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).

Real Estate Investing: The good and bad of investing in real estate

Posted By |

By David Miller, CFP, RFP

Special to the Financial Independence Hub

Real estate can be a differentiator in a diversified investment portfolio. But when you watch the pundits in the media and certain TV network shows, as seen on HGTV, buying, flipping or renting a property seems like a sure way to increase your income or get rich quick. As glamourous as it seems when you take a sledgehammer to a useless wall to ‘open up the space’, the reality of making it a marketable investment is often much more daunting. What really is daunting is the sheer number of options you have when it comes to investing in real estate, and the obvious question is:

Does it make financial sense to add real estate to your portfolio?

The Positives

Real Estate does make sense in most investment portfolios but let us back up a little bit here and provide some context:

What are the primary reasons people choose real estate as an investment?

There is something reassuring about investing in real estate, as in the case of owning a rental property. You own a tangible asset and you may feel like you can see the value and the risks just by walking through the property. You may own your home, and assuming you are mortgage free, brings an incredible feeling of security and freedom.

Real estate investing can offer a stable, reoccurring income; after all, ‘who doesn’t pay their mortgage or rent?’ It also carries a fairly high certainty of a higher value over the long term; after all, “they are not making more land” (unless you’re in the South China Sea or Dubai). These are two common positive arguments.

If you look specifically at Canada, there can be times when your rate of return can be incredibly high. We experienced this with Calgary’s real estate boom from 2005-2007. The Greater Toronto Area and Greater Vancouver area from 2015-2018 have seen incredibly high growth and price increases that have been covered extensively through the media.

Real estate investing provides an interesting option that is not directly tied to overall stock market risk, which can provide you with increased diversification. Whether the stock market goes up or down, your real estate price may move independently.

The wealthy endowment funds, private pensions, institutional money and the Canada Pension Plan invest heavily in real estate, private equity and infrastructure projects that average Canadian investors either don’t know about, can’t invest or don’t invest into.

To summarize, the benefits of a real estate investment are that it is a tangible, generally stable income producing, ‘always goes up’ investment and offers other benefits not seen in the stock market. Ready to jump in with both feet? Not so fast. There are some serious pitfalls to understand and multiple options to choose from.

How can I invest into real estate?

  • Buy a rental property (putting at least 20% down)
  • Buy a commercial building
  • Real Estate Investment Trusts (REITs)
  • Exchange Traded Funds (ETFs) of REITs
  • Mutual funds specializing in real estate
  • Private equity or debt (Mortgage pools/investment corps)

Primary Issues

Price Risk

Can real estate values fluctuate? The real answer is yes. Nationally, Canadian housing prices reduced by 4.9% on average in 2018, the worst performance since the 2008 financial crisis. Toronto and Vancouver skew the average price to high side, but even they are starting to fall off their 2017/18 highs and there are obvious concerns of a bubble bursting.

Prices for real estate are difficult to gauge as every property is different and value is in the eye of the beholder. To sell your property, you likely need to employ a realtor to get a starting price and you need to find someone else who agrees on the price to buy. Real estate negotiations can go awry quickly, which causes further delays regarding the liquidity. For this service, there is a sales cost paid to the realtor, usually 7% of the first 100,000 and 3% after, although this can be sometimes negotiated.

In an example of how poor the Calgary commercial real estate market is; this*is an article that explains how the city of Calgary is losing over $300 million in tax revenue every year as downtown core commercial property values have decreased by a collective $12 billion. This is an example of how real estate values can fluctuate to the downside and how unstable a source of income a real estate investment could be.

See the chart below for the relative volatility of the selected Calgary, Toronto and Vancouver markets when compared with the US Equity and Canadian Equity markets. While the annual volatility in the S&P 500 and TSX has been much higher relatively, this chart shows that you could lose out if you sell your real estate holding at the wrong time or pick the wrong city or neighbourhood to invest in.

 

Calgary data via CREB Monthly Average Sale Price “Attached, Detached, Apartment”, Jan 2005 to Dec 2018. Vancouver Data via CREA.ca HPI Tool Greater Vancouver Composite historical price data Jan 2005 to Dec 2018. Toronto Data via CREA.ca HPI Tool Greater Toronto Composite historical price data Jan 2005 to Dec 2018. TSX data via tmxmoney.com price history. S&P 500 data via http://www.multpl.com/s-p-500-historical-prices/table/by-year. The chart above only looks at price change and does not factor the effects of leveraging or reinvestment of interest or dividends.

Liquidity Risk

Liquidity refers to how quickly you can get your money out if you change your mind about your investment. Are you prepared to invest money into a residence only to find out it’s a money pit? What happens when you struggle to sell it when the market turns, and you could really use the extra money for something else? What if there is an emergency and you need those funds and there is no liquidity? If you are buying a stock or ETF on a major open market, the level of liquidity can be measured in volume of shares bought or sold and shares usually change hands instantaneously. While investing in stocks should be a long-term investment, at least you have the option to get out at any time almost instantly. The same is generally true in real estate; however, the liquidity premium is significantly higher. Continue Reading…

Alternative assets in ETFs and mutual funds, including a new one from Franklin Templeton

Posted By |

 

Alternative asset classes like private equity and real estate have long been in vogue with pension funds, institutional investors and some high-net-worth individual investors but the pickings have been slim for retail mutual fund investors. Now, Franklin Templeton Investments Canada has introduced the Franklin K2 Alternatives Fund.

The company says its new mutual fund, announced on Monday, March 11, uses “a multi-strategy approach in seeking to dampen volatility and offer downside protection, while providing added diversification and low-correlation to asset classes typically held in a traditional portfolio.

Franklin Templeton Canada Duane Green pointed to the unpredictable market environment of the past year and said “investors are looking to reduce volatility and protect capital … Our alternatives fund addresses these investor needs and combines the benefits of a sophisticated solution with the liquidity, convenience and fee transparency of a mutual fund.”

In a piece this weekend in the Financial Post, which mentioned the new Templeton fund among others, investing reporter Victor Ferreira said Canadian retail investors looking for exposure to hedge-fund like strategies that can involve leverage and short-selling are being inundated with new options, following a rule change in January. At least six firms have brought so-called “liquid alternative” products (some of them ETFs and some of them mutual funds from firms like Mackenzie and C.I. Funds) to market since regulations barring them from doing so were lifted at the beginning of 2019. Prior to the regulations being altered, he said, only a few firms were able to offer such products after applying for exclusions.

As the Post pointed out, some alternative assets — notably real estate and private equity — are seldom easily liquidated if you need some cash. It cited a 2018 Scotiabank report that projects the Canadian market for these kind of products could grow to be worth $20 billion.

According to Franklin Templeton marketing documents, alternative asset classes or hedging products can improve return potential without significantly increasing risk. It describes three possible “buckets” investors can choose from: traditional Equity Beta or “Risk On,” traditional Bond Beta or “Risk Off” and Alpha Alternatives, or “Risk Uncertain.” It said Alternative Assets can also protect client assets during declining equity markets. In addition, Alternatives have “held up well in weak bond markets.”

Green told the Post that the new Franklin Templeton fund gives investors access to three different strategies: the fund will index 50 hedge funds and aim to replicate their returns. On the long/short side, the fund will also identify the most popular stocks that alternative asset managers are buying and take long positions in them while shorting S&P 500 or futures contracts and any individual names it deems unattractive. Thirdly, the fund will target risk premia.

Or, in the language used in the Franklin Templeton press release: Continue Reading…

Solving the home country bias in Canadian portfolios

Posted By |

Canadian investors tend to suffer from home bias – a preference to hold more domestic stocks over foreign equities. This is actually true of investors in most countries, but it’s particularly troubling in Canada where our stock markets are highly concentrated in the financial and energy sectors.

The federal government could be partially to blame for our home bias tendencies. As recently as 2005 the government imposed a limit on the amount of foreign content allowed in RRSPs and pension plans. This cap was introduced in 1971 to help support the development of Canada’s financial markets but was scrapped in the 2005 federal budget, freeing Canadians up to invest abroad.

Sizes of World Stock Markets

It’s well known that Canada makes up less than 4 per cent of global equity markets (2.7 per cent, to be exact), yet 60 per cent of the equities in Canadian investors’ portfolios are in domestic securities.

Even most model ETF and index fund portfolios have Canadian investors overweighting domestic equities, holding anywhere from 20 to 40 per cent Canadian content.

Canadian home country bias

The result is a portfolio that is more volatile and less efficient than one with international equity diversification. Indeed, investors with a Canadian home bias are taking risks they could have diversified away by increasing their allocation to global equities.

My two-ETF portfolio

So how does my portfolio stack up? When I switched to my two-ETF solution, made up of Vanguard’s VCN (Canadian) and VXC (All World, ex-Canada), I chose to have an allocation 20-25 per cent Canadian stocks and 75-80 per cent international stocks.

That allocation would be relatively easy to monitor and rebalance if it was simply held in my RRSP. Whenever I added new money to my RRSP, I’d simply buy the ETF that was lagging behind its initial target allocation.

But I complicated things recently when I started contributing again to my TFSA. I wanted to treat my TFSA and RRSP as one total portfolio and keep the same asset mix in place. Since my RRSP was much larger than my TFSA, I decided to hold mostly foreign content (VXC) in my RRSP while putting Canadian stocks (VCN) in my TFSA.

This worked out great for several years but now I’ve run into a second problem; I’m contributing to my TFSA at a much faster pace than my RRSP. That’s because I’ve maxed out all of my unused RRSP contribution room and, due to the pension adjustment, I get a measly $3,600 per year in new contribution room.

Meanwhile I still have loads of unused TFSA contribution room and so I’ve been socking away $12,000 per year for the past two-and-a-half years. I hope to continue at that pace for many more years until I’ve completely caught up on all that available contribution room.

The result is a portfolio that is becoming increasingly more tilted to Canadian equities. At this rate, if I continue filling my TFSA with VCN, my portfolio will have more than 30 per cent Canadian content in five years, and nearly 40 per cent Canadian content in 10 years.

My Home Bias Solution

I’m considering a change to my two-fund portfolio. With the introduction of Vanguard’s new all-equity asset allocation ETF – VEQT – I could turn my two-fund solution into a true one-fund solution and make investing even more simple. Continue Reading…

Aman Raina’s 4-year Robo Advisor review

Posted By |

 

By Aman Raina, SageInvestors

Special to the Financial Independence Hub

Four years ago, Obama was President of the United States and Stephen Harper was Prime Minister of Canada. A Liberal was running America and a Conservative was running Canada. The New England Patriots were still making it to the Super Bowl, even winning a few…

…and I had opened my Robo Advisor account.

Yes it been a full 4 years since I opened up my Robo Advisor account. For those new to investing, a Robo Advisor is a new wave of wealth management companies that invest on behalf of others using an online platform and a combination of algorithms and computer coding to buy and sell specific investments and manage portfolios. Four years ago these firms were just stepping into the investing conciousness, but since then they have mushroomed and even traditional investment companies are now offering some flavor of online investment management services. It all seemed quite appealing however there was one thing that many marketing materials, blogs, and mainstream media was avoiding (and still are I might add)…do these types of services make money for investors?

Since no robo advisor company back then was interested in disclosing their performance (they still avoid it) other than citing research that their strategy is superior, I decided four years ago to try an experiment and find out for myself. I setup an account with one of the big Robo Adviser firms. My goal was to go through the process and blog about my experience and more importantly, the results. I’ve always said that we need a good five years to really get a handle on how effective these services are compared to traditional wealth management services. Well, we’re at the 80% mark of my ROBO journey, so let’s check back in and take a look at how it’s doing now and see if we can squeeze any conclusions about the service.

In previous years, I have stated that for us to get a real handle on their effectiveness, we need to see these robo-portfolios experience some stress. Up until 2018, the markets have been quite tame. We’ve seen how these portfolios operate in a period of rising stock prices. In 2018 we finally hit some periods where there were major swings in stock prices around the world. In February we saw the Dow Jones on several days drop more than 1000 points and in December we had the Christmas Eve Massacre where stock prices fell off a cliff creating a lot of hand wringing over the Christmas break. Finally meaningful, although short-term stress points for the ROBO portfolio.

Performance

Below is the current status of my ROBO portfolio as of January 30, 2019 and below that is the chart of annual returns over the past four years.

My ROBO Advisor portfolio as of January 30, 2019

My ROBO Advisor portfolio as of January 30, 2019

ROBO Portfolio Annual Return

(annual returns)

 The first year was a rough one for ROBO as it had lost 2.15 per cent. In the second year and third year, ROBO picked up its game. The portfolio generated a 13.2 per cent return in Year 2 and in Year 3 it posted another solid year with a 14.2 per cent return. In 2018, the portfolio pulled back going down a total of 2.1 per cent. The loss was tempered by dividends, where the portfolio generated $142.91 in dividend income. The ROBO was also saved a bit by a strong rebound in stock prices in January coming off the correction in December. The losses could have been much worse. Considering the largest component of the ROBO portfolio was concentrated in US and Canadian stocks and where the S&P500 and TSX/S&P Composite were down 6.3 and 11.7 per cent respectively in 2018, a 2.1 per cent drop is very reasonable. I lost money but not as much. Since January 2015, the portfolio is up 22 per cent over the last 4 years.

Asset Allocation

When I set up the account I answered a series of questions about my financial literacy and risk tolerance. ROBO took my responses and crafted a portfolio that it felt was compatible with my profile. As I am pretty experienced with investing and have a long-term investment horizon, ROBO determined that a portfolio mix of 85 per cent stocks and 15 per cent bonds would work for me. It has since then retained the same stocks/bonds ratio.   Continue Reading…

Should you start an E-commerce business?

Posted By |
Image via Pexels

By Gloria Martinez

Special to the Financial Independence Hub

Do you want a job where you can work from home, set your own hours, and earn a virtually limitless amount of money? If you answered “yes” and you’re decently tech-savvy, e-commerce could be the perfect fit for you. E-commerce can be any type of online business transaction, but most of the time, it refers to online shopping.

Why e-commerce?

Skyrocketing rents and a shift toward online shopping has brought about the demise of many brick-and-mortar businesses. Unable to compete with the low prices of big-box retailers, mom-and-pop shops are shuttering their doors. Even big-box brands are suffering as their limited inventory fails to keep up with ecommerce giants like Amazon.

With e-commerce, entrepreneurs can avoid these small-business pitfalls. It’s no mystery that hosting a website is far cheaper than maintaining a brick-and-mortar store, and the rise of dropshipping has rendered the need for massive warehouse space obsolete.

Is e-commerce profitable?

E-commerce isn’t a guaranteed path to success by any means. Countless online stores open and close without registering a blip on consumers’ radar. However, stores that do well do very well. An analysis from RJMetrics found a typical ecommerce store generates $63,000 in monthly revenue by its third month. By year three, that number jumps to $352,000 a month.

How to make money in e-commerce

Setting up a successful e-commerce site requires three things:

1.) An in-demand product

Every e-commerce store needs a niche, but it can’t be just anything. Your niche needs to be something shoppers actually want to buy. However, it shouldn’t be the hottest thing on the market either or it will impossible to stand out.

Complete keyword research to find what consumers are searching for, then narrow down your search until you find a micro-niche with a profitable market. Make sure it’s a product you’re genuinely interested in. If you’re selling something you know nothing about, you’ll have a hard time making a compelling pitch to potential customers.

Once you’ve found your niche, have a plan to keep your inventory fresh. If your store has limited offerings, shoppers won’t keep coming back for more. Rotate your inventory on a schedule that makes sense. If you’re dropshipping wholesale clothing, change your inventory with the seasons. If you’re selling video games, make sure your site reflects the newest releases. Remember: It’s much easier to sell more stuff to an existing customer than it is to find new ones.

2.) A great website

Nothing kills an e-commerce site faster than a website that’s not user-friendly. Resist the urge to DIY your site to save money. A clunky website will lose you far more money than it saves. A good e-commerce site instills trust in shoppers, makes products incredibly easy to find, and executes an effective sales funnel. Web Designer Depot gives an excellent rundown of what goes into creating a high-quality ecommerce site. Continue Reading…