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).

How to manage a Side Hustle while studying full time

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 There’s no denying that getting your MBA — or any graduate degree — is a costly endeavor. Even if financial aid covers the cost of tuition, there’s still a raft of fees and the cost of books, moving, and living, which will vary widely depending on where you attend school. On top of all that, you have to give up your income for the next X years while you study.

Or do you? If the expenses are making you sweat, then you might be one of the many full-time students who consider taking on a side hustle.

What is a Side Hustle?

A side hustle is any job you do “on the side” to earn a little extra cash, whether it’s babysitting for your next-door neighbors, running social media for start-ups, or driving for Uber. It’s not your main focus, not what you center your life around, and certainly not what you’d answer when asked, “What do you do?,” but it’s a little bit of your time each week or month that brings in extra cash. If you’re lucky enough, you can get into a list of rich side-hustlers. Side hustles have been around since, well, paid work, but with the rise of the gig economy and the advent of public university tuitions, there are more students side-hustling than ever before.

Keep in mind that you took on a graduate degree to invest in yourself; if you end up sacrificing your studies for some extra pocket change … well, you shouldn’t need a finance class to tell you that’s bad economics. There’s no way your side hustle is lucrative enough to be worth NOT getting the most out of your degree, so if it comes down to making time for one or the other, your studies should always take priority. However, it’s also possible that you could be lucky enough to find a side hustle that actually enhances your degree by giving you experience in a relevant field.

Finding a Side Hustle

Often, the best side hustles arise purely by luck. Your favorite professor happens to need someone to do a little research for him or write up some case studies, or some other task related to your field of study, and you’re the man or woman for the job. Continue Reading…

Is buying a house a good investment? Usually, but here’s a case where it wasn’t

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Is buying a house a good investment? Recently we spoke to the son of one of our Successful Investor Wealth Management clients who has to make a decision about housing, but needs to look at it from a financial point of view.

He and his wife bought a small starter home on a tiny lot in an old part of downtown Toronto. They both work in the north end of the city, so they had a long commute. But they liked the neighbourhood, and a number of friends lived nearby.

New considerations came up after their first child’s birth.

As it happens, a family member owns an investment house in the north end of the city, in an area that’s renowned for having some of Toronto’s top public schools. It’s twice the size of their current home, half as old, worth three times as much, and is in livable condition. It has a driveway that can park three or four cars, plus a garage. In winter, it has room for an enormous backyard skating rink. In summer, it can accommodate barbeque get-togethers with 50 or more guests. The location makes the house an easier commute for both of them.

The family member/owner is willing to accept a yearly rent equal to 1.2% of the value of the home, which is less than his interest cost. He’s even agreeable to making modest improvements at his own expense, since he can write off the cost against his rental income. The house plays a key role in his estate plan, since it’s part of a long-term land-assembly project. He is willing to let them live there for as long as they want, or until he dies, with little if any change in the rent. He just wants a trouble-free tenant.

Is buying a house a good investment? Here’s a specific case where it wasn’t

They asked our advice on buying a house before, and they asked again when this sell-or-hold question came along.

Back in 2015, we told them the same thing we’ve repeatedly told other clients and Inner Circle members. Since the 2008/2009 recession, central banks in Canada, the U.S. and other countries have set off on a unique economic experiment. They have artificially pushed interest rates down to historically low levels, for two reasons: to keep the economy out of recession, and to make it possible to pay the interest costs on extraordinarily high and rising government debt.

Now, with this sell-or-hold decision to make, the situation has changed. House prices and interest rates have both gone up substantially. This means far more potential Toronto-area house buyers have been priced out of the market. In addition, the artificial interest-rate paradise is coming to an end. Interest rates have gone up and our view is that they will keep rising.

Our advice for this particular young family was to accept the sweet deal on the rental house, and sell the starter. They can save the money they’d otherwise pay on property taxes toward a down payment on their dream home. Their incomes are likely to rise, since they are in the prime of their careers, so they’ll have that much more to add to the dream-home fund. When they are ready to buy, here are some tips:

Is buying a house a good investment? 6 key real estate investing tips for Successful Investors

Tax pluses. Homeowners get a tax-free, rent-free benefit of having a place to live. Profits on sales of principal residences are also tax-free. Continue Reading…

No, passive investing is not in a bubble

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There have been many ridiculous statements made about passive investing over the years. None have garnered as much media attention as hedge-fund manager Michael Burry’s claim that passive investments such as index funds and ETFs are the next bubble. He said these index-tracking investments are “inflating stock and bond prices in a similar way that collateralized debt obligations did for subprime mortgages more than 10 years ago.”

“When the massive inflows into passive vehicles reverse, it will be ugly.” – Michael Burry

Such a bold claim from someone who correctly called the subprime mortgage crisis is certainly cause for concern. But when you peel back the layers, Burry’s statement doesn’t make much sense. Looking for a smarter take than that, I reached out to Erika Toth, a Director of ETFs at BMO Global Asset Management, to explain why passive investing is not in a bubble.

Take it away, Erika:

Debunking Michael Burry’s Passive Investing Bubble Claim

I may not have had Christian Bale play me in a movie, and I did not make millions during the financial crisis, but I have spent years now studying market structure and eating, sleeping, and breathing ETFs. Burry’s comments that sparked a media frenzy (and let’s all agree that the financial media loves to sensationalize) echo some of the most common myths and misconceptions I have encountered on the ETF wrapper.

This “passive investing is in a bubble” argument assumes that all the money invested in passive indices has flowed in to the same indices, that hold the same stocks, in the same proportions. However, there are many different types of passive funds and ETFs: some track the S&P 500, some track indices built around low volatility, quality, value, or momentum filters. Some track specific sectors.

Related: What’s not to love about ETFs?

Different investors have different investment objectives and motivations. Some want to buy the market. Some require higher cash flow. Some require lower volatility. Some are searching to exploit market inefficiencies in order to generate alpha. Pension funds have to make sure their liabilities are funded. Some investors are searching for companies that meet the highest environmental, social, and governance standards. Some require certain tax efficiencies or credit qualities to be met. Therefore, it is impossible that the entire world’s stock and bond markets would move to 100% passive.

It’s also important to note that individual stock ownership by households (domestic and foreign) accounts for just over half of the equity market: the largest share, by far. Mutual funds (active and passive) own about 24%; ETFs own about 6%. Pension funds would represent about 10% (government and private); and about 8% is owned in other vehicles such as hedge funds. (This is according to data put together by the Federal Reserve Board: see below).

ETFs themselves are too small a slice of the overall pie to be able to cause a crash in the prices of the stocks they hold; they simply reflect those prices. Those statistics are for the equity market. ETF ownership of the global bond market is even smaller, roughly 2-3% by most estimates.

The theory that everyone will run to the exits at the same time in the event of a major downturn is incorrect, and 2008 is a good example of that. My favourite example comes from Ray Kerzehro, who is Director of Research at independent firm PWL Capital, in the still-very-relevant white paper he published in 2016.

Kerzehro examines how high yield bond ETFs in the U.S. traded during the height of the financial crisis. Keep in mind that high yield bonds are NOT a large cap equity index made up of the largest and most liquid stocks in the world: they are a riskier asset class of lower credit quality and are less liquid as well. So, even in this riskier and less liquid asset class, there was actually no massive exodus from those ETFs.

What happened is that trading VOLUME actually spiked. Buyers & sellers of the ETF units had different views for different reasons, and the ETF structure actually provided price discovery to an asset class where many of the underlying bonds had gone no-bid. Continue Reading…

Money: Influencing people and their behavior

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By Steve Barker

For hundreds of years, the American dream has been to become one of the fortunate few that moves from rags to riches. Although many people enter onto United States’ soil believing they will become one of the chosen few to make the dream a reality, statistics show that most people don’t make their millions no matter how hard they try. What is more interesting is what happens to those that do make their fortune and how it often changes them, their perspective on the world, and other people’s view of them. Money can influence people and their behavior in some surprising ways.

Psychology and Money

The way you view yourself, your success in life, and for abilities can all be linked directly to your money, or lack thereof. While you may have been told your whole life that money is the root of evil, you are probably like the majority of the 7 billion people on earth as you try to make more money: ever chasing the currency you should believe is evil. The eternal chase for more money to purchase more things to buy bigger and better items is at the bottom of a social belief system, and though it may not be who you believe you are, it can influence how you see yourself fitting into society and how you react toward others.

Self and Money

Where you fit into your world view is often dependent on money and how much you make. For some reason, people tend to classify themselves into social rankings relating to money, the ability to earn it, and the amount already earned. This is sometimes referred to as class essentialism. In other words, some people believe they have the natural ability and are pre-genetically disposed to have the right to make money, be more intelligent, and be part of a higher social group. Research has found this is especially true of the wealthy groups questioned, while the poor respondents believed it was all about work, rather than ability, genes, or intelligence. That is why it can be difficult for the suddenly rich winners of the lottery or huge sports contracts to fit into a world that sees those individuals as less-than. The split can be intense and derisive.

Values and Money

Money has an influence on how you value your time, actions, and motivations, but most importantly, you may find it influences how you value yourself. If you find yourself as part of a higher social group because of the money you bring in, you may see yourself as happier, healthier, and more giving. On the other hand, some research indicates that the newly rich from the sudden creation and rise of crypto currency were found to be more business-oriented, less trusting, and more suspicious of the world around them. If you set a value of $20 an hour on your time, you can see that someone that values their time at $300 an hour may have a very different world view than you do, whether it is good or bad is all a matter of perspective.

Ethics and Money

While it is unknown why some people have higher ethical values than others from the moment they are born, researchers are finding that wealth has a direct influence on all types of ethical situations. The higher an individual believes his or her class inclusion is, the more unethical he or she believes they have the right to be. Continue Reading…

Aman Raina’s mid-year ROBO advisor review

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By Aman Raina, SageInvestors.ca

Special to the Financial Independence Hub

We have passed the half-year mark and so I thought it would be a good time to check back into my ROBO portfolio to see how it’s doing and if there is anything interesting going on.

I was all good to go on writing a very pedestrian update as the portfolio had not undergone any significant changes in over a year. Then I got a couple of emails.

Snippets of Email from my ROBO informing me of “changes” in my portfolio.

 

About a month later I received a follow-up email with some more explanations.

 

 

Follow up email from my Robo Advisor

 

The emails paint a picture of some minor changes and tinkering.

Changes? Lordy there were a few.

After remaining static for about a year and a half, the ROBO made some very significant changes in the portfolio. The asset mix of 85 per cent stocks and 15% bonds remained, but the allocations were altered quite dramatically. Here’s the breakdown along with the allocations in the past.

 

Caption: Asset allocation of my ROBO portfolio since inception

Allocation to US stocks fell from 32.5% to 26.5%

  • Allocation to Canadian stocks fell from 22.5% to 10.5%
  • Allocation to Emerging Market stocks increased from 10% to approximately 16%
  • Allocation to other Foreign Stocks increase from 15% to 32%
  • The bond allocation changed from domestic government and corporate bonds to Government and US bonds.

This marks the 3rd significant change in my portfolio’s asset allocation in the 4 1/2 years I’ve had the portfolio. I think we can clearly say this portfolio has not been passively managed.

The changes are pretty dramatic, but actually welcome. Regular readers of this blog know I’ve been a bit critical on the ROBO’s concentrated exposure to US and Canadian stocks. Prior to this adjustment, almost 55 per cent of the equity component was in US/Canadian stocks, which I thought was pretty high. Granted, it has been a winning move as the results have been quite strong. I have been concerned that the portfolio is pretty exposed if the markets were to take a major downturn. It seems ROBO has gotten the message and re-calibrated the portfolio. This is a good thing to see, although again I wonder why it took so long. I also wonder if this rebalancing was more of a market timing action or an asset reallocation action? Hard to say.

The other change involved the rotation of ETF products. ROBO decided to use different ETF products. Here’s the summary.

Bonds

  • Sold BMO Mid Fed Bond Index (ZFM) and bought Mackenzie US Government Bond ETF (QTIP)
  • Sold iShares Core Canadian Bond ETF  and bought BMO Long Fed Bond ETF (ZFL) .

This is ROBO’s latest tinkering of the Bond component of the portfolio. Continue Reading…