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).

American, Delta and United: Which airlines will survive?

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By Ian Duncan MacDonald   

Special to the Financial Independence Hub

An investor asked If he should invest in American Airlines, Delta Airlines and United Airlines.  He had noticed that the share prices of these industry leaders had reached new lows.

Is investing in airline stock currently a risky speculative play?  Just how much of a gamble would it be?

A quick Google search discloses that Warren Buffett recently sold all his airline stocks (4 billion dollars worth); air travel has dropped to 5% of its pre-pandemic level; airline employees are being offered early retirement; airline executives have taken pay cuts; capital expenditure projects have been shelved and  billions of dollars in emergency loans from the government have been taken out.  The daily cash burn rate of the airlines is reported to be over US$100,000,000 a day

The US government’s passing of a 50 billion dollars in aid for the airline industry was contingent on the airlines not furloughing employees or cutting their pay. This seems to have ignored the reality that hundreds of thousands of the 750,000 employees in that industry are now redundant.

Historically commercial risk dictates that when there are too many suppliers to serve a market, the weakest supplier must disappear through merger or insolvency.  The survivors then become stronger with the acquisition of the departed’s market share.

Which of the three airlines in the following chart seems weakest? Which seems to be in the best financial condition?  Does it surprise you that analysts are still recommending buying all 3 of these stocks or does it indicate that these businesses are deteriorating faster than financial information can be provided to make accurate projections?

Try to identify each of the airlines in the chart

While the Information in the chart is for the 3 major airline stocks (AAL, DAL and UAL) I have deliberately not identified them by name. Who do you think is in the number one, two and three columns? By going to Yahoo finance and entering in these three stock symbols you can quickly find information that identifies which they are. You will also see, if you have never done it before,  just how easy it is to gather facts to help you evaluate a potential stock purchase.

The IDM Stock Scoring software on the bottom line of the chart is a measuring/summary tool that was developed to grade stocks by their potential.  A score cuts through pages of data available on every common stock.  It helps investors quickly and easily determine if a  stock is a desirable purchase or not.  This score is compiled from the 9 factual items itemized in the chart. The “best” score seen, reported so far, was a Canadian bank with a score of 78.  The “worst” or lowest score was an 8 for a company that soon became defunct.  Purchasing stocks scoring less than 50 is thought to be too speculative.

Dividends are paid from the Operating Margin.  Does it surprise you that the airline in the chart with the highest operating margin and highest dividend also has the highest score and the highest number of analysts recommending it as a buy?

A reliable score enables investors to add stocks to their portfolios without the need to rely on the questionable advice of investment advisors.  Periodic rescoring of stocks in a portfolio allows investors to react to positive and negative changes easily and quickly.  Scoring puts a stop to making stock purchases blindly based on questionable rumours or recommendations.

Being aware that stocks can be easily and accurately graded makes many investors reluctant to invest in mutual funds and Exchange Traded Funds.  They quickly realize they have no certainty as to what these bundled investments are putting their money into.  Continue Reading…

Vanguard reduces fees on three passive Canadian Bond ETFs

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With interest rates falling ever closer to zero, the mantra that costs matter in investment funds is truer than ever.

So it’s good news that on Tuesday Vanguard Canada cut fees on three passively managed Canadian bond ETFs, the sixth fee reduction in its Canadian operation in the last seven years. With the latest fee cuts, Vanguard says its average Management Expense Ratios on its ETFs are 57% lower than the industry average.

As the graphic to the left shows, the management fee will now be 0.15% on the Vanguard Canadian Long-Term Bond Index ETF (VLB/TSX), the Vanguard Canadian Government Bond Index ETF (VGV) and the Vanguard Canadian Corporate Bond Index ETF (VCB). Previously the fee on VLB was 0.17%, VGV’s was 0.25% and VCB’s was 0.23%.

Vanguard Canadian Long-Term Bond Index ETF seeks to track the Bloomberg Barclays Global Aggregate Canadian 10+ Year Float Adjusted Bond Index, investing primarily in public, investment-grade fixed income securities issued in Canada. Vanguard Canadian Government Bond Index ETF seeks to track seeks to track the Bloomberg Barclays Global Aggregate Canadian Government Float Adjusted Bond Index, and invests primarily in public, investment-grade government fixed income securities issued in Canada. Vanguard Canadian Corporate Bond Index ETF  seeks to track the Bloomberg Barclays Global Aggregate Canadian Credit Float Adjusted Bond Index  and invests primarily in public, investment-grade non-government fixed income securities issued in Canada.

Kathy Bock, Managing Director and Head of Vanguard Investments Canada Inc.

“For us, low costs are not a pricing strategy. We are built to pass on the benefits of our size and scale to investors in helping them achieve investment success,” said Kathy Bock, Managing Director and Head of Vanguard Investments Canada Inc. in a press release, “This is even more important in the current market climate, where low returns mean that costs erode an even larger share of returns than they would normally.”

The extreme volatility of the last few months has challenged both individual investors and financial advisors and in such an environment “high-quality bond ETFs can play a key role as a stabilizing force in a portfolio,” said Scott Johnston, Vanguard Canada’s Head of Product, “We are pleased to support investors with these fee reductions to help them keep more of their returns.”

Low fees and the “Vanguard Effect” in Canada

Including fee reductions from 2013 to 2015, and in 2018 and 2019, Vanguard estimates the cumulative reductions have saved Canadians more than $10 million.

As competitors adjust fees down in response, industry investment fees have come down significantly over the last several years, typically after Vanguard enters a particular geographic market. This “Vanguard Effect” phenomenon has occurred in the United States, the United Kingdom and Australia as well as Canada.

For more information on Vanguard’s broad pricing impact on the ETF market, see this infographic.

 

 

   

The MoneySense ETF All-Stars 2020

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After a slight delay because of the Coronavirus and the bear market, MoneySense.ca has just published the 2020 edition of its annual feature, the ETF All-Stars. You can find the full report by clicking on the highlighted headline: Best ETFs for Canada 2020.

There you’ll find an overview of the changes this year as well as how our 8-person panel of ETF experts view the bear market. You can click on each tab (example Canadian equities, fixed income, etc.) to find the chart of the updated All-stars list. Each of the subheadings below contain hyperlinks to the underlying MoneySense content.

While our expert panel added a number of new ETFs this year – some in global fixed income, several low-volatility ETFs and two new families in the One-Decision Asset Allocation category – virtually all our last year’s picks returned, most unanimously. The only 2019 pick that was removed for the 2020 edition is ZPR, as preferred shares had another year of disappointing performance.

This seems to vindicate our long-term approach. Our list now consists of an elite 42 “All-Star” picks: a big jump up from 25 last year, plus 8 more individual “Desert Island” picks. So in total, we have 50 recommended ETFs, which should be a good start for readers in narrowing down the wealth of possible choices in this growing cornucopia of choice.

Canadian Equities

All four Canadian equity ETFs return: VCN, XIC, HXT and ZCN (See accompanying chart for full ETF names) plus we added BMO’s low-volatility Canadian equity ETF,  ZLB. See discussion on Low-vol ETFs further down. Remember that Canadian stocks are also amply represented in the One-Decision Asset Allocation ETFs discussed below.

US equities

The panel opted to retain all four of our 2019 US equity ETF picks, while adding three low-volatility ETFs. Returning picks are the U.S. Total US Market XUU from iShares, and three low-cost plays on the S&P500 index: VFV and VSP from Vanguard, and BMO’s ZSP. Readers should also check the latest crop of desert island picks: several panelists went with specialty US equity ETFs, such as HXQ.U from Mark Yamada and, — new this year — Yves Rebetez selected NXTG as a 5G (fifth generation wireless) Nasdaq play. The PWL team of Felix and Passmore picked a US small-cap value play: Avantis U.S. Small Cap ETF (AVUV/NYSE Arca).  And Dale Roberts chose the Vanguard Dividend Appreciation ETF (VIG/NYSE Arca).

International and Global equities

The panel retained our five international or global ETF All-stars from 2019: two from iShares (XAW and XEF) and three from Vanguard (VXC, VEE and VIU). But we also added the three low-volatility ETFs: ZLI, RWW/B and XMW. See the extended discussion of all these new low-volatility ETFs in the relevant section below. Continue Reading…

What will the Post-Covid world look like?

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By Amit Ummat

Special to the Financial Independence Hub

We’re all talking about how the world will change because of COVID-19 and are already seeing things like more cooking and less takeout, lower profits for more stability, and electronic voting. But what about taxes and tax policy? The global economy is undergoing drastic change, but what will be the repercussions of these changes for tax authorities? We can expect three things: more state involvement, reduced globalization, and universal basic income. Let’s have a look at each of them.

1.) More State Involvement

Governments will be more involved in the economies of their nations and this is where new approaches to tax policy come into play. National governments will no longer tolerate tax minimization by large corporations (including airlines) and then acquiesce to requests for taxpayer-funded bailouts.

Denmark and Poland recently made it policy to exclude tax-haven companies from COVID-19 relief schemes. So, if a corporation fails to pay its fair share of tax and thereby fails to finance public goods and services, it cannot expect state-sponsored loans or wage-subsidy programs. The government of Denmark said companies which pay out dividends, buy back their own shares, or register in offshore tax jurisdictions, will not be eligible for aid programs from the state.

Expect more of this. It means income inequality will be tolerated much less by governments and society, prompting action by tax authorities to ensure that all taxpayers pay their fair share. This is already happening.

We hear echoes from every corner of the world that the share of revenues going to labour and producers are grossly out of whack. In 1960 labour expenses were roughly equal to profits, but now there is incredible disparity with the lion’s share of revenues going to capital owners and only a small fraction going to labour, and that fraction hasn’t even kept pace with inflation.

Don’t expect a Marxist-type revolution where the means of production are usurped by the working class, but there will be an expectation for income allocation to be more equalized between capital and labour.

2.) Reduced Globalization and Stronger Domestic Supply Chains

With this pandemic we have seen what happens when nations aren’t able to control supply chains for essential goods (i.e., ventilators and other PPE). The United States is a perfect example. Globally, we will see supply chains repatriated by nations, and technology allowing for this through AI (Artificial Intelligence), portable manufacturing equipment, and more accessible communications. This will make it easier to impose tax on corporations since much of the activity will take place in a single geographic jurisdiction.

While globalization has produced a myriad of benefits, including a huge reduction of poverty in the world, it’s no coincidence that the growth of the globalized economy has spawned incredible growth to the middle class, such as in China and India. But this has also led to the loss of manufacturing jobs in Western countries. One can argue that globalization is why Western nations have become almost entirely service-based. Continue Reading…

Playing with the Box: Re-reading Nick Murray

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Author and Advisor’s advisor Nick Murray. NickMurray.com

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

I was on a cross country flight recently and I re-read a book called “Simple Wealth, Inevitable Wealth” by Nick Murray, a former rock star speaker who was beloved by the financial advice industry – mostly because he constantly told his advisor audiences that they are great, do important work and are worth every penny they make.  The book was written 20 years ago and, unlike the other books by Murray, was written expressly for investors.  Reading it again provided both a nostalgic stroll down memory lane and an enlightening insight into how much the financial services industry has changed in the past generation.  Some parts of the book have held up well.  Others… not so much.

The risk of outgrowing your capital

I’ll begin with the positive.  The good news is that I still find it refreshing to read Murray’s perspective on the perverse way the media defines risk.  He simply, compellingly and eloquently walks readers through the very real risk of outliving your capital as a result of a reliance on the quaint notion that bonds are “safe”.  Safety, according to Murray, is having a pool of capital that you cannot outlive – and putting a significant portion of your life’s savings can significantly impede that outcome becoming a reality.  I was also heartened by his acknowledgement that there are false dichotomies and that the real decision in the ongoing ‘debate’ between active and passive approaches is really a choice between the more relevant considerations of product cost.  Murray also writes persuasively about the need for specific, measurable, time-bound goals that help to focus the mind and guide in principled decision-making.  Best of all, Murray names and blames what I believe to be the biggest culprit in most peoples’ failure to meet their financial goals: themselves.  More specifically, their own behaviour.

There are also a few things that cause me to shake my head in disbelief, however.  The most obvious of these are the return assumptions that he puts forward as being reasonable.  Granted, the numbers he uses are based on historical data, but he does relatively little to explain that real returns are fairly constant and that a portion of all nominal returns is inflation.  While he doesn’t expressly tell people what inflation rate to expect, he does note that there is historically about a 5% premium for stocks over bonds.  He uses 11% as a proxy for expected stock returns and 6% for bond returns.  To put that in perspective, I currently assume inflation to be 2% with a 5% real return for equities (7% nominal) and a 0% real return (2% nominal) for income.  How times have changed, now that everyone has re-calibrated their expectations toward a low-growth, low-inflation environment for the foreseeable future.

Sustainable withdrawal rates

Then there’s the related question of a sustainable retirement withdrawal rate.  Murray uses 6%.  Many years ago, I remember people talking about the real rate being 5%.  For the past number of years, I’ve been using 4%.  Note that my current withdrawal rates are actually more aggressive/ less forgiving than Murray’s.  You’re much more likely to not run out of money withdrawing 6% from something that’s earning 11% than to withdraw 4% from something earning 7%.  Financial planning is easy when your assumptions are based on a rose-coloured past rather than a murky future.

The thing that struck me the most, however, was his admonition to readers (remember, Murray is writing to ordinary investors here) to focus on first principles.  Everyone knows the old ‘life’s like that’ story about getting a young child an expensive present for Christmas or a birthday only to have that child spend more time playing with the box that the gift came in than with the gift itself.  Continue Reading…