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).

Some tough questions for the financial advice industry

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JustWealth Andrew Headshot
Andrew Kirkland, JustWealth

By Andrew Kirkland

Special to the Financial Independence Hub

The Canadian financial advice industry is facing some existential challenges. Over the past decade, the investment sector has seen a slow decline in best practices and value-driven client service.

Consumers have taken note of this industry shift and the results are worrisome: investor trust in financial professionals in Canada has taken a sharp turn downwards from 2013 to 2015. Recent surveys further demonstrate this erosion in trust— a 2015 survey by the CFA Institute and Edelman indicates that only 61 per cent of Canadian retail investors and 57 per cent of institutional investors trust the financial services industry to do what’s right. It’s time the investment industry engaged in some much-needed introspection on what its future will look like.

Outdated advisor-client model

The outdated traditional advisor-client model is largely the cause for shortcomings in client satisfaction and trust. Continue Reading…

Keep your Fixed-Income Fire Extinguisher within reach

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fire extinguisher and sign isolated over a white backgroundBy James Redpath, CFA

Special to the Financial Independence Hub

Bonds are boring. They’re supposed to be.

In the relatively dry world of finance, one of the valuable functions that bonds (fixed income) provide is to increase the diversification and resilience of balanced portfolios — by serving as a fire extinguisher when times get tough, rather than an accelerant.

They’re designed to make money, but also to manage any potential sparks or flare-ups lit by their flashier equity counterparts. While no one has pulled the alarm in this new realm of negative interest rate policy imposed by certain central banks, it’s still a good idea for fixed-income investors to be aware of their bond holdings; they should check to ensure that, like a fire extinguisher kept in the kitchen, they’re still appropriate and ready to do the job they’re meant to should the need arise.

What’s happening with negative interest rates?

In 2014, the European Central Bank became the first major central bank to shift interest rates into negative territory. The central banks of Sweden, Denmark, Japan and Switzerland followed suit soon after.

Continue Reading…

Debuting today: my new “Retired Money” blog at MoneySense.ca

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happy businessman with passive incomeToday and every two weeks or so, MoneySense.ca will be running a new online column by me they’re calling “Retired Money.” You can find the first instalment by clicking on this highlighted headline: Ways to Pay Less Tax in Retirement.

This first piece looks at some tax credits that working folk will probably be unfamiliar with: The Age Credit for those who are 65 with relatively low incomes, and the Pension Credit.

So what do we mean by “Retired Money?” What happened to Findependence and Victory Lap? Well, those will remain a focus of this website and my forthcoming book with Mike Drak: Victory Lap Retirement. Here’s how MoneySense bills the new column:

Retired Money …. will explore smart ways to draw down income in retirement and semi-retirement. 

Here at the Hub, we usually house topics like this under the Decumulate & Downsize section. A typical guest blog will be something from Doug Dahmer, such as Debt is a Four-Letter Word during your drawdown years.

MoneySense Portfolio Event this Saturday

Going back to MoneySense, this coming Saturday morning, May 7th, MoneySense is hosting a special event. Continue Reading…

Rebalance in May and go away?

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AdrianEditor’s Note: This blog by Adrian Mastracci spawned my column in the Financial Post today, headlined In May, Don’t Sell, Rebalance. Below is the original blog written for the Hub by Adrian. — Jon Chevreau

By Adrian Mastracci, KCM Wealth

Special to the Financial Independence Hub

 “Pitfalls of “sell in May and go away” strategies are not going away anytime soon.”

The catchy phrase “sell in May and go away” is making the annual pilgrimage rounds once again; a strategy that believes stock investing from November to April has better prospects than other months. Keen followers sell their equities now, such as stocks, mutual funds and (equity) ETFs.

They then repurchase equity investments around November. The “sell in May” part of the strategy needs much closer scrutiny, especially the costs and fees of selling and repurchasing. I’m fully on board with the excitement of getting away to a favourite destination. However, I don’t see any benefits to selling in May.

 Selling in May doesn’t work well often enough

If only successful investing were that simple! As an aside, selling in May does not work well often enough. These pointers should change your views on the wisdom of selling:

  • Commissions incurred to sell and repurchase investment selections.
  • Deferred Sales Charges (DSC) may apply when you sell mutual funds.
  • Front loads or DSC fees starting at the high rate for purchasing new mutual funds.
  • Tax payable on capital gains realized in 2016 when you sell current investments.
  • Earning less interest income than dividends from equities you sold.
  • Paying more tax on that interest versus that on dividends you gave up.
  •  Say the remaining DSC on mutual funds you sell is 2% to 3%.
  •  The DSC on newly purchased mutual funds will likely rise to near 6%.
  • Current dividend yields given up are in the 3% to 4% ballpark.
  •  Interest rates on cashable deposits now hover close to 1%.
  •  Another variable is whether the repurchase prices will be lower, similar or higher than today.
  •  Not to mention the amount of short-term speculation and portfolio upheaval you take on.

While they might seem appealing, these strategies are not as simple as they initially feel.
Add up all the costs, fees and implications of your round trip before you sell the farm in May.

I suggest not to clear the deck, nor to take other drastic actions.
A modified investing approach may better suit your needs.

Try these ideas instead:

  • Migrate to a more comfortable, long-term asset mix.
  • Make a series of smaller investing moves.
  • Arrange another portfolio opinion.
  • Rebalance in May and go away.

Rebalance in May

Investors should not spend any time agonizing whether they should sell in May and go away. I liken it to implementing a knee-jerk reaction that does not deliver.

Perhaps all that is necessary is a rebalancing of the asset mix already in place: a strategy that sells some of the winners and buys some of the laggards.

The beauty of a simple rebalancing is that you don’t have to make the right market calls.
Just rebalance the nest egg to your asset mix targets, not to the markets.

Be extra careful when contemplating sweeping changes, like “sell in May.”
You may create lasting and costly portfolio damages.

My investing philosophy is about making logical decisions and following a sensible plan.
I can’t find a logical reason or plan to “sell in May.”

So I stick to the prudent, tried and true rebalancing strategy. It leaves you much more time to decide where to go to in May and thereafter.

Adrian Mastracci, MBA,  is president and portfolio manager for Vancouver-based KCM Wealth Management Inc., specializing in designing and stewarding retirement portfolios.

FWB TV: The Free Lunch that is Index Investing

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Screen Shot 2016-04-28 at 11.54.55 AM
Author Lars Kroijer

It’s been said that diversification is the investing equivalent of a free lunch, since it allows you to manage your risk while getting higher returns.

 The good news is that according to research, index funds and other passively managed investments like ETFs (Exchange traded funds) have diversification built in.
Yes, we’ve heard of people who were able to buy the right individual stock or sector at the right time, but they are few and far between. You can learn more about the free lunch of indexing by viewing the latest FWB video by clicking on this title: There is such thing as a free lunch and it’s called index investing.
Indexing beats picking individual stocks or sectors
The video, which runs three-and-a-half minutes, points out that using index funds to diversify equity exposure around the world is easier and more effective than attempting to pick individual stocks or even identifying promising industries.
And while it’s possible to buy the entire world’s stock market through a single fund, investors shouldn’t take that for granted. As investment author Lars Kroijer relates, 40 or 50 years ago you would have been hard pressed to be able to buy into most markets outside North America, Europe or Japan.

Continue Reading…