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).
Tip of the week: “When you work out a plan for your retirement, make sure that you aren’t basing your future income on over-optimistic calculations that will end up leaving you short.”
Every year as RRSP season heats up, many investors are confident they are taking concrete steps toward a secure retirement. But are those steps based on realistic calculations?
Let’s say you’re 50 and you want to retire at 65. You have $200,000 in your RRSP, and you expect to add $15,000 in each of the next 15 years. To determine if this is enough to retire on, you need to make assumptions about investment returns and income needs.
• What you can expect
Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. For purposes of this retirement plan, we’ll assume a 6% yearly return, and disregard inflation. Continue Reading…
Editor’s note: the piece below was written a few weeks before the market chaos of last Friday and this Monday, which only makes it that much more relevant now. Even more prescient was a B&E guest post on August 13th entitled What you can do about the upcoming stock market crash.
Marie Engen, Boomer & Echo
By Marie Engen, Boomer & Echo
Special to the Financial Independence Hub
The stock markets have shown some volatility this summer and this has concerned some investors who have been riding the latest “full steam ahead” bull market and think a market correction is imminent.
These concerns have increased interest in investment products that have a principal guarantee. But are they worth it? These guarantees come with a steep cost.
Market-linked GICs
Market-linked GICs, also called equity-linked GICs, are hybrid products that proclaim to capitalize on the growth potential of the stock market without risking your original investment. The return is derived from gains in the equity markets over the term of the GIC – usually 3 or 5 years.
The portion of the return derived from the equity markets depends on various components:
The benchmark used to calculate the return e.g. S&P/TSX Bank Index or Capped Utility Index, Nikkei 225 Index
Pre-set maximum return e.g. 6% for a 3-year term
Dividends are not included in the calculations
Interest income is paid on maturity. If the equity portion produces no return, you receive no interest at all. Pay particular attention to how the equity portion of the return is calculated.
Like conventional GICs they are guaranteed by the Canada Deposit Insurance Corporation to the maximum allowable limits and are available for purchase in registered and non-registered vehicles.
Segregated Funds
A segregated fund is essentially an insurance product based on an underlying mutual fund that is offered by insurance companies. Under the insurance contract – usually for 10 years – part, or all, of the original principal amount may be guaranteed. In some cases there is the ability to reset the guarantee at a higher amount in future years. Continue Reading…
If you’ve ever dabbled in graphic design, you’re familiar with the concept of white space. When viewing an illustration, we typically pay the most attention to the visible ink on the page, such as a paragraph of text, a bar chart or an entertaining illustration. White space is the essential empty areas in between that are hidden in plain sight. We barely notice them … until they’re not there:
Where’s the white space? (Deposit Photos)
When making investment decisions, most people likewise assume that the most eye-catching ink matters the most: an alarming economic forecast, an exciting Initial Public Offering, hot trading tips. But there’s a catch. This evident assumption does not hold up under evidence-based scrutiny. In reality, you have little or no control over how the most obvious news impacts your investments. The most exciting action has already been priced into any trade you might make well before you decide to make it.
Stop fixating on headlines
Instead of fixating on the headline news, consider that liberating financial white space. There, hidden in plain sight, you’ll find a number of powerful investment strategies that are freely available and far more within our control. In this series, we’ll introduce three of our favorite “plain sight” investment strategies:
I often hear the phrase protect your downside. It’s the sales pitch that a large part of the investment management industry thrives on, and it plays to the myopic loss aversion that most investors exhibit.
Myopic loss aversion is the tendency of investors to evaluate their portfolios frequently with greater sensitivity to losses than gains, causing them to act as if their time horizon is much shorter than it actually is.
Let’s look at the example of John, who wants to invest for his retirement 30 years from now. After happily watching his portfolio increase with steady returns for a few years, he panics when the market trends down slightly for a week. He knows he doesn’t plan to touch the money for a long time, but the thought of a decline, even over a relatively short period of time, makes him feel sick. He may even pull his money out of the market until things feel safe again.
Myopic loss aversion
An obvious path to safety would seem to be hiring a person or a company that knows how to protectyour downside, and the investment industry has answered this calling. Continue Reading…
Panicky stock markets in China are spreading to Asia and the rest of the world today. Over the weekend my Twitter feed provided links to various stories arguing the case against panic but clearly there’s extreme anxiety in the air and investors are going to do what they’re going to do.
Deep breaths, relaxing? Sounds a bit like meditation. And that might be as valuable a thing to try right now than a belated attempt to lock the stock market barn after the horse has already escaped.
Here’s a review I did for the FP four years ago of the book illustrated to the left: The Mindful Investor, Maria Gonzalez. The advice then was that the next time the markets crash, try to calm your mind with meditation. For a video interview I conducted with the author then, click on Mindfulness over Market Matters.
On page 152, the book specifically mentions how to deal with a stock market correction through a relaxation technique. “Once you feel calmer and more stable, you’ll be be better able to listen and make good decisions, ones that aren’t based on panic and fear.”
Of course, the more you watch the carnage through the media and web, the harder this is going to be. You might want to reread Steve Lowrie’s Hub post: Stop reacting to market noise.
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