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).

Volatility arrived in 2018 but the ETF Exodus didn’t

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Figure 1: Market Share, Canadian ETFs

By Jeff Weniger, WisdomTree Investments

Special to the Financial Independence Hub

 Money managers had a rough year in 2018. The S&P/TSX Composite Index was off 8.8%, while the MSCI World Index of global equities was down 0.1% in Canadian dollar terms. About the only bright spot was the S&P 500 Index, which was down 4.4% in USD but up 4.1% for Canadians because of U.S. dollar strength. But these tepid figures mask the freefall’s extent; many markets met the bear market definition — declining more than 20% — inside the confines of Q4.

Figure 1 above grabbed attention in our 2019 Canadian ETF Industry & Market Outlook. Many didn’t realize how much market share the smaller players have gobbled up recently.

No doubt, the biggest ETF providers are doing just fine. In fact, we imagine most of the 33 Canadian ETF companies in our corner of the asset management industry must be downright giddy. Many are hitting the sweet spot where track records are becoming seasoned, brand recognition is solidifying and product users are now proselytizing for them.

Grasping at straws

“Active” mutual fund managers have for years been tossing around a prediction that needs to be checked at the door.  To paraphrase them: Wait until we see a downturn in stocks. That’s when everyone is going to dump their ETFs and come back to active mutual funds.

Be careful what you wish for; we think the exact opposite.

The stock market peaked in September, but the exodus from ETFs and into mutual funds never materialized. As an industry, our collective AUM is ever so slightly off its peaks, but that’s because of market losses, not outflows. Continue Reading…

Three times you might want to change your asset allocation

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By Steve Lowrie

Special to the Financial Independence Hub

2018 was a tough year for many investments: including equities, which delivered negative returns.”  As we covered here, periodic negative returns are nothing new. But it’s been a while since they’ve lined up with a calendar year: not since 2011 here in Canada.

I suppose it’s human nature to want to try to avoid the dive by heading for higher ground. So, when markets trend down, this FAQ heats up: Is it time to change my asset allocation?

In past posts, like this one here at the Hub, I’ve generally advised sticking with your investment plans, including your asset allocation, rather than reacting to market volatility. But that doesn’t mean you can’t ever change your asset allocation. Today, let’s cover three times you may want to.

1.) If you’ve built your portfolio on shaky ground

If your current “allocation” is actually just a random assortment of investments, there’s never a bad time to establish an underlying plan to guide the way, and to alter your allocations accordingly. Especially if your current portfolio is high-priced and premised on active management (trying to dodge in and out of winning/losing markets or securities), the sooner you can transition into a solidly built portfolio, the better. In this piece, I covered how to determine and document your asset allocation with an Investment Policy Statement.

2.) If your financial circumstances have changed

What if you receive a financial windfall such as an inheritance, or you encounter a hardship such as losing your job? If your financial “landscape” changes, it makes sense to revisit your asset allocation and adjust it if needed, to reflect any changes in your personal financial goals, and any increased or decreased capacity to take on investment risks.

3.) If your life has changed

Even if your financial circumstances haven’t changed, your life may. Marriage, divorce or widowhood; the birth of a child; a career change or retirement. These are the sorts of events that might call for a fresh look at whether your current asset allocations continue to reflect your evolving needs.

You may have noticed a theme here: If particulars in your own life change, it can make good sense to alter your asset allocation to reflect your revised circumstances.

The flip side of this coin holds true too: Avoid changing your asset allocation just because the markets are heading up, down or sideways.

So, if your annual performance reports had you seeing red at year-end, please ask yourself: Has anything in your own life changed, or are you reacting to market mood swings? If you’ve built a plan and it still reflects your goals, your best bet is to stick with it. That still doesn’t guarantee success, but it still gives you your greatest odds.

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on Dec. 1, 2018 and is republished here with permission. 

Can you afford to launch a startup? Yes!

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By Emily Roberts

(Sponsored Content)

There is a common misconception that starting a business is an expensive proposition. You need equipment, a website, an office, and staff to get the venture off the ground. Sure, in some instances, you will need all that and more: but there are ways to minimize your expenditure and secure funding to help you get going.

Why start a business?

Whether you have been ‘packaged out’ or are looking to transition into a new career, there has never been a better time to start a business. Working for yourself gives you unprecedented freedom. You can work flexible hours, from home if you choose, and any profit you make is yours. For anyone tired of working for someone else, while they reap the benefits, there’s a lot to like about being your own boss.

Financial support for entrepreneurs

There is a ton of support available for entrepreneurs. Fundera recently compiled a list of 105 different ways to secure money for your small business. You might not be eligible for all of them, but it’s worth taking a look.

Look for free loans first. These don’t need to be repaid, so it’s a win-win for you. If your startup is in a tech, science, or health niche, there are Federal small business grants available. These include the Small Business Technology Transfer Program and the Small Business Innovation Research Program. Check grants on offer in your state too, as there is less competition for state funding.

To check the full list of available grants and funding packages, click here.

Tools and equipment

Many businesses need tools and equipment to get started. For example, if you want to set up a handyman business, you’ll need a truck, basic tools, and possibly gardening equipment. Some of these you’ll likely already have, but you may need to purchase other items. Continue Reading…

How to build the best long-term stock portfolio for retiring in Canada

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Diversification, RRSPs, and compounding interest are important topics for investors building portfolios for retiring in Canada

Long-term stock investment strategies aren’t built to make a fast dollar. They are built to prosper over time, and most important, teach you how to pick the right stocks. Retiring in Canada can be easier if you follow our tips for building a long-term stock portfolio.

Retiring in Canada: Diversify your holdings to create a long-term retirement portfolio

One of our key rules for successful investing is to maintain a diversified stock portfolio. This means spreading your money out across most, if not all, of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

Here are some additional suggestions to prepare investors for retiring in Canada:

  • When it comes to a diversified stock portfolio, stocks in the Resources and Manufacturing & Industry sectors expose you to above-average share price volatility.
  • Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
  • Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

Conservative or income-seeking investors may want to emphasize utilities and Canadian banks for their high and generally secure dividends.

Long-term value investing is a key part of building a balanced and diversified portfolio

The core of the long-term value investing approach is identifying well-financed companies that are established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

Here are three of the financial ratios we use to spot them:

  • Price-earnings ratios
  • Price-to-sales ratios
  • Price-cash flow ratios

A long-term investment strategy for retiring in Canada maximizes compound interest

Compound interest — earning interest on interest — can have an enormous ballooning effect on the value of an investment over the long-term. It can be considered the mother of all long-term investment strategies. This tip is especially important for young investors to learn. The benefits of this stock trading tip apply to both dividend-paying stocks and fixed-return, interest-paying investments such as bonds. When you earn a return on past returns, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

To profit from this tip, you need to pay attention to steady drains on your capital, even seemingly small ones: like high brokerage commissions. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.

Registered Retirement Savings Plans as an option for retiring in Canada

Registered Retirement Savings Plans, or RRSPs, are a form of tax-deferred savings plan. RRSP account contributions are tax deductible, and the investments grow tax-free. When you begin withdrawing funds from your RRSP, they are taxed as ordinary income. RRSPs are the best-known and most widely used tax shelters in Canada.

Bonus tip: If you’re retiring in Canada soon, you should switch your RRSP to a registered retirement income fund (RRIF)

Why should you switch your RRSP to a registered retirement income fund (RRIF) if you’re retiring soon in Canada: as opposed to other options?

If you have one or more RRSPs, you’ll have to wind them up at the end of the year in which you turn 71. We think converting your RRSP to a RRIF (registered retirement income fund) is the best option for most investors. You have three main retirement investing options:

  • You can cash in your RRSP and withdraw the funds in a lump sum. In most cases, this is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income.
  • You can purchase an annuity.
  • Proceed with the RRSP to RRIF conversion.

Converting your RRSP to RRIF is the best retirement investing option for most investors. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal.

Like an RRSP, a RRIF can hold a range of investments. One convenient thing to note about the RRSP-to-RRIF conversion process is you don’t need to sell your RRSP holdings when you convert: you simply transfer them to your RRIF.

Retiring in Canada can be easier if long-term strategies are used. Have you employed any short-term investment strategies to prepare for retirement, and if so, how have they performed for you?

If you’ve already retired, what investment tips would you offer to those just planning their retirement finances?

 

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was originally published in 2017 and is regularly updated, most recently on July 10, 2018. It is republished on the Hub with permission. 

ETF investors sitting comfortably in the Balanced Growth sweet spot

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By Dale Roberts
Special to the Financial Independence Hub

In October I penned this blog post, The Balanced Growth Portfolio. The Investor’s Sweet Spot. A Balanced Growth model with typically be in the area of 70-80% in stocks and the remainder in bonds. It’s a growth portfolio, but with a modest allocation to bonds to reduce the price risks. As I often write, those bonds work like shock absorbers through market volatility or market corrections. They help smooth out the ride.

I’d call this model the sweet spot as it might offer the best balance of very good total return potential with less risk compared to an all-stock portfolio. It many periods it will deliver the best risk-adjusted returns.

In fact, in many periods the Balanced Growth portfolio model can deliver the same returns as an all-stock model, while taking on less risk. Stock market corrections become the great equalizer. The pure equity model will certainly outperform in a long bull market run, but then the stock market corrections come along and bring the stocks down to earth while the Balanced Growth model then moves into the lead. They might play a game of tortoise and the hare for many years or decades.

See my above post link for charts on that comparison.

Let’s look at the ETF holdings of Canadians

Industry statistics are published by the Canadian ETF Association. You can access the December 2018 report and commentary here.

The chart at the top of this blog shows the monthly breakdown of assets held in ETFs. Current Month is month’s end December 2018, Previous Month is November, of course. Keep in mind that the assets will be affected by the total inflows and outflows (purchases and sells) and also the market variance. The stock markets fell in December and that will bring down the total stock assets number.

 

We see that Canadian ETF investors are in that sweet spot of near 70% equities and 30% bonds. And the good news is that while the stock markets were pulling their little December hissy fit, investors were adding new monies to their ETFs: both Fixed Income and Equities. And you’ll see that Canadian ETF investors are acquiring within the Balanced Growth band.

We see that investors did respond to the stock market price risks and moved more monies into the fixed income side of the ledger in December. No problem there. Sometimes Mr. Market gives us a little love tap and reminds us that markets can go down in a hurry. We get a very considerate warning shot across the bow. On that here’s my Seeking Alpha article from one year ago Mr. Volatility is Asking You, Taunting You – So You Wanna Go?

Many of us might be getting a little flabby with respect to our risk taking ability. We have not been tested much in the last decade coming out of the Great Recession. We should always remember that markets can be volatile and they can fall by some 30%, 40% or 50% or more in a major market correction. I reminded readers of those risks in my first post to the Tangerine Forward Thinking blog with Why You Might Still Want Bonds In Your Investment Portfolio.

Ensure that you know your risk tolerance level and that your portfolio is best matched to you risk tolerance level. Have a more than solid investment plan but consider that emotional risk. From that Seeking Alpha article and offered by the most ferocious heavyweight boxer of all time, Mike Tyson …

Everyone has a plan until I punch them in the face.

Yes, Mr. Market may punch you in the face one day. Are you ready? I can take a punch in the market and in the boxing ring. I grew up with a boxing ring in the backyard so that my older brother could practice punching someone in the face as he prepared for and kept in fighting shape for playing Junior ‘hockey’. He only ever lost one hockey fight. Me and my face take full credit. Mr. Market has thrown a few punches too.

All said, be prepared.

How are Robo-Advised Canadians putting monies to work? 

Keep in mind that many investors will create their own ETF Model Portfolios through their discount brokerage. But of course there’s a massive move to the Canadian Robo Advisors, where investors can access digital and human advice that will then lead to the recommendation of risk-appropriate ETF portfolios. That risk assessment is key. Continue Reading…