10 years. The types of blue-chip investments we recommend have a history of profits going back for at least that long. Companies that make money regularly are safer than chronic or even occasional money losers. Continue Reading…