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).

Is now a good time to buy stocks? Look beyond headlines to learn answer

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Examine The Theories That Forecasters Rely On To Predict Market Swings — And Learn Their Flaws

The universe is constructed in such a way that nothing is certain. You can always come up with perfectly rational reasons why something won’t work. But people find ways to overcome obstacles, and some businesses succeed despite risks.

Is now a good time to buy stocks? Below are a couple of factors to consider. 

Is now a good time to buy stocks? Understand pendulum theory and you will understand the past

You could sum up the investment version of the pendulum theory like this: stock prices alternate between periods of overvaluation and undervaluation; the degree and duration of each period of overvaluation is related to the degree and duration of the subsequent period of undervaluation, and vice versa.

In other words, pendulum theory says that when stocks head downward after a period of overvaluation, they won’t stop at fair value. Instead, they’ll keep dropping until they hit lows that are in some sense as out-of-whack as previous highs, or close to it.

Pendulum theory is a handy way to label the past, and it gives you a sense of how stock prices behave. But it’s useless at predicting the future or timing the market. That’s why pendulum theory generally plays a small part in successful investing. If you qualify as a “successful investor,” you probably recognize that the market never gets so high that it can’t go higher, nor so low that it can’t drop some more. This is a key part of understanding the stock market.

Is now a good time to buy stocks? Consider this valuable concept to gain another perspective

Here’s one of the most valuable things you should recognize as an investor: “A rising market climbs a wall of worry.” In other words, you need to recognize that a stock market’s rise automatically generates negative comments. The higher and/or longer the market rises, the more negative comments it generates. These are the bricks in that wall of worry.

The inevitable building of this wall grows out of human nature. Many people are instinctively cautious or conservative. When they see a stock or the stock market go on a rise, they look for reasons why the rise may falter or reverse. That’s especially true of stock market commentators. When a stock or the market rises beyond their expectations, they dig deep for hidden flaws.

This spurs them to come up with comments that at times seem deliberately slanted to promote a negative view. You might call them “misleading indicators.” Here’s an example:

“The market had the biggest drop in a day (or week, or month),” or “the longest string of falling days, since … [a date chosen to maximize shock value].” When these kinds of comparisons began appearing in the news this year, after a long dry spell, some investors took it as ominous news. They assumed it meant the market was at risk of greater declines. It means nothing of the kind.

Sometimes, of course, the market puts on big one-day declines near the start of a long-term price decline. It has also done so near the end of such declines and at various points in the middle. The same goes for big one-week and one-month declines and for long strings of down days.

Every year, the market will hit a series of “new highs for the year,” or a series of “new lows for the year.” In many years, it will hit some of each.

When you adopt “A rising market climbs a wall of worry” as a mindset, it will help you maintain your perspective. You’ll start to recognize that milestones like these are trivia, passed off as meaningful statistics. The investment news is full of them. You may find they make interesting reading or listening, but they also burn up valuable time. You’ll earn a far greater return on that time if you devote it to learning and comparing facts about the companies you invest in.

Stop worrying too much about the big picture

If you constantly worry about the “big picture,” including trying to pick market tops, you may at times manage to sell at just the right moment to sidestep a serious downturn. But you may only do that after sitting through a series of downturns. The downturn you avoid may turn out to be the last in a series—the “final leg downward,” as short-term traders like to refer to it. Continue Reading…

5 years of Findependence: The Hub celebrates its fifth anniversary

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How time flies! Five years ago this Sunday — Nov. 3, 2014 — the Financial Independence Hub [aka “The Hub”] was launched. From the start the idea was to publish a blog every business day, 52 weeks a year. Thanks to a wide variety of guest bloggers and other contributors, that has been achieved: as of this writing, the Hub had published almost 1,700 blogs.

For those curious, this link will take you to the very first Hub blog, which outlined the planned direction. From the get-go we tried to make a distinction between traditional full-stop Retirement and Findependence, which of course is the contraction for Financial Independence. The related book is Findependence Day (available in both Canadian and US editions).

Findependence is different from Retirement

Even some of the republished blogs the past week indicate how much the term Financial Independence has caught on, although sadly, the term Findependence less so. Just a few days ago, regular Hub contributor Mark Seed published a blog on Strive for Financial Independence not Early Retirement.  (We’re working on getting him to use the term Findependence but Rome wasn’t built in a day!)

I wrote much the same thing soon after the Hub was launched in 2014: Why Financial Independence is a better term than Retirement.

I may as well take this opportunity to clarify a few things about how the Hub operates. First though, we’d like to thank our advertisers, some of which (like Vanguard) have been with us since almost the beginning. It’s that kind of support that means the Hub remains free to users, who by now realize that most Hub blogs publish around 9:10 am, with a daily digest going out around 10 am.

Where the Hub’s content comes from

Why daily content? I guess it goes back to my days as a newspaper reporter and columnist, when my personal motto was “A story a day keeps the editor away.” Of course, it wouldn’t be much of a Semi-Retirement if I had to write a blog for the Hub every day all by myself so from the get-go we were open to guest blogs. An early supporter was Robb (and Marie) Engen of Boomer & Echo: skip over to the Hub’s search function and you’ll find dozens of stories by them. And by the way, that search tool can be very useful in accessing any of the 1700 blogs or so that the Hub has published: they’re still there; you just have to retrieve them with the tool.

Also early in giving us permission to republish blogs were Patrick McKeough of The Successful Investor, Adrian Mastracci of KCM Wealth Management, Mike Drak, my co-author on Victory Lap Retirement, Billy and Akaisha Kaderli of RetireEarlyLifestyle.com and many more. Just this year we’ve added a few more excellent bloggers: Mark Seed of MyOwn Advisor, Michael Wiener of Michael James on Money, Dale Roberts of Cut the Crap Investing, Fritz Gilbert, the Plutus award winning blogger behind Retirement Manifesto and a few more I hope I’ve not forgotten.

I can hear critics questioning the rationale of this republishing approach: all I can say is that you can consider it sort of the Greatest Hits of Financial Independence, given that our goal has always been to be — as you can see in our slogan elsewhere on this site — North America’s Portal to Financial Independence. We are chiefly an aggregator, although there is also original content.

Yes, I try to write a blog most weeks, though as regular readers may realize, they tend to be “throws” — summaries of paid columns or blogs I’ve written elsewhere, including MoneySense.ca, the Financial Post, Motley Fool Canada, the Globe & Mail on occasion, and Money.ca. Think of it as a sort of one-stop-shopping for what I personally write, even as I retrench a bit as my Semi-Retirement unfolds. (I’ll be 67 in April). In a way, the outside revenue I get from writing for the mass media helps defray the Hub’s modest costs, and of course helps to promote the site to new readers.

Apart from republished blogs, the Hub also regularly tries to publish at least two pieces a week of fresh content written by a variety of other contributors: financial advisors and other investment professionals, occasionally marketers or  firms representing a cross-section of the financial services industry.

The Hub’s 6 categories for the Human Financial Life Cycle

We try to publish a wide selection of topics corresponding to the human financial life cycle: if you’ve not noticed, take a look at the blue menu near the top of the site and you’ll see that our blogs are categorized in six sections. We start with young people (Millennials) who are just getting started in their financial lives. So we start with Debt and Frugality, followed by Family Formation and Housing: they will be interested in topics like real estate and buying their first home, mortgages, interest rates, credit cards etc. From almost the Hub’s inception, Zoocasa.com’s Penelope Graham has contributed excellent articles monthly on the real estate industry. Continue Reading…

Avoiding blind spots in financial advice

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By Darren Coleman

Special to the Financial Independence Hub

In my last blog, I took on those Questrade TV commercials where the client schedules a meeting with their financial advisor to tell them they’re fired. While people don’t normally schedule a meeting with an advisor to do such a thing, I think the real story is that the client does not experience value from the relationship. And if that’s the case, not paying the fee and moving on makes perfect sense.

But that doesn’t mean doing it yourself is the best idea. Investment management and financial planning is more complicated and intricate than people realize. Having access to tools doesn’t make you an expert; I can buy everything I need to renovate my house or rewire my kitchen, but that doesn’t mean I should. Better to leave this to Mike Holmes. Here are some key areas when an excellent financial advisor can add great value.

Fire Drills

We all want to plan for a happy future with a comfortable retirement, maybe a new car, or an exotic holiday. People associate these things with creating a financial plan, largely due to multi-million-dollar ad campaigns by mutual fund companies. But life is not a Cialis commercial and bad things happen.

With Christmas coming get ready for media stories about the family whose house burnt down with all their possessions, including presents under the tree, going up in blazes. Then we’re told they didn’t have insurance and donations are being taken for them at the local bank branch.

To prevent misfortune from turning into tragedy, a good Financial Advisor will first have their client pay attention to planning for things going wrong. Indeed, assessing key risks to one’s financial health (i.e., premature death, disability, loss of employment, liability, critical illness) should be the primary component of a financial plan.

We also must look at documents and processes such as a will and Power of Attorney that describe what happens when we can’t speak for ourselves. Unfortunately, these are things most people do not do on their own. And if they do, they usually don’t do them with skill and adequate preparation.

A great, and valuable, Financial Advisor does more than just inquire about insurance and other documents. They run a ‘fire drill’ on the family.

Let’s say someone doesn’t come home one day because of illness or sudden death. What happens next? Who gets the call? What documents are needed and where exactly are they? Along with all this are other important questions.

  • What income is going to come into the household to replace those lost wages?
  • What paperwork needs to be filed?
  • Who’s going to do it?

Your employer is legally bound to run a fire drill at least once a year. Shouldn’t your financial plan do the same?

Budgets don’t balance themselves

Despite Prime Minister Justin Trudeau’s statement, I can assure you that budgets do not do this. We all have multiple and often competing demands on our time, money and energy. And when we combine the wishes, desires and needs of other family members, things may and will get derailed. Continue Reading…

The 6 phases of Financial Independence

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By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

The term “financial independence” has many meanings to many people.

To some, this means the ability to work on your own terms.

To others, it boils down to not working at all but instead having “enough” to meet all needs and possible wants.

Where do I stand on this subject?  This post will tell you in my six phases to financial independence.

Retirement should not be the goal: Financial security and independence should be

Is retirement your goal?  To stop working altogether?  While I think that’s fine I feel the traditional model of retirement is outdated and quite frankly, not very productive.

As humans, even our lizard brains are smart enough to know we need a sense of purpose to feel fulfilled.  Working for decades, saving money for decades, only to come to an abrupt end of any working career might work for some people but it’s not something I aspire to do.

With people living longer, and more diverse needs of our society expanding, the opportunities to contribute and give back are growing as well.  To that end, I never really aspire to fully “retire”.

Benefits of financial independence (FI)

In the coming years, I hope to realize some level of financial security and eventually, financial independence.  For us, this is a totally worthwhile construct.  The realization of FI can bring some key benefits:

  1. The opportunity to regain more control of our most valuable commodity: time.
  2. Enhanced opportunities to learn and grow.
  3. Spend extra money on things that add value to your life, like experiences or entrepreneurship.

Whether it’s establishing a three-day work week, spending more time as a painter, snowboarder, or photographer, or you desire to get back to that woodworking hobby you’ve thought about: financial independence delivers a dose of freedom that’s hard to come by otherwise.

FI funds time for passions.

FI concepts explained elsewhere

There are many takes on what FI means to others.

There is no right or wrong, folks: only models and various assumptions at play.

For kicks, here are some select examples I found from authors and bloggers I follow.

  1. JL Collins, author of The Simple Path to Wealth, popularized the concept of “F-you money”. This is not necessarily financially independent sums of money but rather, enough money to buy a modest level of time and freedom for something else.
  2. Various bloggers subscribe to a “4% rule”* whereby you might be able to live off your investments for ~ 30 years, increasing your portfolio withdraws with the rate of inflation.

*Based on research conducted by certified financial planner William Bengen, who looked at various stock market returns and investment scenarios over many decades. The “rule” states that if you begin by withdrawing 4% of your nest egg’s value during your first year of retirement, assuming a 50/50 equity/bond asset mix, and then adjust subsequent withdrawals for inflation, you’ll avoid running out of money for 30 years. Bengen’s math noted you can always withdraw more than 4% of your portfolio in your retirement years however doing so dramatically increases your chances of exhausting your capital sooner than later.

For simplistic math, such bloggers calculated your “FI number” could be approximately your annual expenses x 25.  So, if you’re annual expenses are about $40,000 per year (CDN $ or USD $ or other), then your “FI number” is a nest egg value of $1,000,000.

Using that framework, there are levels of FI some bloggers have adopted:

  • Half FI – saved up 50% of the end goal (in this case, $1 M).
  • Lean FI – saved up >50% of end goal to pay for very lean but life’s essentials like food, shelter and clothing (but nothing else is covered).
  • Flex FI – saved up closer to 80% of the end goal, this stage covers most pre-retirement spending including some discretionary expenses.
  • Financial Independence (FI) – saved up 100% of the end goal, you have ~ 25 times your annual expenses saved up whereby you could withdraw 4% (or more in good markets) for 30+ years (i.e., the 4% rule).
  • Fat FI – saved up at or > 120% of your end goal (in this case $1.2 M for this example), such that your annual withdrawal rate could be closer to 3% (vs. 4%) therefore making your retirement spending plan almost bulletproof.
  1. There is the concept of “Slow FI” that I like from The Fioneers. The concept of “Slow FI” arose because, using the Fioneers’ wording while “there were many positive things that could come with a decision to pursue FIRE, but I still felt that some aspects of it were at odds with my desire to live my best life now (YOLO).”  They went on to state, because “our physical health is not guaranteed, and we could irreparably damage our mental health if we don’t attend to it.”

Well said.

My six phases of financial independence

(Picture from our catamaran cruise, Barbados 2019)

To the “Slow FI” valuable points, since we all only have one life to live, we should try and embrace happiness in everything we do today and not wait until “retirement” to find it. Continue Reading…

How Canadians are impacted by rising home prices: National Survey

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

Election season may have come and gone, but the need for affordable housing remains a top-of-mind issue for Canadians, regardless of governing political party. According to a recent national survey conducted by Zoocasa, a whopping 84% say they feel the ability to afford a home is a major issue that’s negatively impacted the population: and 78% feel the government needs to make it a priority focus.

As well, the survey findings reveal that anxiety around affordability extends beyond those who wish to get onto the property ladder; while renters express particularly strong feelings of uncertainty (93%), current homeowners are also feeling the squeeze from spiralling home values, with 80% in agreement.

Let’s take a look at the top concerns indicated by Canadians.

Incomes can’t keep pace with Real Estate prices 

It’s no secret that prices for houses for sale in markets across Canada have seen enormous growth over the last five years. According to the Canadian Real Estate Association, the national average home price now exceeds half a million dollars, at $515,500 (though it should be noted that removing Vancouver and Toronto houses and condos from the equation would trim that total to $397,000).

This has left the majority of Canadians – 91% – feeling as though home prices have outstripped wages in their city or town, while another 92% say they feel rising home prices have reduced the ability of middle-class Canadians’ abilities to purchase a home.

As a result, in order to seek out greater affordability, more than half of first-time buyers said they’d leave their current location and move to a market with lower home prices, contributing to what’s referred to in real estate circles as “driving until you qualify.”

Other homeownership hurdles

But rising home prices only tell a portion of the story: while 70% of respondents agree they’re the largest obstacle to getting on the property ladder, the inability to save enough for a down payment also ranks highly on the list of challenges. Continue Reading…