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).

Stop giving Markets your attention

Posted By Robb Engen | January 3, 2019

When I got an activity tracker several years ago I was horrified to learn just how sedentary my lifestyle had become. I’d drive to work, park my butt at a desk for eight hours, drive home, park my butt on the couch for a few more hours, and go to bed. It was mindless laziness.

I fit right in with the average North American, who walks an average of 3,000 to 4,000 steps per day.

Steps to improve my steps

My activity tracker suggested a goal of 10,000 steps per day. I was motivated by the step counter and helpful nudges to get myself moving. I started parking in a free lot about 1 kilometre away from work, adding an extra 3,000 steps to my day (and saving $50 per month in parking fees!).

My new walking routine got me up to an average of 7,000 steps per day, but still not close to my goal. Then, following my wife’s lead, I got into running three to four times per week. The extra activity helped me reach my goal – not every day, but on average throughout the week. Funny enough, I still find motivation from my activity tracker as it nudges me to reach and surpass my daily move goals.

The hyper-attention and daily nudges helped me get my butt in gear and become a healthier person.

Curbing my Screen Time

Similarly, Apple sends iPhone users a new weekly report called Screen Time that shows how much time you spend on your phone. You’ll see which apps you use most often, how many times per day you pick up your phone, how many notifications you receive per day and from which application.

The report can be an eye opener if you’re into mindless scrolling through social networking sites like Facebook, Twitter, and Instagram. Twitter is the biggest attention sucker for me. Hey, it’s where I get my news!

I also get a lot of notifications and can conclude from the report that I receive about 30-40 emails per day from work. Not cool. Because of those notifications I tend to pick up my phone 65-70 times per day to either check my email, respond to a text, or check Twitter.

The week the Screen Time report first came out I spent six hours per day on my phone. I’ve got that down to less than four hours per day and try to design rules around curbing my screen time. That means turning off unnecessary notifications and keeping my phone in another room when I go to bed.

Again, these nudges had a positive effect on drawing my attention to a negative behaviour and making a conscious effort to curb it.

Negative Stock Market Attention

Back when I was a stock-picker I obsessively checked my portfolio, and read every market headline. I scoured the internet for news about my individual stock holdings and searched for analyst opinions (only the ones that confirmed my own opinion, of course).

But just like in the previous two examples, all this attention and information made me want to act. My oil stocks were getting killed and I wanted to get out. Sobeys made a mess of its Safeway acquisition and I wanted to get out. The general market would fall by 5-10 per cent and I felt like I needed to do something – like contribute more money than I had planned, or hold off on adding new money until things “settled down.”

Nudges worked against me. I’d get email alerts when Fortis or Great West Life missed their earnings targets. What should I do with this information?

The Globe and Mail app would send helpful push notifications like, “markets plunge on European/China/Russia fears,” or,“Dow posts worst day ever.” A smart investor is supposed to act on this, right? Shift their portfolio to safer assets? Buy gold?!?

Don’t just do something, stand there!

I switched to indexing four years ago with a simple two-ETF portfolio of global and domestic stocks. Now that I own thousands of companies I no longer pay attention to the fortunes of one or two. I find myself paying less attention to market headlines in general.

I make my monthly contributions automatic and only check my portfolio when the cash balance is large enough to make a trade. I figured instead of tinkering with my portfolio daily and reacting to news I’d be better off taking a two-decade nap and letting compounding do its thing.

Your long-term investing plan has no time for daily market noise. Yes, we may be entering a bear market. Or it’s just a run-of-the-mill market correction. Nobody knows for sure.

We do know that yesterday [late December] the Dow and S&P 500 had historic gains. If you happened to act on your fears and exit the market, thinking it was on its way to a 40-50 per cent meltdown, you missed out on that important rally. In fact, many of the largest one-day gains occur during down markets.

Final thoughts

Technology can help bring attention to a negative behaviour and turn it into a positive outcome. But those nudges and alerts can also work against you.

When it comes to investing often the best course of action is to do nothing and stick to your plan. Daily gyrations smooth out over a period of several months, and over several years the trajectory of the stock market tends to point up and to the right.

Many so-called experts question the value of robo-advisors during a downturn such as this, saying that investors would be better off with a human advisor. But from what I’ve heard during tumultuous times, the robos send helpful nudges via text and email explaining what is happening and why fluctuations in the market are part of a normal investing experience.

For investors that can be calming reassurance in the face of negative headlines screaming for your attention.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on on Dec. 27, 2018 and is republished here with his permission.

U.S. Growth stocks: You’d better be Seabiscuit

Posted By Financial Independence Hub | December 27, 2018

This is Part 2 of a two-part blog series on the prospects for Growth and Value Stocks.

Read Part 1 Growth Stocks: Where’s the Beef?

By Jeff Weniger, CFA, WisdomTree Investments

Special to the Financial Independence Hub

When your starting point is a 1.4% dividend yield,¹as is the case with the S&P 500 Growth Index, the group of stocks that make up the basket need to have long-term dividend growth that performs like Seabiscuit, the super horse. No tripping out of the gate or getting bumped in the stretch.

Latching on to the concepts in my white paper, Dividend Growth’s Drivers: Picking Apart Quality, we present figure 1, which shows the interrelationship between the percentage of earnings that are retained (as opposed to paid out as dividends) and the return on equity (ROE), which is net income as a percentage of shareholders’ equity.

This relationship is thedriver of dividend growth, and as the years go on, concepts like figure 1 have become core tenets of second-decade WisdomTree.

Figure 1: The Critical Equation

Figure 2 uses the critical equation to calculate long-term dividend growth at prevailing profitability levels.

As it stands, the S&P 500 Growth Index’s 23.2% ROE implies long-term dividend growth of 16.8%. That could happen, yes. Anything canhappen. But here’s a better idea: expect downward revisions instead.

Figure 2: Implied Dividend Growth Estimate

After all, look at the historic record in figure 3. There isn’t a single five-year period that had growth stocks’ earnings running forward at a 16.8% clip, not even in the roaring 1990s. In contrast, value stocks’ implied dividend growth is on planet Earth.

Figure 3: Dividend Growth Rate, 5-Year Periods, 1995–Present

Does anything jump out in figure 3? Look at the dividend growth experience of growth and value from 2010 to 2015 and from 2015 to the present.

Those growth stocks start to look less like Seabiscuit and more like also-rans if recent years are any indication. Granted, value indexes are dominated by banks, and the period from 2010 to 2018 was characterized by the benefit of their reinstated dividends. Nevertheless, if growth stocks were only able to increase their dividends at a high single-digit rate during this period of irrepressible economic expansion, what happens if recession hits? Let someone else pay 22 times earnings to find out.

Slow and Boring? Better than Growing Out of 1%

The S&P 500 Value Index has a dividend yield that is about double that of the S&P 500 Growth Index (2.7% vs. 1.4%). This kind of gap makes it nearly impossible for the latter index to ever grow out of its valuation.

If U.S. growth could not differentiate its … ahem … dividend growth relative to value from 2010 to 2018, what makes anyone think the next several years will be different? For growth stock skeptics, the WisdomTree Fund that hits value is the WisdomTree U.S. High Dividend Index ETF (HID/HID.B).

It retains 38% of its earnings, pays out the other 62% as dividends and has an ROE of 13.5%. That ROE is satisfactory enough. Using the “critical equation,” it has long-term implied dividend growth of 5.1%, which is less than the levels of the S&P 500 Growth Index. But when the starting point is a 1.4% forward dividend yield, companies that populate indexes like the S&P 500 Growth Index would have to run up their dividends at a 15% or 20% annual pace for a long time before the math even thinks about shifting in their favour.²

For investors who do not want to commit to value because they keep getting burned, a fund like the WisdomTree U.S. Quality Dividend Growth Index ETF (DGR/DGR.B), which tracks the WisdomTree U.S. Quality Dividend Growth Index CAD, seeks to target companies that rank well on our ROE x earnings retention framework.

Critically, its dividend weighting methodology also checks valuations at the door. That gives it a starting dividend yield of 2.7%, about 130 bps more than the S&P 500 Growth Index. It also has an explicit screen for ROE and return on assets (ROA). Its 15.8x forward earnings multiple is 3.3 multiple points below the S&P 500 Growth Index.

Over the next 5 or 10 years, we’ll take DGR.B or HID.B over S&P 500 Growth Index. This is where the rubber meets the road, when the cap-weighted U.S. large-cap growth indexes start to be priced like they’re Seabiscuit, when in reality they’re an underlay.

¹Sources: WisdomTree, Bloomberg, as of 11/15/18.

²Sources: WisdomTree, Bloomberg. Unless otherwise stated, all data in this blog as of 11/15/18.

Jeff Weniger, CFA serves as Asset Allocation Strategist at WisdomTree. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.

Tracking your financial health in Retirement

Posted By Financial Independence Hub | December 24, 2018

By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

No matter what stage of life you are in, it is important to know your financial health. This is not something you do just around income tax time but throughout the year. It’s good to check in at least monthly or, as we do, daily. The same as any successful business must know their income and liabilities, so should you.

Today there are plenty of free online tools that can help you, but we are old school and prefer to be able to check and edit our data anywhere in the world and at any time regardless of an internet connection. We have done this since we retired in 1991. Back then we used a paper notebook and pen, but today we created a spreadsheet using an Excel program that is on most computers sold today.

How it works

Throughout the day as we spend money we keep a mental note of the cost. Then, usually in the evening while winding down, we enter the data into our spreadsheet. We created categories such as housing, food, dining, transportation, donations, healthcare, and so on. Each of those entries then gets automatically added giving us a total for the day. That number is added to all of the previous entries and then divided by the day number in the year, 1 through 365, giving us a daily average.

Utilizing this system we can adjust the entries using local currencies, therefore knowing what we are spending in Mexican Pesos, Thai Baht, Vietnamese Dong, Guatemalan Quetzales or the money of any place where we are traveling. While this figure can easily be converted to dollars if we want, we prefer to think of our costs in the currency of our host country. This keeps our spending at the perspective of the natives instead of distorting it by thinking in Dollars.

This information is important

Once you know how much you are spending per day you can utilize this information to adjust spending accordingly if necessary. You are in control of your outflow at this point, and you can make changes in real time.

Net worth: What is it?

Another important tool for understanding your financial health is calculating your net worth. This number is derived by adding up all of your assets minus your liabilities. Do you own a house or rentals? Figure out what they are worth, then subtract out what you owe and this equates to the equity you have. It is important to use realistic numbers knowing that if you sold today, there would be fees and expenses involved as well as taxes to be paid. Do you have cars? Even though they are a depreciating asset, meaning they lose money over time, you still have some value there. How about retirement accounts? IRAs or RRSPs, 401(k)s or Defined Contribution pensions, regular banking and brokerage accounts, credit-card and student loan debt: all need to be factored into the equation.

This information is a powerful retirement tool

Now that you know your net worth and what you are spending per day, you can take further control of your future by figuring out what percentage of your net worth you are spending. Continue Reading…

Retiring early: the hardest part is waiting for your spouse

Posted By Financial Independence Hub | December 20, 2018

By Dale Roberts

Special to the Financial Independence Hub

Just over 6 months ago I left a job that I truly enjoyed and moved to what I like to call a new life-work stage. I’m not retired; let’s call it a stage of semi-retirement. My RSP and TFSA portfolio was not retirement ready; it’s only halfway there. The acronym FIRE has become very popular over the last few years: Financial Independence Retire Early. I guess I would fit that definition to some degree, but I don’t have that financial part down yet.

I still need to make half a living, and that’s by design.

Many will attempt to sprint to the finish line of retirement. That is, they will work hard and as much as they can so that when they reach that magic age and that magic number (considerable retirement portfolio or pension) they can stop and rest and enjoy that financial freedom. That sounds wonderful, but perhaps troublesome for many. We hear of too many stories of retirees falling ill or passing away within the first few months or years of retirement. There are many physical and biological and psychological reasons for that unfortunate reality. I’ll cover that in a separate article.

Many will take the halfway-to-retirement route and instead of a sprint to the finish line, they’ll stroll to the finish line. That’s me, strolling. The thing is I am walking this walk alone; my wife still works and she wants to work for another 4 or 5 years. She’s ‘not ready to retire.’ And that’s good, we do need her income for now, until I can start to earn half a living. For us to fully retire we would need to downsize from our accidental investment: our Toronto home. Next year we’ll have our 2 kids in University and we want to keep our home as a base and a familiar comfort zone. This is not the time to take off to the beach.

First 6 months of semi-retirement.

Out of the gate the new work-life stage was nothing short of incredible. Last June I packed up the laptop and set up shop in Prince Edward Island. My first home office was a little beach cottage in Stanhope. It was my ‘workcation’. I launched my site from the wonky Wifi of Lyon’s Cottages. The property manager Ken did everything he could to keep that Wifi signal chugging along for 3 weeks.

It was an incredible period, being able to hang out with my daughter who is just finishing up her undergrad work ‘on the island.’ My wife and son joined us for a week of family vacation. That’s a whirlwind of new activities and emotions. Leaving your career and co-worker friends, starting a new business and taking off to Canada’s most lovely beaches. There was a lot of ‘new and exciting’ all rolled into a few weeks.

That said, I got a good taste of that ‘waiting.’ And as Tom Petty (RIP) sang, ‘The Waiting Is The Hardest Part.’ While I have a very generous amount of loner in me I was surprised at how uncomfortable a feeling that was – that working alone and being alone for many hours on end. I couldn’t wait for my daughter to finish work and head up to the cottage for dinner and a walk along the beach.

I couldn’t wait for the rest of the family to join us for that week of family vacation.

I was offered a very quick introduction to the ‘feeling of retirement.’ And I can tell you that is feels a lot different when you are doing that retirement thing – alone. It’s well-known that we have to have a solid plan when we retire. To run to that retirement finish line and then wonder what the heck you are going to do is at the very least misguided. Your time will not magically fill itself with wonderful and fulfilling activities.

When we are working our week is filled with tasks that need to get done on time. We usually know how to fill that time and we often wish there were more hours in the day or more days in the week. Retirement is not much different. We have to fill our days and weeks with tasks and chores and accomplishments. We need some structure. You likely will not be on vacation most weeks or months. Vacation is the easy part, and that may not feel all that different to the vacations that you took in your working life.

That said, I would guess that we can start to take our vacations for granted when those vacations are a regular event. We humans can get used to (and bored with) just about anything. I love to travel with family, that might be my most cherished time. But I think I could get somewhat bored of endless travel, or at least the trips could lose some of the magic. Vacations feel great in our working years because there is anticipation and there is an end date.

Retirement has to have meaning and purpose.

The concept of purpose might be the most important consideration. That word gets used a lot by those who study retirement and retirees. When we lose our purpose that can send a lot of negative signals to our brain and our body. And certainly that purpose can take many shapes and forms. A retiree might look after the grandkids on regular basis, take care of older parents, volunteer, work on a side job that includes a useful mission.

If you are retiring alone for a few years, waiting for your partner, you’d best have a very good plan built around that purpose. And you might want to fill your 9-5 Mondays to Fridays with enough contact with others – engaging human contact. Free time to do ‘nothing’ loses its appeal real quick. It’s not all that special when free time is followed by more free time.

Make the most of your time when you are waiting for your spouse to retire. I’d suggest that the real retirement starts when you are both retired. But you can make the waiting years very enjoyable and fruitful and meaningful.

Retirees who are doing it right.

Fritz Gilbert at Retirement Manifesto retired the same month, June of 2018. He offers a wonderful blog that details his and his wife’s FIRE journey. Here’s 6 Lessons From The First 6 Months of Retirement.

You’ll find their retirement consists of a lot of structure and a lot of purpose. There’s regular exercise. There are Grandkids and dogs to take care of. It’s busy enough. There’s lots of room for vacations. As much as one can try to prepare, Fritz is also surprised by the new venture known as retirement.

I’m Lucky

I semi-retired with a purpose, my blogand other writings that help Canadians with their own search for FIRE and other financial goals. That’s all very exciting and interesting and rewarding. But I know I need more. I need to get ‘out there’ more to promote the blog and mission and to reach Canadians face to face. I will also add some volunteer work for more tasks and greater purpose.

My first 6 months of semi retirement reinforced what is well-known, that being financially prepared is only half of the prep work that is required for a successful and happy retirement. Retirees need a plan. A newlife plan for your newlife.

Money + Plan = FIRE-AH.

Financial Independence Retire Early – And Happy.

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Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dec. 11, 2018 and is reproduced here with his permission.

Home financing options for credit scores

Posted By Financial Independence Hub | December 19, 2018

By Michael Plambeck

(Sponsored Content)

It’s important to go over all your options in regard to home financing to ensure you know what your options are and what’s available to you. This is especially crucial if you are a first-time buyer. Though this can seem like an overwhelming process, knowing what your options are based on your credit score, what types of help are available, and how you can improve your credit score if it’s poor or bad, is the best way to figure out what to do.

How to check your credit score

There are many ways to check your credit score to figure out where you are currently at. You can use a number of institutions and resources to check what your credit score currently is, such as using FICO,or Equifax.

It’s never a bad idea to regularly check all of your credit reports in order to be completely sure that the information is both complete and as accurate as possible. This will help you to know where you need to make improvements, how you can do it, and what your situation is at that point in time.

Low credit scores and what your options are

Having a low credit score sends red flags to lenders and deems you a credit risk. In short, this will make it very difficult to get a proper credit loan.

Here is a quick list detailing the range of credit scores and what they mean:

300 – 499: Bad credit
500 – 579: Poor credit
580 – 619: Low credit
620 – 679: Average credit
680 – 699: Good credit
700 – 850: Excellent credit

Having a high credit score means you should have no problem getting a loan from your bank or your credit union. Having a middle credit score, which is a credit score from average to good, you have a wide variety of options available other than your bank or credit union if they deny your application, such as quick loans or by going online.

If you have bad to poor credit, getting credit is going to be very difficult. The fees and interest rates will more than likely be higher than what you can afford, but that’s only if you can get approved at all.

You can do your best to go through the Federal Housing Administration in order to get a mortgage loan, but they only grant loans through FHA-approved lenders, which may pose a problem. They have a list of requirements that must be met in order to get an FHA mortgage loan, which are listed below for you:

A FICO score between 500 to 579, which equals a 10% down payment
A FICO score of 580 at the very least, which equals a 3.5% down payment
Debt-to-income ratio of under 43%
Mortgage Insurance Premium (MIP)
The home in question being the primary residence of the borrower
Proof of employment and a steady stream of income

However, there are options you can go through in order to get the approval you need for a home loan if you’ve exhausted all your other options, which include going for an FHA mortgage loan. Homeloansforall.com, for example, will help you get approved even if you have bad credit and find the resources you need based on your city and state.

No matter what your credit score may be, the financing options you have in front of you, and what the future may bring, once you are approved for any type of loan, it’s important to keep up with your payments in order to keep the home.

To help keep up with your mortgage payments and be clear of the debt, check out how to pay off your mortgage in 10 years.

Michael Plambeck, founder and owner of Home Loans For All, bridges the gap between its content team and industry team by being an expert in both areas. Michael is a home loan expert who has worked closely with loan officers and realtors for over four years, and who is engaged in constant continuing education to make sure he’s up-to-date on all real estate laws and regulations.