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).

Harnessing Findependence: The Power of Podcasts

Posted By |
Jon Chevreau and Canada Podcasts’ Philip Bliss:  https://canadaspodcast.com/findependencehub/

By Philip Bliss

Special to Financial Independence Hub

In an age where knowledge is easily accessible, podcasts have emerged as one of the most potent tools for personal development.

Findependence [aka Financial Independence] is a goal many aspire to, but achieving it often requires a solid understanding of money management, investments, and entrepreneurship. This is where podcasts shine, providing a wealth of knowledge and inspiration that can be instrumental in your journey towards financial freedom.

This new tool is particularly valuable in the fast-paced world of entrepreneurship, where the quest for knowledge and inspiration is ceaseless. In this digital age, Canada’s Podcast has emerged as a game-changer, becoming a cornerstone for Canadian entrepreneurial development and a key to enabling Findependence. Let’s explore why these audio/video gems are so critical to the journey of every aspiring entrepreneur.

1.) Education at your Fingertips

Podcasts offer a wide array of financial knowledge, from personal finance basics to advanced investment strategies. By tuning into podcasts, you can learn about budgeting, saving, and investing while going about your daily routine. Whether you’re commuting, exercising, or doing household chores, these audio programs allow you to convert idle time into a valuable learning opportunity.

Some popular finance podcasts like “The Dave Ramsey Show” and “BiggerPockets Money” offer practical advice on budgeting, getting out of debt, and achieving financial freedom. These shows are like having a personal finance mentor guiding you through the intricacies of money management.

2.) Diverse Perspectives and Ideas

Findependence is not a one-size-fits-all goal. Everyone’s journey is unique, and podcasts reflect this diversity. Podcast hosts often bring their personal experiences and perspectives to the table, offering a rich tapestry of ideas and approaches to achieving financial success.

You can listen to real-life stories of people who have achieved findependence, learning from their triumphs and pitfalls. This diversity of experiences can help you tailor your approach to fit your own circumstances and goals.

3.) Investing Insights

For those looking to grow their wealth through investments, podcasts can be a treasure trove of valuable insights. Whether you’re interested in stocks, real estate, cryptocurrencies, or other investment avenues, there’s likely a podcast that caters to your interests.

Podcasts like “Invest Like the Best” and “The Motley Fool” provide deep dives into various investment strategies, market analysis, and expert interviews. By regularly listening to such shows, you can stay updated on market trends and make informed investment decisions.

4.) Motivation and Inspiration

Findependence can be a long and challenging journey. At times, you may find yourself discouraged or unsure about your financial decisions. Podcasts can serve as a source of motivation and inspiration, reminding you of the benefits of findependence and keeping your goals in focus.

Many findependence podcasts share stories of people who have achieved their financial goals against all odds. These tales of perseverance and success can fuel your determination and keep you on track, even when the path seems daunting.

5.) Building a Supportive Community

Podcasts often come with dedicated communities. These communities provide a space to discuss financial topics, share experiences, and seek advice from like-minded individuals. Engaging with these communities can be a valuable source of support as you work towards findependence. Continue Reading…

Expect strong single-digit returns in possible soft landing: Franklin Templeton’s 2024 Global Investment Outlook

Posted By |

Investors can expect strong positive single-digit returns for the ten years between 2024 and 2034, portfolio managers for Franklin Templeton Investments told advisors on Thursday.

Ian Riach

Speaking at the 2024 Global Investment Outlook in Toronto, portfolio manager Ian Riach said Canadian equities will have expected returns in C$ of 7.2%, a tad below the 7.4% of U.S. equities and 8.6% for both EAFE and Emerging Markets and 8.1% for China. Riach is Senior Vice President and Portfolio Manager for Franklin Templeton Investment Solutions and CIO of Fiduciary Trust Canada.

Fixed-income returns are expected to be in the low single digits: 3.9% for Government of Canada bonds, 6% for investment-grade Canadian bonds and 4.8% for  hedged global bonds, again all in C$. See above chart for the Volatility of each of these asset classes, as well as the past 20-year annualized returns for each. From my read of the chart, expected returns of North American equities the next decade are slightly below past 20-year annualized returns but EAFE and Emerging Markets expected returns are slightly higher, with the exception of China.

Fixed-income investors who were dismayed by bond returns in 2022 will no doubt be relieved to see expected future returns of Canadian bonds and global bonds are higher than in the past 20 years. “Expected returns for fixed income have become more attractive; recent volatility [is] expected to subside​,” Riach said in the presentation provided to attendees.

Capital markets expectations (CME) are used to set Strategic Asset Allocation, which forms the basis of Franklin Templeton’s long-term strategic mix for portfolios and funds, the document explains: “Portfolio managers then tactically adjust.”

“This year CMEs are generally higher than last year. Primarily due to higher cash and bond yields as a starting point,” the document says.

Global equity returns are expected to revert to longer- term averages and outperform bonds​,  EAFE equities “look attractive,” and Emerging market equities are expected to outperform developed market equities​, albeit with more volatility.

Central banks may have to tolerate higher inflation, but are determined to at least get it closer to target in the short-run.  The Bank of Canada does have some room to tolerate a higher rate as its target is more flexible at 1%-3%.  This compares to the Fed’s hard-wired 2%.  Thus, rates in the US may stay higher for longer to bring inflation down to target

Risks of Recession

Riach described three major broad portfolio themes. The first is that Recession risks are moderating but “reasons for caution remain.” The second is that on interest rates, central banks have reached “Peak policy, but expect higher rates for longer.” The third is that “Among the risks, opportunities exist.” Addressing the narrow market of the top ten stocks in the S&P500 (the Magnificent 7 Big Tech stocks plus United Health, Berkshire Hathaway and ExxonMobi), market breadth should broaden to the rest of the market.

For portfolio positioning, Riach suggested selectively adding to Equities, overweighting U.S. and Emerging markets equities, underweighting Canada and Europe equities, and for Fixed Income,”trimming duration and prefer higher quality corporates.” In short, “a diversified and dynamic approach [is] the most likely path to stable returns.”

Jeff Schulze, Head of Economic and Market Strategy, ClearBridge Investments (part of Franklin Templeton) gave a presentation titled “Anatomy of a Recession.” A recession always starts as a “soft landing,” as the slide below illustrates.  “We’re not out of danger. Leading indicators point to Recession,” he said, “The base case is Recession.” While the S&P500 consensus is for earnings growth, the U.S. GDP is expected to worsen.

 

 

He described himself  not as a permabear but a permabull, at least until a year ago. If as he expects there’s a “soft landing” with stocks possibly correcting by 15 to 20% in 2024 Schulze would view that as an opportunity to add to U.S.  equities in preparation for the next secular bull market.

One of the catalysts will be A.I., not just for the Magnificent 7 but also for the S&P500 laggards. As the chart below illustrates, economic growth often holds up well leading into a recession, with a rapid decline coming only just before the onset of a recession.  Continue Reading…

The Thucydides Trap and the Challenges facing China’s Rise

Posted By |

Examining the Thucydides Trap including factors impacting China’s economic and geopolitical growth

Shanghai Lujiazui civic landscape: Deposit Photos

Thucydides, a fourth-century BC Athenian historian and general, wrote a book about the Peloponnesian War, a conflict between Athens and Sparta. He concluded that the war was inevitable due to the growth of Athenian power and the fear it caused in Sparta. This idea, the Thucydides Trap, has been generalized to suggest that when a rising power challenges a dominant power, war becomes unavoidable.

The concept of the “Thucydides Trap” re-emerged in recent years, with some authors suggesting that the U.S. and China were likely to go to war based on Thucydides’ observations. However, comparing the economic power of China and the U.S. solely based on the size and growth rate of their GDPs can be misleading. China’s larger population should be taken into account, and when considering per-capita GDP, the U.S. still surpasses China.

The export boom in Asia started in the 1960s, led by Japan, and was followed by Taiwan, South Korea, and China. Each country developed its own export capabilities. However, China, despite its late start, has faced challenges in reaching the high-end market and relies on importing high-end components. On the other hand, Japan, Korea, and Taiwan excel in high-value manufacturing goods, such as advanced computer chips.

Massive inequality and limited consumption

China’s focus on expanding its workforce and factory output, rather than raising worker incomes, has contributed to its growth but has also led to massive inequality and limited consumption. The Chinese approach contrasts with the Western emphasis on using technology to raise productivity and wages. Additionally, China’s reliance on low-cost unskilled labor and its demographic challenges, resulting from the one-child policy, pose long-term problems for the country.

Russia’s war on Ukraine is not a clear example of a rising power challenging the U.S. and NATO. Russia has been a declining power for decades and has used outdated weapons in the conflict. The beating Russia has faced in Ukraine has surprised many and may have disappointed Chinese leader Xi Jinping, who may have hoped that Russia could distract the U.S. and NATO while China pursues its own long-term plans. After all, Russia has carried out some successful invasions in the past couple of decades, even if they haven’t recovered much of the lost Soviet Empire. But China itself hasn’t been in a war of any consequence since its 1979 border clash with Vietnam.

I.P. Theft

The U.S. announcement of broad new limits on sales of semiconductor technology to China has been viewed by some as a war-like gesture. However, China’s technological gains have often involved theft of intellectual property, according to foreign firms and individuals who have worked there and invested their own money.

They say that enforcing intellectual property rights in China is difficult for foreigners due to local judicial protectionism, difficulties in obtaining evidence, small damage awards, and a perceived bias against foreign firms.

China also forces foreign joint-venture operators to share their designs and patents with local partners, who may then go off and sell copies elsewhere in China or Asia. Many accept the demand, just to get access to the vast Chinese market.

More ambitious Chinese businesses may simply buy a copy of a competitor’s product and reverse-engineer it if that’s all it takes: just pirate the technology, in other words. In The End of the World is Just the Beginning, however, Peter Zeihan wrote,

“Or, if we’re being brutally honest, to successfully reverse-engineer the products of others: Don’t get me wrong, I don’t feel great when I see a new story about some Chinese spy successfully funneling American military technology to Beijing. But please keep it in perspective. China didn’t figure out how to make a ball-point pen without imported components till 2017. The idea that China can get a set of blueprints and suddenly be able to cobble together a stealth bomber or advanced missile system is a bit of a scream.”

Demographics is a key negative for China

China’s demographic situation is a significant long-term problem. The one-child policy and forced migration from the interior to the coast have resulted in an aging workforce and a shrinking labour pool. As retirees increase, the government will face challenges in supporting them with reduced tax revenue and a smaller labour force.

The key indicator of future population is the number of children the average woman has in her lifetime. The “replacement number” that keeps population stable is 2.1 children. The UN estimates that China’s rate dropped to 1.16 in 2021 from just under 3.0 in the early 1980s, and 2.5 as recently as 1990. After decades of government family-size control, the new legalization of larger families has not yet caught on. Continue Reading…

The Power of Low-Fee Core Bond ETFs in your Investment Portfolio

Posted By |

By Alizay Fatema, Associate Portfolio Manager, BMO ETFs

(Sponsor Blog)

The latest economic data unveils a captivating narrative of a strong and resilient economy in both Canada and the U.S. The current inflation stickiness and robust job market numbers make a solid case for the central banks in both countries to keep interest rates higher for longer.

Towards the end of September 2023, markets basked in record-high yields. However, earlier this month, based on the current situation in the Middle East, bond yields fell owing to an increase in demand for safer assets and caused longer-term bond prices to surge.  U.S. consumer prices remained elevated for the month of September and a pullback in demand for a treasury auction pushed longer-term yields higher again, resulting in 10-yr U.S Treasury yields touching their highest point since 2007. On the contrary, the recent CPI printed lower than expectations in Canada, yet the yields remain high as hot economic data continues to build pressure south of the border.

Source: Bloomberg

Given the current two-decade-high interest rates, yields on Aggregate Bond ETFs have surpassed 5%, making them an interesting avenue for fixed-income investors. Before we dive in further, let’s discuss some aggregate bond ETFs in detail along with their benefits.

Aggregate Bond ETFs as the Core of your Investment Strategy

Aggregate bond ETFs are exchange traded funds that aim to track performance of a diversified portfolio of bonds. These ETFs are referred to as core because it reflects their status as a foundational building block of a well-rounded investment portfolio. These ETFs can help investors achieve diversification, steady income & stability within their investment portfolios. BMO currently offers two Aggregate Bond ETFs:

  • BMO Aggregate Bond Index ETF (ZAG) aims to replicate the performance of the FTSE Canada Universe Bond Index. This ETF primarily invests in a Canadian investment-grade fixed income securities consisting of Federal, Provincial and Corporate bonds, with a term to maturity greater than one year.
  • BMO US Aggregate Bond Index ETF (ZUAG) tracks the performance of the Bloomberg US Aggregate Bond Index. It invests in U.S. investment-grade bonds such as U.S. treasury bonds, government-related bonds, corporate bonds, mortgage-backed pass-through securities, and asset backed securities with a term to maturity greater than one year. ZUAG is also offered as hedged to CAD (ZUAG.F) and in USD (ZUAG.U).

Source: BMO Asset Management.

These aggregate bond ETFs have proven to be an extremely viable investment solution owing to their key features:

  • The Symphony of Diversification: Aggregate Bond ETFs provide exposure to a broad spectrum of bond market offering diversification across the curve, various sectors and segments, maturities, issuers, and credit qualities; making them resilient for any market environment.

For example, in the current high-interest rate environment, exposure to short duration bonds might provide some down-side protection. On the other hand, if central banks start cutting rates, then longer duration can provide some upside potential.

Aggregate Bond ETFs can also be considered an equity market hedge. Given the inverse correlation between equities and bonds, they can provide a cushion against market turbulence and can potentially outperform stocks during selloffs.

  • Harnessing Cost Efficiency through Lower Fees: These ETFs are passively managed with the aim to track performance of the aforesaid indices. Their expense ratios are lower as compared to some actively managed funds, thereby reducing overall investment costs and improving net returns for investors. BMO is currently charging a Management Expense Ratio of 0.09% for both ZAG & ZUAG.  
  • Liquidity & Ease of Trading: Like all other ETFs, ZAG & ZUAG are traded on stock exchanges, enabling investors to easily buy and sell shares throughout the trading day, allowing them to see real-time prices. The bid-ask spreads on these products are lower in contrast with the underlying bonds which enhances their liquidity compared to traditional bonds, making them a cost-effective way to attain the exposure to the aggregate bond market.
  • Navigating Risk Management through High Credit Quality: Aggregate Bond ETFs are perceived as a stable and safer investment option as they provide exposure to investment-grade bonds, which are considered to have lower risk as opposed to high-yield or junk bonds. In the current rising interest rate environment, the credit quality & relative stability of the investment grade bonds make them an appealing choice for investors seeking to minimize risk & preserve capital.

Combined with the key features mentioned above, these Aggregate Bond ETFs provide investors with a low-cost core in any investment portfolio. They distribute monthly interest payments, providing a steady stream of income. These ETFs emphasize on preservation of capital and provide transparency and visibility into the funds’ composition and their underlying assets. Continue Reading…

Navigating the Student Loan Dilemma: Unlocking Financial Independence with RESPs

Posted By |

By Andrew Lo, President & CEO of Embark Student Corp.

(Sponsored Post)

The pursuit of higher education is a cornerstone of personal and professional growth for many young Canadians. However, this pursuit often comes at a hefty price, with student loans being a significant barrier to financial independence. The burden of student debt can haunt graduates for years, affecting their ability to save, invest, and achieve financial stability. But there’s good news: opening a Registered Educations Savings Plan (RESP) can lighten the burden of student loans and help you help your children start their adult life debt-free by encouraging regular and early savings, offering valuable government grants, and harnessing the power of compound interest.

The Student Loan Conundrum

Canada is home to a world-class education system, but the cost of pursuing post-secondary education can be daunting. Tuition fees, books, accommodation, and other expenses can quickly add up, leaving many students with no choice but to turn to the most common method of affording post-secondary:  student loans.

What some students don’t fully understand when they use student loans is that they come with interest rates that accrue after graduation. For many young Canadians, this means they start their careers with substantial debt, and few resources to help them repay their loans.

In a recent poll of Canadian students, 79% admitted that the amount of debt taken on to afford post-secondary can be debilitating. This burden of student debt can have a profound impact on a young graduate’s financial journey, with 57% of students surveyed agreeing that graduating with student debt will make it harder for them to become financially independent from their parents.

Unfortunately, the constant struggle to make loan payments often hampers their ability to save and invest in their futures. Despite this, student loans are still the most normalized way of paying for education in Canada.

There’s a better way pay for post-secondary education

One effective way to combat the student loan conundrum is to start saving for education expenses early. It can be hard to think about university and college when a child is a few years old but by beginning to save as soon as possible, families can significantly reduce their need for student loans. You’re probably thinking, “accumulating savings to cover educational costs while managing the rising cost-of-living is no easy feat.” This is where a Registered Education Savings Plan [RESP] comes into play.

RESPs are powerful tools that Canadians can take advantage of to fit the post-secondary bill. They can be opened by the parents or guardians of a child, other family members, or friends, to save over a total period of 35 years. By contributing regularly to an RESP, families can build substantial savings to cover tuition and related expenses. Starting early allows for smaller, manageable contributions over time, reducing the financial stress associated with higher education. The most valuable part of this savings tool is that it opens your savings up to a world of government grants that you can qualify for.

Unlocking “Free Money” with Grants

One of the most compelling features of RESPs is the opportunity to acquire “free money” in the form of grants. The Canadian government provides a generous grant called the Canada Education Savings Grant (CESG) as a reward for saving, allowing you to collect up to $7200.

This grant matches 20% of your contributions on the first $2,500 saved annually. Over the years, if you contribute $2500 annually to an RESP, this works out to an additional 20% being added to your first $36,000 saved without even considering investment gains. By maximizing these grant opportunities, families can alleviate the financial strain of higher education and better prepare for the future. Continue Reading…