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).
As was announced here recently, Motley Fool co-founder David Gardner has launched a new weekly financial podcast called Rule Breaker Investing.
I’ve long been a fan of Chris Hill’s weekly Motley Fool Money podcast, which generally runs close to 40 minutes and makes a nice weekend catchup on the financial week just past. He also spearheads a shorter podcast called Market Foolery, which runs Monday to Thursday. (Full disclosure, I once appeared on that podcast and also write for Motley Fool Canada).
This month’s financial “STOP Doing” advice is inspired by the events in Europe, with Greece at Ground Zero. I wish I could tell you how it’s all going to play out or, better yet, promise you a happy ending, sooner than later.
Unfortunately, I can’t do that. Time alone will tell. The understandable craving to maintain control over your personal and financial well-being may leave you scanning the popular media’s headlines, searching for tidbits on how to protect yourself from the unfolding uncertainty. That’s why this is an excellent time to repeat a theme I’ve covered before: STOP feeding on junk media.
The Media Can’t Protect You from Volatile Markets
As I described in an April 2014 post, “Here’s why you should ignore the [popular] financial media … While I could recommend many things, I think the most important point for everyone to remember is that it is a myth that today’s headline news has a direct effect on the financial markets.”
This point can be hard to wrap your head around. It seems counterintuitive, but here’s the scoop: Any good or bad news reported by the media may feed your curiosity about what’s going on in the world, but it’s of no use with respect to investing.
Minister of State for Social Development, Candice Bergen.
The last of the seven eternal truths of personal finance that ran in the Financial Post in June was “Don’t say no to free money from the government.” After it ran, I heard from a spokesperson for the federal government’s Ministry of State for Social Development. He pointed out that it might have been appropriate to mention the RDSP or Registered Disability Savings Plan, which helps families with disabled family members save in a tax-efficient manner. I agreed it was an omission and offered to run the guest blog that follows. — JC
By Candice Bergen,
Special to the Financial Independence Hub
If you have a disability or if you have a child with a disability, you should know about the Registered Disability Savings Plan (RDSP).
The purpose of the plan is to help Canadians with disabilities and their families to save for the future. The federal government also provides generous grants and bonds to help with long-term savings if eligible.
Across Canada, approximately 100,000 people are already benefiting from the program; however, estimates show that there are still more than 400,000 people who are eligible but have yet to take advantage of this plan. That’s unfortunate because it’s very easy to set up an account. In fact, all you need is a Social Insurance Number, be a Canadian resident and qualify for the Disability Tax Credit.
Once an RDSP is set up, anyone—friends or family included—can contribute to it. You can open a RDSP at a participating financial institution, such as a bank or credit union.
You can contribute as much as you want to a RDSP each year, up to a lifetime limit of $200,000. The earnings from the Plan build tax-free until taken out of the plan.
As The Economist reported this week, assets of exchange-traded funds (ETFs) have now surpassed those of hedge funds. In one of its “Leaders,” the British weekly described hedge funds as a “fatal distraction” for pension funds. It also ran a longer piece on the same story, saying ETFs are roaring ahead of hedge funds.
Back in 1999, ETFs had only 10% of the assets under management enjoyed by hedge funds. Today, according to research firm ETFGI LP of London, UK, assets in the global ETF industry were US$2.971 trillion (that’s Trillion with a T!), compared to US$2.969 trillion for hedge funds. But of the $36 trillion (US$) invested in pension funds worldwide, only $3 trillion are in hedge funds. It noted that CalPERS, a huge US pension fund, has “concluded putting money in hedge funds is not worth the bother.”
I talked to ETFGI managing partner Deborah Fuhr (who left BlackRock four years ago) after the Economist article came out this week. She said the ETF industry likely became bigger than hedge funds back in May of 2015, when ETF assets reached US$3 trillion but as Hedge Fund Research only provides quarterly data rather than monthly, it could not be confirmed until now.
It’s a big milestone for ETFs but there’s still a long way to go before ETFs catch mutual funds. Fuhr says global ETFs have just 8.4% of the assets claimed by the mutual fund industry.
Stocks versus Bonds
Here at the Hub the past week we had a study in contrasts, with two financial expert/authors running guest blogs with quite disparate views on asset allocation. Continue Reading…
Here at the Hub we like to present all points of view. On Tuesday, we ran a guest blog by author and chartered accountant David Trahair about the new second edition of his book, Enough Bull, which explained why he is 100% in fixed-income vehicles like GICs. Today, we do the same thing with a guest blog by Scotia McLeod’s Robert S. Cable, who argues almost the polar opposite in his new book, Inevitable Wealth. We’ll review both books formally in the coming weeks. Meanwhile, over to Bob! – – JC
Stocks beat bonds, hands down
Robert Cable
By Robert S. Cable
Special to the Financial Independence Hub
All of the research I’ve carried out since I began doing this in 1980 and every piece of research I’ve seen comparing stocks to bonds– every single time comes to the same conclusion — that is that stock returns don’t just beat the returns of bonds, stocks clobber bonds. It’s absolutely no contest.
In my book, Inevitable Wealth, I compare 40 years of returns, from 1975 through 2014. I show $100,000 invested in Government of Canada five-year bonds, with money reinvested every five years, to the same $100,000 invested in stocks by way of the TSX Composite Index.
In 1975, those bonds yielded 7.25% so your annual income started out at $7,250. Stocks paid somewhat less, $5,360. Advantage bonds—initially. However just four years later, the dividends paid on stocks had moved higher to the point where the dividends paid on stocks was greater than the bond’s income.
But check out these numbers. In 2014, your bonds paid an annual income of just $2,770, down from $7,250, 40 years earlier. Talk about taking a pay cut! Meanwhile in 2014, stocks paid dividends of $49,560. Your stock income was more than 17 times what bonds paid.
What’s really interesting though is this: while stocks paid a much superior and growing income, they really aren’t income investments. The dividend income paid is simply a by-product of these companies sharing their profits with shareholders.
But as they say, that’s only half the story. We’ve looked at the income stocks and bonds produced. But what about the value of each of these investments over those 40 years?
Stocks beat bonds by 17 to 1 over 40 years
Well, that $100,000 you invested in bonds back in 1975 is still worth right around the same $100,000. If you took inflation into account, your $100,000 would actually be worth more like $15,000. The $100,000 invested in stocks? Well, not including the dividends, at the end of 2014 your stocks would be worth a bit more, $1,732,060. Continue Reading…
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