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 problem with Preferred Shares

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By Ian Duncan MacDonald

Special to the Financial Independence Hub

You identify preferred shares by their stock symbols. Their symbol contains a “PR” or a “PF.”  For example, an Enbridge Inc. preferred share is ENB.PR.N.

Preferred shares pay dividends, often in the range of 5 or 6 per cent. This is usually one or two per cent more than what the company pays common share holders.

Like a bond, they are a form of loan; thus they do not share in the capital gain of a corporation, nor do they have any ownership or voting rights. While they rank ahead of common shares in realizing money from a company’s liquidation, they rank behind bondholders. Their ranking is of little benefit.  After the lawyers, bankruptcy trustees and the banks (with their fully secured debentures) are paid off, the chance of anything being left for distribution is just about nil.

While you can conveniently buy and sell preferred shares on the stock market very few investors have any interest in them.  Zero trades in a day is not unusual. There are 654 shares on the TSX pay paying a dividend of 3.5%. or more.  Of these, 364 are preferred shares and of those only 112 had more than 4,000 shares traded in a typical day, despite their high dividends. This is due to the low possibility of preferred shares delivering an increase in share price to speculators.

Preferred shares are issued at a standard price of $25 each. Of the 364 preferred shares only 17  had a share price exceeding $25 and of these only one was greater than $30.  The chance of realizing a capital gain from a preferred share is 1.91% and 183 or (50% of them) had lost at least 20% of their value.  They were now worth less than $20. Five were trading for less than $10.  It is not surprising that not one analyst recommended that investors buy any of these 364 preferred shares. Continue Reading…

How to use your retirement plan to fund your dream business

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By Eric Goldschein

Special to the Financial Independence Hub

If you’ve decided to take the leap and start your own business, you probably have one pressing question on your mind: Where will you get the money to fund it? 

Startup costs can drain personal bank accounts, and few business owners are in a position to qualify for affordable small business financing right away. Lenders tend to prefer long-established businesses. 

If you’ve been a diligent financial planner and have been saving up for retirement, you may have access to a low-cost source of business funding: your own retirement plans. Here are three ways to use your retirement to fund your dream, whether that’s an e-commerce business or a restaurant: 

1.) Use a 401(k) business loan

Some 401(k)s and other eligible retirement plans in the U.S. — 403(b), and 457(b) plans and profit-sharing plans — allow you to loan yourself either US$50,000 or up to half of your vested balance (whichever is less). 

If you are testing out your business as a side hustle and will remain employed and contributing to your retirement plan, this is an excellent option. A 401(k) loan gives you access to low-cost funding (interest rates are usually the prime rate plus 1%) that you can use to see if your idea is worth investing in further. 

You also won’t pay any additional fees or penalties for taking out this money, unless you default on your payments: in which case the IRS will treat it as a regular withdrawal, incurring penalties. 

If you need $50,000 or less to improve your new business, contact your plan administrator to get the ball rolling.  

2.) Use a “rollovers as business startups” plan

Do you need more than US$50,000 in business funding, and are you ready to work on your business full time? If so, you can use a rollover as business startups (ROBS) to access funds from a 401(k), IRA, or other eligible retirement account without penalty. 

There are a few qualifications you need to meet to use a ROBS plan:

  • Your business must be a C-corporation (if it isn’t, you must restructure it). 
  • Your retirement account needs at least $50,000 in it, and it cannot be a Roth IRA. 
  • You must be an employee of the business and receive a salary. 

The next steps are a bit complicated, but the basics are as follows: Set up a new retirement plan under your C-corp. Roll over your funds from your existing retirement plan to your new one. Then, your C-corp sells stock to the retirement plan, and you use the proceeds from that sale to fund your business—buying new inventory, renovating your space, or any other general business needs. An accountant, lawyer, or financial service can help you do this. 

This isn’t a loan, but a constructive use of your retirement funds. The biggest risk here is losing your retirement funds in pursuit of small business success. If you think that’s a risk worth taking, this is a good bet.    Continue Reading…

Personality, Progress and Promise in Japanese Leadership

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Mt. Fuji, Japan

By Jesper Koll, WisdomTree Investments

Special to the Financial Independence Hub

Prime Minister Shinzo Abe’s Japan is a forward-looking, pragmatic bastion of stability in an increasingly uncertain world. The cabinet reshuffle in September cements the unique position that Japanese politics and policymaking occupies relative to most other democratically elected governments. Abe is in complete control of his destiny, picking and choosing competent and loyal elected parliamentarians to further advance his agenda.

Right from the start in December 2012, the goal of “Team Abe” has been single-minded, echoing the rallying cry that inspired the leaders of the Meiji Restoration: “Fukoku Kyohei — Strong Country, Strong Army”. Don’t get me wrong: this is not about rearmament like it was during the 19th century Meiji era. I draw attention to the Fukoku Kyohei rallying cry to stress that Team Abe is perfectly focused and capable of using political capital for both a strong economy and constitutional reform. In fact, without the first, the second may never happen.

In my experience, Abe’s leadership team has always remained relentless in pursuing strategies that aim to restore Japan’s place in the world as a respected, admired and worthy top-tier nation. They know that a strong, growing and competitive economy is the most necessary condition to achieve that goal. The second condition is a stronger, smarter and more independent sense of national self-determination and pride among the Japanese people. This is where Team Abe is convinced constitutional reform is necessary as a powerful symbol and catalyst for greater national unity and understanding of what Japan is and wants to be.

The “Abe–Aso–Kuroda” master class in Policy Pragmatism continues

First, for economic policy management, the Abe–Aso–Kuroda central axis got reinforced. Nowhere else in the world of global policymaking can you find such a consistently well-coordinated and decisive axis of power between the prime minister, the fiscal authority ( Finance Minster Taro Aso) and the central bank (Bank of Japan Governor Haruhiko Kuroda). The Abe–Aso–Kuroda triumvirate will continue their master class in policy coordination. Where the U.S. and Europe are wasting time debating terminology and procedure, Japan is way ahead in actually implementing “fiscal dominance” and “modern monetary theory”. The Abe–Aso–Kuroda axis simply gets on with it because they have something that both Europe and the U.S. appear to have lost: political and policy consensus.

At least to this observer, Europe and the U.S. bring to mind the fumbling and growing desperation that Japan went through during the long period of political instability before strongman Abe arrived. To turn modern monetary theory into practice, you need functioning and decisive fiscal coordination and plans that go beyond the expediencies of annual budget cycles or election cycle pork-barreling. No fiscal policy vision, no fiscal dominance … make no mistake! Abe–Aso–Kuroda do know what they want to spend on.

In clearer terms, watch for a boost in fiscal spending if or when global or local economic momentum loses steam. The Bank of Japan will finance the added borrowing requirement if excess savings fail to absorb it.

What about “Structural Reform?”

Here, the cabinet reshuffle opens the door for new ideas and initiatives. Both the ministers for Economy, Trade and Industry (METI) and for Economic Policy have been replaced with U.S.-educated, highly competent young leaders. It is right to expect a pickup in the metabolism of structural reform policy proposals, with a particular focus on boosting entrepreneurship, speeding up industrial reorganization (e.g., M&A, MBO and spin-out rules), regional revitalization and special economic zones, etc. Importantly, the new METI minister, Sugawara Isshu, served as vice-finance minister before, which could lead to closer linkages between tax incentives and industrial reorganization. Continue Reading…

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…