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).

Dividend investing vs Index Investing (& Hybrid strategies)

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By Bob Lai, Tawcan

Special to the Financial Independence Hub

Dividend vs Index + Good reads from the PF community
Image courtesy Tawcan

 

Ahh, the age-old debate… dividend investing vs. index investing. Is one better than the other?

Well, like any good debate, there is much evidence that can support both sides of the argument.

For example, dividend investors will quickly point out that over the long term, dividend stocks return better than non-paying dividend stocks.

SP500-and-SP-500-with-Dividends-Reinvested-Returns-Chart

On the other hand, index investors will point out that dividends are irrelevant.

I’m not going to argue which one is better on this post, but you can probably figure out where we stand given we are hybrid investors.

When it comes to investing, it’s super easy to just take all the numbers, plug them into the different formulas, and analyze the results to the nth degree. There have been a lot of books on how to invest based on mathematical formulas or theories.

They are all good and all, but I would argue that investing in real life is very different than running mathematical analysis.

30% investment strategy vs 70% psychology

In my short +15 years of DIY investing career, I have come to realize that investing in real life is not just about investment strategy and analysis. Rather, I believe investing in real life is about 30% investment strategy/theory and 70% psychology.

Psychology plays an important role in deciding whether your investment is going to be a success or a failure. It is also the number one reason why people end up buying high and selling low even though they should be doing the complete opposite.

When your hard-earned money is melting away faster than ice cream on a sunny day, all you care about is preserving whatever money you have left, so you end up selling low on emotion. On the other hand, when stocks are going higher and higher and you’re seeing everyone and their dogs making money hand over fist (and paw ha!), you want to get in on the action as well, so you end up buying high on emotion. Continue Reading…

The revival of the 60/40 rule: Good for brokers, but not for investors

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The revival of the 60/40 rule is a plus for brokers – but not for investors

Image by Pexels: RDNE Stock Project

Some experienced brokers (now more often referred to as investment advisors) are pleased at the recent rise in interest rates and inflation. After all, it could lead to a revival of the 60/40 rule, which was in common use for much of the second half of the 20th century, especially among experienced stockbrokers. Veteran brokers understood how to use it to spur clients to do more trading between stocks and bonds, and pay more brokerage commissions and fees.

The 60/40 rule is based on the proposition that a good-quality, balanced portfolio is made up of 60% good-quality stocks and 40% good-quality bonds. This idea leads to another: that investors can enhance their results by “rebalancing” their portfolios when they get away from that 60/40 goal, due to divergences between the bond and stock markets.

This is one of those clever ideas that at first glance, seems to make sense to many investors. It makes sense to brokers because it’s sure to make money for them. The payoff is rather less certain for the paying customers: the investors.

The problem is that stock and bond prices rise and fall under the influence of ever-changing sets of random factors: sometimes moving them in the same direction, other times moving them apart. These sets of random factors will vary in a random fashion as well. The stock/bond balance in a portfolio can hold steady for long periods, or swing abruptly from the “ideal” 60/40 split in a single day. This can happen even on a quiet day with few news developments to promote buying or selling.

The 60/40 rule gives the broker a rationale for proposing trades in a portfolio when changes in stock and bond prices have moved the portfolio away from the idealized 60/40 split.

This leads to another of the many conflicts of interest that exist in the investment business. However, unlike the hidden bond commissions I mentioned above, some brokers made a living out of the 60/40 rule. In my days as a broker, some old-timers in the office told me they could use the rule to add 2% to 4% of a client’s total portfolio to their gross annual commissions.

Any trade in your portfolio will cost you money in the form of fees and/or commissions, regardless of whether you make or lose money. But every trade you do in your portfolio will make money for the brokerage firm and/or salesperson, of course. That’s how they get paid.

Useless as a market indicator, great as a marketing device

We’ve often pointed out that market indicators sound a lot better than they perform. The 60/40 rule falls a step or two below an indicator. Rather than telling investors how they can make money in their investments, as market indicators supposedly do, this rule tells brokers and financial advisors how they can encourage their clients to do more buying and selling in the market, and thus increase broker incomes.

After all, the rule is based on a belief about the supposed advantage of a particular ratio of stocks to bonds in a portfolio. It’s not as if the rule comes with instructions on when to buy or sell, as you can derive from many market indicators. Instead, it gives brokers a rationale for advising their clients to buy bonds and sell stocks (or vice versa) more often. Continue Reading…

A Year in Review & Beyond: Navigating Curveballs and Embracing the Future

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By Alizay Fatema, Associate Portfolio Manager, BMO ETFs

(Sponsor Blog)

As we begin the new year, it’s only fitting to cast a retrospective gaze in 2023 and unravel the pivotal moments that altered the landscape of the global markets. 2023 was a year where several themes dominated the global economy while it was still recovering from the aftershocks of the COVID-19 pandemic.

Looking in the rear-view mirror, some of the key contributors to financial markets volatility were the banking crisis, inflation concerns and central banks monetary tightening policies, rise of the artificial intelligence and geo-political risks stemming from the ongoing wars.

Unveiling the Banking Turmoil

Unlike the subprime mortgage crisis of 2008 that was triggered by risky mortgage lending practices, the banking upheaval of March 2023 started owing to deficiencies in risk management and lack of proper supervision which ultimately caused multiple small-medium sized regional banks to fail in the U.S.

During the month of March 2023, Silvergate Bank, Silicon Valley Bank and Signature Bank faced bank runs over fears of their solvency and collapsed [1][2]. As a result, share prices of other banks such as First Republic Bank (FRB), Western Alliance Bancorporation and PacWest Bancorp plunged. FRB was later closed, and its deposits and assets were sold to JP Morgan Chase. Internationally, the jitters of the US banking crisis spilled over into Switzerland, where Credit Suisse collapsed owing to multiple scandals, and was acquired by its competitor, the UBS Group AG, in a buy-out on March 19, 2023 [3].

The Federal Reserve (Fed), Bank of Canada (BoC), European Central Bank, and several other central banks announced significant liquidity measures to calm market turmoil and mitigate the impact of the stress [4].

The Interest Rate Hiking Odyssey

Deeming inflation as transitory during 2021, central banks finally embraced inflation as a persistent problem and engaged in interest rate hiking saga starting from March 2022 which continued into 2023. These aggressive rate hikes had a significant impact on the financial markets as they made borrowing more expensive and led to record high bond yields. The chart below shows that the Fed conducted multiple hikes to bring the rates to 5.5%, highest level in more than 22 years [5]. BoC also increased its policy rate to 5% in a similar fashion.

Any “good news was bad news” in 2023 as robust labour market and resilient economic growth meant that central banks would have to keep interest rates higher for longer to the detriment of equities. Given the effect of monetary policy changes are subject to a lag, we would have to wait and see the full impact on the economy in the coming months.

The Rise of Generative Artificial Intelligence (AI) reshaping the future

2023 left an indelible imprint on the trajectory of technological evolution due to the rise of artificial intelligence and its profound effects that reverberated across numerous industries. We witnessed a pivotal juncture in the progression of generative AI in 2023 ever since Open AI released ChatGPT on November 30, 2022 [6], and within a few months it became one of the fastest growing applications in history and created a massive frenzy in the tech world. Despite concerns about the repercussion of higher interest rates in 2023, investors’ enthusiasm for AI took centre stage and the Nasdaq 100 index achieved the best year in over a decade owing to a stellar performance of the leading tech companies.

The Ascendance of Money Market ETFs in an Uncertain Financial Landscape

Assets in money-markets, high-interest savings accounts (HISAs) and other cash-like investments reached an all-time high during 2023 after the most aggressive monetary tightening cycle that was started by the Fed & BoC in 2022.  There is nearly $6 trillion parked in these funds and cash deposits in the U.S. [7], and over $25 billion in cash and HISA ETFs in Canada.

Yielding over 5%, these money market funds attracted retail investors, serving as a great avenue to park cash with guaranteed liquidity, minimum risk, low volatility, and flexibility. However, the recent shift in the Fed & BoC stance is signaling the end of the tightening campaign and projecting rate cuts in 2024. The latest ruling by office of the Superintendent of Financial Institutions (OSFI) to uphold 100% liquidity requirements on HISA ETFs may impact the dynamic of these money market/HISA funds during this year.

Geopolitical Risks amidst two Ongoing Conflicts

2023 went down in history as being a year marked by two big wars: an ongoing conflict in Ukraine that started in 2022 as it fights off a Russian invasion and the outbreak of violence in the Middle East in October 2023 between Israel and Hamas [8].

Fear of potential escalation in the Middle East conflict and prospects of the war spilling over in the wider region added to uneasiness in the markets as the region is a crucial supplier of energy and a key shipping passageway. The market reacted to the news of the conflict by shifting towards safe-haven assets as this unforeseen geopolitical event increased uncertainties [9].

Dodging Recession, Double Digit Equity Returns and a Comeback in Fixed Income

During 2023, many investors feared that higher-for-longer interest rates would trigger a recession in the U.S and would take a toll on corporate profits and bond returns. As the Fed embarked upon the most aggressive rate hiking cycle, the yield curve inverted, sending a classic warning signal of a looming recession.

Moreover, the U.S. Institute for Supply Management’s (ISM) manufacturing index dropped below 50 in November 2023, indicating a contraction in manufacturing activity. Despite having the highest prediction of a recession with heightened volatility in the markets throughout 2023, the US economy avoided recession and equities posted double digit returns. Moreover, fixed income rebounded in 2023 and reported positive returns after persistently declining for two years, thanks to the bond rally in the last two months of 2023 as markets priced in rate cuts for early 2024.

The Canadian economy also dodged recession, largely attributed to substantial immigration which bolstered overall spending and economic growth. However, the GDP per capita declined, indicating that spending hasn’t matched the influx of newcomers primarily due to the increasing costs of home ownership and rent further exacerbating the housing crisis.

 

“Index returns do not reflect transactions costs, or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.”

 Could 2024 be the Year of Fixed Income?

After having a humbling experience in 2023, the market consensus has now shifted for 2024 with the majority of fund managers in the U.S. expecting a soft landing for the economy [10], which might fuel rate cuts now that the sky-high inflation is subsiding and heading down towards the Fed’s & BoC’s target.

The chance of higher policy rates going forward is slimmer and the potential for rate cuts in 2024 is much stronger if inflation cools off further, the labour market weakens, consumer demand diminishes, and economic growth slows down. Both central banks indicated that future policy decisions will be data dependent and any rate cuts in 2024 will be contingent on inflation cooling off meaningfully, i.e., in line with their 2% target.

The market is currently anticipating rates to remain elevated till Q2 of 2024 as the labour market still seems robust and the December Consumer Price Index (CPI) print pushed the expectation of rate cuts even further. Continue Reading…

Where does the Tech Sector stand after Winter Earnings Season?

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By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Content)

The technology sector has put together a strong performance in the year-over-year period as of early afternoon trading on Tuesday, February 6, 2024.

For example, the S&P 500 Information Technology Index has delivered a year-over-year return of 47% at the time of this writing.

The tech sector, and the United States stock market at large, has been dominated by the performance of the “Magnificent 7” in 2023 and early 2024. The “Magnificent 7” are Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla. Today, we’ll explore the performance of two big names and get a handle on the tech sector at large after many of the biggest names have unveiled their final batch of earnings for fiscal 2023.

“Tech companies have generally managed to report solid earnings so far this quarter,” says Harvest ETFs Portfolio Manager James Learmonth. “That highlighted continued strength in spending on artificial intelligence initiatives. In the shorter term, there has been a significant run in the sector over the past year and while there exists some potential for a consolidation period, momentum has continued, and the growth drivers remain in place.”

James Learmonth manages the Harvest Tech Achievers Growth & Income ETF (HTA:TSX). This ETF seeks to tap into large-cap tech companies that now lead this sector. HTA holds those leading companies to deliver both income and the growth opportunities investors seek in tech.

Which tech company’s earnings beat expectations in the winter of 2024?

Meta Platforms, which is one of the premier equally weighted holdings in HTA, unveiled its fourth quarter (Q4) and full-year fiscal 2023 earnings on Friday, February 2, 2024. The company reported adjusted earnings per share (EPS) of US$5.33 on revenue of US$40.1 billion in the final quarter of fiscal 2023: up from reported revenue of US$32.2 billion in Q4 FY2022. It beat analysts’ expectations with its Q4 2023 performance.

The company delivered advertising revenue of US$38.7 billion, which also beat analyst projections. Moreover, Meta reported 2.11 billion Facebook daily active users (DAUs). Ad impressions rose 21% from the prior year while the average price per ad declined by 2%. Meta also announced an additional $50 billion in share buybacks and its first-ever quarterly dividend payment.

Microsoft also put together a very strong earnings report. The multinational technology giant delivered revenue growth of 18% year-over-year to US$62.0 billion in the quarter ended December 31, 2023. Meanwhile, operating income jumped 33% to US$27.0 billion. Net income rose 33% to US$21.9 billion while non-GAAP net income delivered 26% growth. Diluted earnings per share (EPS) were reported at US$2.93 – up 33% compared to the previous year.

Shares of Microsoft have jumped 13% in the year-to-date period as of late morning trading on Friday, February 9, 2024. Meanwhile, Meta Platforms stock has surged 36% over the same period. These are the kind of equities that HTA seeks to harness to fuel growth and provide income through covered calls to Unitholders.

Where the tech sector is headed going forward

While this period of impressive earnings is encouraging, Portfolio Manager James Learmonth is monitoring any changes in momentum that “could come from the risk of a pause in spending at some point as companies ‘digest’ the equipment purchased over the past 12 months or so from the roll-out of new products … Many end user focused companies have yet to definitively demonstrate that they can effectively monetize AI solutions to the degree currently expected by investors. That is why we want to own the best-in-class companies that have proven platforms to capitalize on the long-term trend.”

He continued: “We remain positive on the sector over the intermediate to longer term. Growth drivers, such as artificial intelligence, cloud-based infrastructure, and other digital transformation initiatives, continue to drive spending. Cybersecurity also remains a key area of investment in an increasingly connected world, particularly given today’s geopolitical climate.”

How HTA is positioned in the current climate

At the time of writing, HTA has 40% exposure to software as a sub-sector, 29% in semiconductors & semiconductor equipment, and 10% in communication equipment. In June 2023, Bloomberg Intelligence projected that Generative AI had the potential to become a US$1.3 trillion market by 2032. The increased demand for generative AI products could add about US$280 billion of new software revenue, according to the research report. Continue Reading…

Can Bitcoin work alongside Traditional Currencies?

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Image from Deposit Photos

By Alain Guillot

Special to Financial Independence Hub

Compared with fiat money and other legal tender, can Bitcoin work to benefit our everyday lives? This is a loaded question, to say the least, with some complex answers, mainly due to the nature of crypto itself. Can BTC beat inflation? And how can you use it in life? Here, we explore.

Bitcoin and Fiat Legal Tender

Fiat money is a currency that is declared legal tender by a country. Think the British pound, the US dollar, and the Euro. These are mainly backed by the country’s gold reserves, known as the gold standard, except for the US dollar, which is backed by the United States’ oil reserves. Yet Bitcoin is becoming legal tender in some countries because of its inherent value. This article by Jonathan Martin explores the backing of Bitcoin in El Salvador if you want to know more.

Will Bitcoin Work to Beat Inflation?

Inflation has been almost out of control for a while now and shows little sign of slowing in some countries. Yet Bitcoin can be something of a hedge against inflation as its price often decreases with high inflation. This makes for interesting investments as you wait for the price to rise and offset any inflationary losses during the period and over the long term. However, it is also notable that Bitcoin itself does experience its own times of inflation but cannot be manipulated.

Beating the Banks

If you have ever sent money overseas, then you know it can be expensive and isn’t always quick. All banks place a relatively high fee on international bank transfers, and it can be slow at the weekend and during holidays. Bitcoin doesn’t experience these issues. And while there is often a fee, it is comparatively low, and transfer is almost instant at any time. This makes Bitcoin an excellent method of both paying for goods and services and receiving money for your own.

The Pros and Cons of Bitcoin Today

Bitcoin can be a great alternative to traditional fiat payments and is widely known as a good investment. But it isn’t without its risks. So, here are some documented pros and cons:

Pros

  • Bitcoin offers a high degree of anonymous data for its users and is transparent.
  • There is no centralized banking system controlling Bitcoin or cryptocurrency.
  • The returns on an investment can be massive if you invest at the right time.

Cons

  • The investment opportunities of BTC are extremely volatile, with long, low periods.
  • There is no government oversight as to how Bitcoin and crypto operate.
  • Even today, there is limited use potential for Bitcoin for most everyday people.

Bitcoin has its uses and is somewhat more secure than money. Given it is relatively new, there are limitations as to how you can use BTC and other cryptocurrencies in daily life.

How Accessible is Bitcoin?

Bitcoin is known as a very accessible medium of payment. Anyone can use it, and anyone can trade it. This is because there is no single entity that controls Bitcoin, even centralized global banks. However, while most developed nations allow Bitcoin, it is worth noting that Bitcoin is banned in some countries. Rather unsurprisingly, these include China and Saudi Arabia. It is also regarded that last year’s dramatic drop in BTC value was caused by China’s actions. Continue Reading…