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).

Vanguard: The hidden $1.3 trillion player in active management

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Vanguard’s Daniel Wallick addresses financial advisors at 2018 Vanguard Investment Symposium

While the Vanguard Group is best known for being a pioneer of index mutual funds and exchange-traded funds, it also happens to be one of the world’s largest practitioners of active management. In a presentation Tuesday in Toronto that is taking place across the country, Vanguard executives said the US$5 trillion of money it manages worldwide includes $1.3 trillion in active management.

Vanguard Investment Strategy Group’s Head of Multi-Asset Portfolios, Daniel W. Wallick, presented financial advisors with a framework for constructing portfolios that combine active and passive approaches to investing. The heart of Vanguard’s approach remains broad cap-weighted indexes (or so-called Beta), which is what Vanguard says it means when it uses the term “indexing.”

For many investors, the broad diversification, low costs and tax efficiency of its mainstream index funds and ETFs may suffice.

But, depending on the desired complexity, Vanguard can incorporate “factors” like momentum, value, or liquidity, all factors that have shown a persistency for generating alpha (outperformance) over long periods of time. Beta and Tilts (to for example, overweighting the home country or large market caps) can be combined for the single most important task of Strategic Asset Allocation but overlaying this can be the addition of potential “Alpha” sources like Security Selection and Timing.

“Strategic asset allocation through market-cap-weighted indexes makes for a powerful tool,” Wallick said. And over 10-year periods, asset allocation policy continues to be the biggest source of variations in returns. Asset allocation explains 86% of return variation in 303 Canadian balanced funds tracked by Vanguard, 91.1% of 709 balanced funds in the U.S., 80.5% of 743 balanced funds in the UK and 89.1% of 580 balanced funds in Australia.

Cost trumps talent, patience is crucial

The 3 keys to successful active management = long-term performance

Vanguard sees three keys to successful active management: Cost, Talent and Patience. Wallick described the in-depth process Vanguard uses to select subadvisors for its actively managed funds but hiring talent has to be within strict cost-control parameters.

“Cost is a powerful indicator of future alpha.” But once the talent has been identified and hired, patience is required: Vanguard research over 15 years found that of 2,200 initial funds, 22% survived and outperformed, 24% survived but underperformed, and 54% did not survive. But even among the 22% that survived and performed, 98% of them underperformed in at least four years.

By focusing on both low costs and rigorously overseeing actively managed subadvisors, Vanguard multi manager funds have outperformed their Lipper peer-group averages by various percentages: 78% of them over 1 year, 83% of them over 3 years, 76% of them over 5 years and a whopping 100% over 10 years.

Factor-based funds vs traditional active funds

There is a half-way position between traditional beta-based Style index funds and ETFs and traditional active funds. The former (Beta) provide low cost, low turnover and lower tracking error while traditional active funds provide the opportunity to add alpha, albeit at a higher cost, potentially greater volatility, and less transparency and control. Between these are factor-based funds and ETFs, which provide consistent targeted exposure as well as low cost, but may have higher tracking error and potentially higher turnover. Continue Reading…

Subsidizing China’s Superpower aspirations

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By Jeff Weniger, WisdomTree Investments
Special to the Financial Independence Hub
 
Christine Lagarde, head of the International Monetary Fund (IMF), has warned that China’s Belt and Road Initiative, the potentially multitrillion-dollar network of roads, rails, pipelines and other infrastructure across Eurasia, risks saddling unstable governments with unpayable debt. Because of the IMF’s concerns, it plans to fund the China-IMF Capacity Development Center (CICDC) to train the Chinese to minimize the headaches in this century’s Marshall Plan. If all goes according to plan, the Belt and Road Initiative will connect land- and sea-based trading routes to cement China as the center of global commerce in a decade or two.

While China appears to be ascending into world superpower status sometime in the coming decades, a $100 investment in “global” equities allocates just $3.51 to the country if we track an index like the MSCI All Country World Index (ACWI).1 That’s not far from Canada’s weight, and it seems remarkably low for a country that is going head-to-head with the U.S. on the global stage.

It was only last year that MSCI added Chinese A-shares, companies listed in Shanghai and Shenzhen, to its MSCI Emerging Markets Index. That is late for an economy whose size surpassed the U.S. in 2014, at least on a purchasing power parity (PPP) basis (see figure 1).

Figure 1: China & U.S. Share of Global GDP

China and U.S. Share of Global GDP

Covering China, wherever the listing

While some Chinese companies are available only in Shanghai or Shenzhen, others are listed solely in Hong Kong. Still others have American depositary receipts (ADRs) or are traded in Singapore.

Our TSX-listed exchange-traded fund, WisdomTree ICBCCS S&P China 500 Index ETF (CHNA.B), tracks the ICBCCS S&P China 500 Index, covering stocks in all those bourses. Its index is currently over 50% in local A-shares. MSCI, by contrast, is only starting to add A-shares securities up to a 5% inclusion factor in 2018, a small starting point. It’s high time China has its own S&P 500, especially if President Xi Jinping has anything to say about it.

Going Out

Deng Xiaoping, ruler of China from 1978 to 1989, famously advised his country to “hide your strength, bide your time.” China’s great goal for the last four decades — development, development, development — was to happen quietly, with fingers crossed that the U.S., Japan and Western Europe wouldn’t get too frightened. Continue Reading…

How much will my Defined Benefit pension pay In Retirement?

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I contribute to a defined benefit pension plan at work. How much will I get from the pension plan in retirement? That depends on when I retire or leave the plan. Hang on, we’re about to get math-y.

Normal retirement age is 65 and I joined the pension plan in 2009 at age 30. Retiring in 2044 (the year I turn 65) would give me 35 years of pensionable service.

The pension plan has a retirement calculator on its website. Curious about the amount of retirement income I’d receive at various ages, I took a look. The calculator just needed a couple of inputs: current salary, plus an assumption for future annual salary increases (I used 2 per cent).

Retiring at age 65 would max out my pensionable service and give me an annual retirement income of $46,000 in today’s dollars. Continue Reading…

Thinking about retirement? Here are 2 two key income sources to expect

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By Scott Ronalds

Special to the Financial Independence Hub

If you’re at the point where you’re starting to think seriously about retirement, you’re probably wondering how much money you’re going to need to enjoy life after work, and where it’s going to come from.

Everybody’s wants and needs are different, so there’s no magic number as to how much you should have saved by a certain age. Plus, the face of retirement has changed significantly, with many people working part-time into their seventies and eighties, and others hanging it up in their fifties.

That said, by making a few assumptions, we can give you a rough estimate of what you can expect from government sources and your portfolio when you decide to retire.

The basics

To keep it simple, we’ll use a scenario which assumes you’re 65 and plan to fully retire from your job this year. A few other assumptions:

  • You don’t have a pension plan with your employer.
  • You’re eligible for full Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.
  • You have an RSP that you plan to convert to a RIF this year, and you plan to take the minimum required payments (which will start next year) from your account. (Note: you aren’t required to convert your RSP to a RIF until the calendar year you turn 71, but you can convert at any age before 71 if you choose).
  • You don’t have any other investments or sources of income.

First off, let’s look at what you’ll get from the government. You can expect monthly CPP payments of roughly $1,114 ($13,370/year) and OAS payments of about $578 ($6,936/year). In total, you can plan on collecting about $1,690 a month, or just over $20,000 a year. These amounts are indexed to inflation. You can decide to defer taking CPP benefits until you’re older, or take them earlier, in which case your benefits will be increased or decreased, respectively. You can also defer taking OAS to receive a larger monthly benefit.

More than likely, this isn’t going to cover your living expenses or fund the lifestyle you want in retirement. So you’re going to need to rely on your portfolio to cover the shortfall.

RIFing it

Converting your RSP to a RIF means your minimum withdrawal next year will be equivalent to 4.0% of your portfolio’s year-end market value. This figure is based on your age, 65, at the end of the current calendar year. Continue Reading…

Marketing for your Side Hustle

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By Christina Sanders

Special to the Financial Independence Hub

You may be running a small business on the side to achieve financial independence. These side hustles can be anything from lawn mowing to website design. No matter what your side hustle is, you’ll need marketing to gain new customers. It doesn’t have to cost you an arm and a leg either. There are plenty of options and methods for promoting your business through cheap, yet effective means.

1.) Focus on local markets

In marketing, there is a constant focus on target markets. These are the people that you want to buy your product or service. They’re the people most likely to buy your product because it solves a problem they have or they trust it to improve their life. This comes down to not only geographics, but also demographic data focused on income level, family size, interests, gender, and age. All these factors will help you to hone in on who you should spend your marketing efforts on.

For a small business, it’s likely best to focus on your surrounding geographic area. Utilizing a local market is usually less expensive and you have a competitive edge by being based in the same region as your customers. That geographic intimacy provides a better understanding of local culture, including common pain points and values. Use that to speak to your potential customers on a more personable level.

2.) Design distributables

You’ll likely want to make some business cards and flyers for your business. Digital marketing is crowded, often difficult, and can be expensive. Physical distributables are very effective, especially in local markets. They can be passed for referrals, posted on community boards, and distributed through mail. If you’re unsure about how your design should look, check out some flyer examples and look at what other businesses have done. There are simple and free online programs for designing flyers, brochures, and posters. Simply do a Google search to find one that works for you.

Having a personal brand in your advertisements goes a long way. You can build trust and confidence with your potential customers by having high-quality designs and messaging. Your brand should represent what values you and your customer both deem important. Having brand consistency will be important for becoming recognizable and memorable in your community. So don’t ever settle for less than high quality, because your brand defines what people will think of your service.

3.) Create a website

People may hear about your business and then wonder more. Where will they likely go? The internet. You need a webpage that answers questions they will likely be wondering and that drives further interest.

This doesn’t have to be difficult. Sites like Wix.com make it easier than ever to build your own website based on beautifully designed templates. Make sure you choose a website design that values ease of use over anything else. Make it incredibly simple for your customers to understand exactly what you do and any other information that would be valuable to them. This is called UX, which you can research online for a more in-depth understanding. Continue Reading…