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).

Retirement Planning in your 20s

Posted By Financial Independence Hub | September 11, 2019

By Jenn Hamann

Special to the Financial Independence Hub

Young people are notoriously focused on the here and now. With their entire lives ahead of them, it’s easy for them to lose sight of how important it can be to plan for the future. This is especially true when it comes to retirement planning. The subject is far from exciting, but it can have a tremendous impact on your life as you get older. Failing to have enough retirement savings when you leave the workforce could make it much more difficult for you to enjoy your golden years.

At least you wouldn’t be alone. More than 40 per cent of millennials say they have not yet started saving for the future. The good news is that the sooner you start, the better off you’ll be when the day finally comes.

One of the most significant obstacles when it comes to millennial retirement savings is simply waiting too long to get started. Many younger workers don’t take full advantage of their employers’ 401(k) matching contributions, for example (in the U.S.; the Canadian equivalent are group RRSPs or Defined Contribution pension contributions). The simple math says that the earlier you begin, the more you potentially could have when you cash out your savings.

If you’re one of those who are convinced you still have time to ignore your future, think again. The adjacent infographic shares some sobering facts about the importance of financial planning, as well as some tips you can use to be more prepared.

Jenn Hamann is Executive Vice President of ToInsure.Me, a leading provider of auto, life and home insurance. She has more than 12 years of experience in the industry, and currently focuses on sales, managing, planning, coaching and retaining business.

Mental Accounting and how we spend money

Posted By Robb Engen | September 9, 2019

We all have quirky behaviours when it comes to managing money. One trick we fall victim to is called mental accounting. We separate our money into different types of mental accounts, with different rules, depending upon how we get it, how we spend it, and how it makes us feel.

An easy example is when you have a fund set aside for something like a vacation or house down payment while at the same time carrying high-interest credit-card debt. Or how you decide to spend a $1,200 tax refund versus what you’d do with $100 per month if you had the right amount of tax coming off your paycheque in the first place.

I’m guilty of mental accounting every month when I budget $1,000 for groceries, $200 for dining out, $125 for clothing, and $75 for alcohol. I manipulate those mental accounts all the time, like when I overspend in one category and just take it out of another (shifting a meal from ‘dining’ to ‘entertainment’ for example).

The Mental Accounting challenge

Why do we assign money to these mental categories? One answer is to control how we think about it. If we were perfectly rational and could figure out the opportunity costs and complex trade-offs of every single financial transaction then it wouldn’t matter how we label our money: it would just come from a big pool called ‘our money.’ It’s just money, after all; totally fungible and interchangeable.

But because we’re human with cognitive limitations and emotions we need help with our money decisions. That’s where mental accounting comes in and acts as a useful shortcut for what decisions to make.

Another interesting way we classify our financial decisions has to do with the length of time between when we bought an item and when we consumed it.

Nobel Prize winner Richard Thaler studied wine purchases and consumption and found that advance purchases of wine are often thought of as investments. Months or years later, when the bottle is opened and consumed, the consumption feels free, as if no money was spent on wine that evening. Continue Reading…

Is it time to time the market … this time?

Posted By Financial Independence Hub | September 5, 2019

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Has recent market news got you thinking it might be time to rethink your market positions? It’s certainly understandable if the economic uncertainty unfolding in the daily news has left you wondering – or worrying – about what lies ahead. No matter how you feel about the U.S. entering into a trade war with China, it’s hard to deny that the prospect is currently causing considerable market turmoil. It is also hard to avoid the recent financial media obsession with an “inverted yield curve” (a rare situation when short-term bond maturities are yielding more than longer-term maturities).

You might have heard that each U.S. recession since the 1970s has been preceded by an inverted yield curve. However, perhaps for the sake of sensationalism, not all articles correctly report that this relationship does not always hold true. In reality, every yield curve inversion does not lead to an imminent recession and/or lower equity prices. Recent analysis by professors Eugene Fama and Ken French tested this very hypothesis. Using data from the U.S. and 11 other developed markets, they found “no evidence that inverted yield curves predict stocks will underperform bills (bonds).”

Regardless of how the coming weeks and months unfold, are you okay with gritting your teeth, and keeping your carefully structured portfolio on track as planned? This probably doesn’t surprise you, but that’s exactly what we would suggest. Unless, of course, new or different personal circumstances warrant revisiting your asset allocation for reasons that have nothing to do with all the tea in China.

That said, the recent news is admittedly unsettling. If you’ve got your doubts, you may be wondering whether you should somehow shift your portfolio to higher ground, until the coast seems clear. In other words, might these stressful times justify a measure of market-timing?

Here are four important reminders on the perils of trying to time the market: at any time. It may offer brief relief, but market-timing ultimately runs counter to your best strategies for building durable, long-term wealth.

1) Market-Timing is undependable

Granted, it’s almost certainly only a matter of time before we experience another recession. As such, it may periodically feel “obvious” that the next one is nearly here. But is it? It’s possible, but market history has shown us time and again that seemingly sure bets often end up being losing ones instead. Even as recently as year-end 2018, when markets dropped precipitously almost overnight, many investors wondered whether to expect nothing but trouble in 2019. As we now know, that particular downturn ended up being a brief stumble rather than a lasting fall. Had you gotten out then, you might still be sitting on the sidelines, wondering when to get back in. The same could be said for any market-timing trades you might be tempted to take today.

2) Market-Timing odds are against you

Market-timing is not only a stressful strategy, it’s more likely to hurt than help your long-term return. Over time and overall, markets have eventually gone up in alignment with the real wealth they generate. But they’ve almost always done so in frequent fits and starts, with some of the best returns immediately following some of the worst. If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have before. You’re betting against everything we know about expected market returns. Continue Reading…

Adding Canadian and international REIT ETFs to your portfolio

Posted By Financial Independence Hub | August 30, 2019

By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

You’ll notice that in the ETF Model Portfolio page on Cut The Crap Investing I first offer up the core portfolios with the traditional building blocks of Canadian, US and International stocks supported by a broad basket of Canadian bonds.

That’s a core approach embraced by many self-directed investors. You’ll even see that simple asset allocation embraced by Dan Bortolotti of Canadian Couch Potato. In fact, Dan will argue that any additions or ‘complications’ are not necessary.

Many will suggest that we do not need to spice things up much beyond that core ‘meat and potatoes’ asset allocation. A Canadian investor can certainly put together a sensible portfolio with those assets and that investor would have been rewarded with some very solid returns.

There are assets that can deliver the potential of greater returns and greater diversification. REITs and foreign bonds and emerging market equity funds would fall into that camp. You’ll see those holdings in the portfolios of many of the Canadian Robo Advisors. In the game-changing asset allocation portfolios from Vanguard you’ll find US bonds and emerging market stocks.

One Canadian Robo Advisor that employs REITs and foreign bonds is ModernAdvisor. I am a big fan of that firm and I am a fan of their asset allocation moves. Please have a read of ModernAdvisor. A Better Way For Canadians To Invest. The Canadian Robos can also be a great source of education by way of their blogs. Here’s a wonderful REIT primer from ModernAdvisor: Diversify With A REIT ETF.

In that post we’ll find the chart that strongly suggest why we should include REITs for greater portfolio diversification.

From that blog post …

In addition to the income aspect of REITs, real estate also provides strong diversification benefits for a portfolio already holds stocks and bonds. Since 2002, the 5-year correlation between the S&P/TSX Capped REIT Index with the S&P/TSX Composite Index has ranged between 0.23 and 0.76, averaging 0.55. The correlation with Canadian bonds is even more attractive, ranging between -0.02 and 0.34, and averaging 0.12.

Correlation of 1.0 indicates perfect positive correlation; that is, the two investments move in the same direction. Correlation of -1.0 indicates perfect negative correlation, that is, the two investments move in the opposite direction. Correlation of 0.0 indicates that there is no relationship between the two investments.

From the chart we can see that we do gain additional diversification.

Canadian REIT exposure is quite easy. The core Canadian REIT approach is covered by Vanguard with VRE, iShares with XRE and BMO offers ZRE.

For more on 2019 ETF performance including those REITs you can have a read of this recent post on Cut The Crap Investing.

US and International REIT exposure

Things get a little more tricky when we leave Canada due to withholding taxes and the potential of currency conversion charges. The go-to Canadian dollar International REIT is iShares CGR. That is a US and Global REIT.

Given that CGR is a Canadian dollar REIT ETF with US and International assets you will face those withholding taxes on income. On that, the folks at ModernAdvisor suggest that you hold that ETF in a taxable account whenever possible as you can claim the tax credit. That said, if you are only investing in registered accounts such as an RRSP and TFSA you might not let the tax considerations drive the bus. The additional diversification and potential of greater returns might rule the day for your portfolio.

Hold US REITs in a US Dollar Account

This is a good practice or portfolio approach for your entire equity assets. Continue Reading…

The vulnerable Euro

Posted By Financial Independence Hub | August 29, 2019

By Jeff Weniger, WisdomTree Investments

Special to the Financial Independence Hub

These are interesting times for the euro. Relative to the Canadian dollar, it may be nearing the end of its four-year uptrend (figure 1).

Figure 1: EURCAD

Figure 2 shows the most recent Wall Street forecasts for 2019 exchange rates. Despite the great unknown of what happens when European Central Bank (ECB) president Mario Draghi passes the sceptre to Christine Lagarde this winter, the median estimate for EURCAD is a miniscule weakening of the loonie from C$1.484 to C$1.49 at year-end.

Figure 2: Street Consensus, EURCAD

Meantime, the backdrop is a total currency war, with Canada among the weakest of the fighters, which is a good thing for CAD bulls. Like the Bank of Canada, the Federal Reserve is — by comparison with many other central banks — fighting the currency war meekly. The U.S. central bank’s balance sheet has declined from US$4.5 trillion to US$3.8 trillion in about four years. But at the ECB and the Bank of Japan (BoJ), crisis-style quantitative easing is at the top of the rumour mill.

And though the Fed may not be fighting hard in the currency war, Washington makes up for it. President Trump is clearly jawboning for a weak dollar. There’s also the matter of the federal fiscal situation in the world’s largest economy, which doesn’t matter until it matters. The U.S. budget deficit-to-GDP ratio of 4.3% is the reddest ink in the G10. In sharp contrast, the Street forecast for Ottawa is for roughly balanced budgets as far as the eye can see.

Canada the exception?

We could almost understand the “need” for currency wars 5 or 10 years ago, but today, with the S&P 500 Index just off recent highs of around 3,000? Hardly. Yet almost every country is fighting this war, with the arguable exception of Canada, sitting here with a largely responsible budget and a central bank that may do nothing this year.