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).

Underinvested in China? How to invest in the “New China” Economy

Posted By Financial Independence Hub | July 28, 2017

Highrises in Shanghai’s new Pudong financial district.

By Caroline Grimont

(Sponsor Content)

Investors are missing out on strong growth opportunities by being underinvested in China: the world’s most populous country and second largest economy.

Since China slowed down from two decades of near double-digit growth, investors have become skeptical about investing in the country.

They worry about the country’s macro challenges; among them, a high leverage ratio resulting from a rapid buildup in debt over the past 10 years, excess capacity in industrial segments, an over-reliance on investment as a growth driver, and more recently, the risks of protectionism.[i]

In our view, these challenges are overstated. China has the capacity to overcome them and has taken a measured approach to sustain its growth, albeit at a slower pace. The Chinese economy has grown almost ten-fold from US$ 1.2 trillion in 2000 to US$ 11.2 trillion in 2016, second in size only to the US. Given the size of China’s economy now, a slower more sustainable rate of growth makes sense.

Our view is shared by Morgan Stanley, which states: “We expect China to avoid a financial shock and achieve high income status by 2027. Our view is that moving to higher value-added activities will propel the economy forward and drive the continued medium term outperformance of MSCI China versus MSCI EM, providing significant investment opportunities.”[ii]

China accounts for almost 50% of global economic growth

China remains one of the fastest growing economies in the world, with a forecasted growth rate of 6.5% in 2017 and 6% in 2018. On a global scale, China represents 15% of the world’s economy and accounts for close to 50% of global economic growth.

Alternative Investments for the Masses

Posted By Jonathan Chevreau | July 27, 2017

Is it time for the average investor to look into alternative investments to the traditional balanced portfolio of stocks and bonds?

In a column in Thursday’s Globe & Mail Report on Business, I look at a relatively new mutual fund from Mackenzie Investments that gives both average and affluent investors a way to diversify their portfolios into alternative investments or asset classes.

You can find it by clicking on the highlighted headline: Alternative Investing for the Masses.

The Mackenzie Diversified Alternative Fund (“MDAF”) is positioned as a low-risk way to diversify beyond the typical “balanced” fund or balanced portfolio of stocks and bonds. As the article says, both traditional stocks and bonds appear pricey at this juncture, and studies show that putting up to 20% of a total portfolio can smooth returns. Indeed, many giant pension funds have far more than that, including such well known pensions as Ontario Teachers and OMERs.

Non-traditional asset classes seen as “alternatives” include private equity, infrastructure, emerging-market debt, limited partnerships and a host of other investments not easily accessed by the average investor. Pension funds can get their own direct access to alternatives but for individuals many were available only through “offering memorandums” available only to those considered sophisticated investors: with $1 million in investible assets or combined annual family income of $300,000.

Low entry point, liquid

By contrast, the Mackenzie fund can be purchased for as little as $500, like most mutual funds, and unlike many hedge funds, can be liquidated on demand like any other mutual fund.

The article goes into the fee issue: the A series has an Management Expense Ratio (MER) of 2.42% and the F series 1.25% (advisors will then tack on their own fee, typically another 1%). But affluent investors get a price break under the Mackenzie Private Wealth Solutions’ preferred-pricing program, with the basic management fee for household wealth in all Mackenzie funds tapering down from 0.8% to as little as 0.5% for $5 million dollar portfolios.

Can you retire on a million dollars?

Posted By Robb Engen | July 26, 2017

In your 20s and 30s, retirement is so far away that you can barely see it on the horizon. The best way to get there is to save what you can afford – say 10 per cent of your income – and then readjust your financial compass as you get closer and have more information.

You might start the journey with the idea that you need a million dollars or more once you reach your destination. To get to one million by age 65, a 30-year-old would need to save $8,500 per year for 35 years, assuming a 6 per cent annual return.

Saving for Retirement

It’s not easy to save $700+ per month in your thirties. Competing priorities like a mortgage, car payments, and raising children often means that retirement savings are put on hold. Put off saving until you reach 40 and you’re now faced with the daunting task of saving more than $1,400 per month for the next 25 years to reach that million dollar mark.

Some might feel it’s prudent to pay off the mortgage and max out children’s RESPs before ramping up their own retirement savings. By age 50, most of those obligations should be taken care of which should now free up significant cash flow to save for retirement. It’ll need to be significant to reach a million. With only 15 years to go now, compound interest is not on your side, and so you’ll need to save nearly $3,400 per month – or $40,000 per year – to get to your retirement goal.

A tempting alternative at this point is to adjust your expected rate of return. After all, with an 8 per cent return you’d only need to save $2,800 per month, and at 10 per cent you’d need to put away less than $2,400 per month.

But the more realistic approach would be to adjust your expected retirement age and then figure out if a million dollars is really the amount you need to enjoy a comfortable retirement. You’d be surprised to learn you can live off much less.

Low future returns? The coming bull market in advice

Posted By Jonathan Chevreau | July 21, 2017

A bull market in advice? This novel idea is the basis of my latest Motley Fool blog, which came out of the 2017 Vanguard Investment Symposium held this Tuesday.

Hopefully, the title is self-explanatory. Click on the highlighted text to access the whole blog: Lower future returns from balanced portfolios means a bull market in advice.

Click through to get Vanguard’s forecasts for future returns. Suffice it to say that they don’t believe the next five years will be as good as the last five years have been for balanced investors.

All of which means good financial advice will be at a premium. Naturally, Vanguard believes that the lower expected future investment returns are, the more important it is to reduce costs and taxes, which of course its low-cost index funds and ETFs facilitate. But it also believes advisors can help investors by addressing the so-called “behaviour gap.” It’s been well documented that poor investing behaviour (buying high, selling low) are destructive to returns, which is why a good financial advisor can more than recoup his/her fees.

Advisors can add 3% value per a year

Many fee-based advisors use the kind of investment funds Vanguard provides and Vanguard believes good advice can “add value” of roughly 3% per year to clients’ investment returns.

Behavioural coaching is the single biggest value-add: 150 basis points (1.5%). “Staying the course is difficult,” but “a balanced diversified investor has fared relatively well,” said one Vanguard presenter quoted in the Motley Fool piece, Fran Kinniry.

Behavioural coaching is followed closely by 131 beeps for cost-effective product implementation (using low expense ratios). This alone can add 1 to 2 percentage points of value, Vanguard says, attributing the finding to “numerous studies.” Rebalancing accounts for another 47 beeps, and Asset Location between 0 and 42 beeps (as opposed to Asset Allocation, which it says adds “more than 0 beeps.”)

A proper spending strategy (identifying the order of withdrawals in the decumulation stage) accounts for another 0 to 41 beeps. All told, the potential value added comes to “about 3%,” Kinniry says.

Vanguard says a “strong move to fee-based” compensation is accelerating. In 2015, 65% of advisors’ compensation came from asset-based fees, while wealthier investors are “most willing to pay AUM-based fees.” Gradually this will ‘flow down” to less well-heeled clients, “as smaller balances can now be well-served” in a fee-based model because of scale and technology.

Using Cerulli data from 2015, Vanguard estimates the median asset-weighted advisory fee is 1.39% for the mass market ($100,000 assets), 1.28% for the middle market ($300,000), 1.09% for the mass-affluent market ($750,000), 0.92% for the affluent market ($1.5 million to $5 million) and 0.70% for the High Net Worth market ($10 million or more).

On average across all clients, the median fee is 1.07%.

Mid-year review of Aman Raina’s Robo Advisor portfolio

Posted By Financial Independence Hub | July 20, 2017

By Aman Raina, SageInvestors

Special to the Financial Independence Hub

As we cross the mid-pole mark in 2017, it seems like a good time to check in on my Robo Portfolio that I created two and half years ago. For those jumping on for the first time, I wanted to try to find out if this new type of investment service which was taking the industry by storm a few years ago does any better job of creating wealth for investors compared to the traditional methods of investing (i.e. Do-It-Yourself or having a professional manage your money on your behalf).

I chose one Robo Advisor company here in Canada and invested $5,000 of my own money. 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 reflected 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. From there ROBO carved out allocations to a variety of equity and bond assets using ETFs to provide the appropriate exposure.

The objective of this exercise is to observe and blog about the whole experience and share with you any unique insights about the service. Most importantly I wanted to see what kind of returns this type of portfolio can generate. My experiment is by no means scientific but I think there is a lot that we can learn about this service if we go beyond the slick websites and marketing to truly look underneath the hood to see how these portfolios are managed.

Performance still reasonable

When we last checked in with my ROBO portfolio in late January, it was chugging along rather nicely, generating somewhat decent returns. It appears to be continuing the trend. Since the start of the year, the ROBO portfolio is up 5.5 per cent. Since I set up the account, the portfolio is up 14.2 per cent. The portfolio is up $298.71 this year, of which $53.59 was in dividend payments. Again, pretty reasonable for me. When you look at portfolio breakdown most of the returns have come from US stocks, Foreign stocks, and Emerging Market stocks.