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).
Markets are hesitant, but large-cap tech has been resilient. Learn why large-cap technology with an income strategy can help investors now.
By James Learmonth, Senior Portfolio Manager, Harvest ETFs
(Sponsor Content)
After recovering from some of their 2022 shocks early this year, markets have been trepidatious through most of 2023. That recovery and volatility story, on paper, looks broad based. Between January and mid-May, the S&P 500 is up around 8-9%. The S&P 500 Information Technology index, however, is up over 25% in the same rough time period. That outperformance skews even higher when we isolate some of the largest names in the technology sector.
So while overall market performance this year has been steady, turning choppier since the US banking crisis began in March, large-cap tech leaders are doing what they tend to do: lead.
In a macro environment of market uncertainty, high inflation and tech outperformance, one strategy can give investors exposure to large-cap technology companies, while providing income and ballast against volatility.
Why Large-cap Tech has been a leader
To understand how a tech income strategy can help investors, it’s worthwhile to unpack what has made technology a leading sector so far in 2023.
Q1 earnings season for tech shed some light on the sector’s outperformance. Part of that performance is due to a more broadly positive market sentiment in 2023, compared to 2022, in addition to some recovery following the sector’s struggles last year. Notable, however, is the positive reception large-cap companies have received for their artificial intelligence (AI) strategies.
AI has been the hot new topic this year, and large-cap tech companies have been quick to capitalize on the rapid pace of innovation in this space. Whether they are innovating their own AI tech, or applying AI to new areas these companies are creating serious value for shareholders with this technology.
It’s worth emphasizing the dominance of large-caps in this moment, companies like Meta, Apple, and Microsoft. In recent history, major tech leaps have been associated with ‘disruption’ of traditional larger players. So far in the rise of AI we’ve seen the largest companies leading, demonstrating their value as innovators and appliers of innovation.
Why Volatility is persisting in the broader market
Despite all the positivity in large-cap technology, broad markets have been choppy this year. Most of their recovery took place in the first months of 2023, and since the onset of a US banking crisis in March market performance has been choppy up and down, aggregating out flat.
Macro forces are largely to blame. The banking crisis highlighted the ongoing impacts of rapid rate hikes by central bankers starting last year. Even as that hiking period seems to be ending, the consequences of those raised rates will be felt over the next several months. More recently, fears about the US debt ceiling have troubled markets while geopolitics continues to impact sentiment. Continue Reading…
In his role as head of research at Merrill Lynch, Bob Farrell established a reputation as one of the leading market analysts on Wall Street. In his famous “10 Market Rules to Remember,” Farrell summarized his insights on market tendencies.
One of Farrell’s rules states, “When all the experts and forecasts agree — something else is going to happen,” which embodies the essence of contrarianism.
In this month’s missive, I explore the roots and causal factors underlying Farrell’s warning, drawing on historical examples. I also illustrate the potential benefits and pitfalls of going against the crowd. Additionally, I demonstrate that market sentiment is currently approaching levels that have historically preceded broad market declines. Lastly, I suggest that there are specific areas where investors should consider trimming exposure, realizing gains, and paying the taxman.
There is no shortage of historical examples of “sure things” ending badly. In the late 1990s, following two decades of above-average returns, both institutional investors and consultants broadly embraced the dangerous consensus that future stock market returns would be about 11%. Dissenters and naysayers were few and far between.
The basis for these forecasts was the extrapolation of recent results. Stocks had been delivering average annualized returns of 11%, therefore it was assumed they would do so going forward – simple. Few investors contemplated the possibility that the past 15 years were anomalous from a longer-term perspective. More importantly, there was little concern that an extended period of above-average returns might have been borrowed from future returns by pushing up valuations to unsustainable levels.
The sad ending to this ebullience was the first three-year decline in equities since 1930. For the seven years ending March 31, 2007, following the market’s peak in early 2000, the annualized return of the S&P 500 was 0.9%. Importantly, these subpar returns encompassed a bitter and painful peak-trough loss of about 50%.
A similar occurrence of widespread adulation ending badly occurred only a half-decade later in 2005, when everyone “knew” residential real estate was a “surefire” way to amass wealth. Zealots justified unsustainable values with oft-cited mantras such as “They’re not making any more land,” “You can live in it,” etc. This blind optimism pushed real estate prices to unsustainable levels which all but guaranteed the subsequent collapse and some painful experiences for the “it can only go up” crowd.
Sorry, Beatles – All You Need is NOT Love
More often than not, what is obvious to the masses is wrong. There are valid explanations, both financial and behavioral, that cause the things which everyone believes to be true to turn out to be untrue.
In July 1967, the Beatles released their famous single All You Need Is Love. With all due respect to John, Paul, George, and Ringo, nothing could be further from the truth in the world of investing. Specifically, the more popular a particular investment becomes, the less its profit potential, if for no other reason than if everyone likes something, such adulation is likely to be reflected in its price.
In what is referred to as the bandwagon effect, investors often become enthusiastic about a particular investment or asset class after it has already produced strong returns. Believing that past outperformance is a sign of strong future returns, the herd then hops en masse on the proverbial bandwagon. This widespread fervor then causes prices to overshoot any rational approximation of value, thereby setting the stage for inevitable disappointment.
In the world of investing, “everyone knows” should come with a “buyer beware” warning. Investments that are heralded as sure things are bound to be fairly priced at best and often become dangerously overvalued. Great opportunities lead to great prices, which by definition means their greatness has been paid for in full, stripping them of their greatness. Conversely, it’s only when people disagree that opportunities to achieve above-average returns exist.
Risk: Reality vs. Perception
Managing risk is at least as important as (and inextricable from) achieving decent returns. Not only do irrational sentiment and expectations result in poor returns, but also give rise to elevated risk. Risk evolves in the same paradoxical manner as returns. As an asset follows the journey from normal to over-owned and overpriced, not only does its potential return deteriorate, but its risk increases.
When everybody becomes convinced that something will produce spectacular returns, then by extension they also believe that it involves little or no risk. This perception often leads investors to bid it up to the point where it becomes excessively risky. In contrast, when broadly negative opinion drives all the optimism out of an asset’s price, its risk profile becomes relatively small. Put another way, investment risk tends to reside most where it is least perceived, and vice versa.
In the world of investments, Bob Farrell trumps the Fab Four. Good investments are generally associated with skepticism, indifference, and even neglect, which sets the stage for high returns with lower risk. Inversely, widespread acceptance and adulation sow the seeds of high-risk and poor returns.
No Good Deed shall go Unpunished
As is the case with many aspects of markets, both timing and patience play an important role in contrarian investing.
Investment trends regularly go to extremes. It is this very tendency that results in calamities and opportunities. Unfortunately, life for managers is not as simple as buying cheap assets and selling their overvalued counterparts. As John Maynard Keynes stated, “The market can remain irrational longer than you can remain solvent.”
Not only can overvalued assets remain stubbornly so for extended periods of time but can become even more overvalued before they ultimately come back down to earth. By the same token, undervalued assets can remain cheap and become even cheaper before any payoff materializes. Sentiment can be a self-fulfilling prophecy for an indeterminable amount of time before reversing, turning previously favored investments into assets non grata, and the subjects of yesterday’s scorn into tomorrow’s darlings. Continue Reading…
Evidence-Based Investing – Your Best Chance to Hit Your Long-Term Investment Goals
By Steve Lowrie, CFA
Special to Financial Independence Hub
If I could, I would grant amazing investment returns to every investor across every market. Unfortunately, that’s just not how it works. In real life, we must aim toward our financial ideals, knowing we won’t hit the bullseye every time.
That’s why I recommend evidence-based investing: or investing according to our best understanding of how markets have actually delivered available returns over time, versus how we wish they would. Our “best understanding” may still be imperfect, but it sure beats ignoring reality entirely.
Luck-Based Investing and Random Returns
Many investors try to pick and choose when and how to invest based on what they or others are predicting will happen next. All evidence suggests their success or failure will be driven far more by luck than skill. Worse, going down this path, there is a very high probability they’ll end up with worse results versus a properly structured “buy and hold” approach.
Some deliberately embrace this approach, hoping to “beat” the market. Others come to it accidentally, by reacting to financial behavioural biases such as panic-selling or spree-buying. Either way, these sorts of investment portfolios typically devolve into a disheartening assortment of holdings over time, offering little sense of where you stand in relation to your own goals or overall market performance. The odds stack steeply against your achieving any carefully planned outcome: provided you had one to begin with.
Evidence-Based Investing and Portfolio Planning
In contrast, evidence-based investors adhere to decades and volumes of time-tested, peer-reviewed analysis by academics and practitioners alike. In aggregate, we seek to answer an essential investment challenge:
How can an investor increase the probability they’ll capture the highest expected market returns, given the levels of investment risk they’re willing to accept?
The answers point to a two-step strategy:
1. Build It. Prepare your personal portfolio:
Allocate your investments between broad asset classes.
Widely diversify your bonds and equities to reduce the unnecessary risks inherent to individual bond or stock picks.
Tilt your overall portfolio toward factors with higher expected returns, according to your personal financial goals and risk tolerances.
2. Keep It. Sit tight with your carefully constructed portfolio for the long term, to ensure you capture the expected long-term growth from your various market allocations. So, stay invested through thick and thin and set aside enough cash reserves to cover upcoming spending needs.
At the risk of repeating ourselves (which is, after all, the theme of this “Play It Again, Steve” financial tips blog series), evidence-based investing translates into building and maintaining a portfolio that looks something like this:
Keeping It: The Hardest Thing
It’s one thing to build an ideal portfolio. It’s another to keep it in balance as intended. In fact, thanks to our behavioural biases, I would argue it’s the hardest part.
For example, what will you do after the stock market has been surging, and your 60%/40% stock/bond allocations end up being closer to 70%/ 30%.? You’ll probably want to let your overweight allocation to high-flying stocks ride, hoping to score even more. That’s because recency and other behavioural biases trick us into believing the party will never end. However, the more prudent, evidence-based move is to sell some of your equity allocations (selling high) and use the proceeds to buy more humdrum fixed income (buying low), until you’re back to your original 60%/40% mix. Continue Reading…
Financial freedom can feel like a pipe dream when you’re in college. You hardly have enough time to complete all of your assignments, let alone work a full-time job and earn enough income to complete all of your financial goals.
That said, there are more jobs that exist online that can help you become financially independent, thanks to the digital age. As a native user of social media, you can find plenty of paid opportunities as an influencer, social media manager, or crafter of homemade goods.
A social-media side gig is great for your long-term career goals, too. You’ll always have employable skills to rely on and can point towards a portfolio of profitable, engaging social media content.
Influencer
If you’re a traditional student, you’re likely a native user of social media platforms like TikTok and Instagram. You may have even built a significant following of friends and strangers who also use the platforms you love. Becoming a brand ambassador or influencer can help you monetize your account and earn extra income through product profiles and branded content.
Start earning money on Instagram by switching your account to “creator mode” and connecting your account with affiliate programs. With the help of these programs, you can link to businesses and brands from across the globe like:
Amazon Associates
eBay Partner Network
CJ Affiliate by Conversant
Rakuten Marketing
These platforms can connect you with brands that align with your values and overall aesthetic. You will need to adhere to their specific rules and guidelines, though, as ill-thought-out influencer marketing can derail a brand’s overall marketing strategy.
If you have a large enough following, you can also get paid directly via sponsored posts. Sponsored posts need to be clearly tagged to stay within Instagram’s rules, but they can be a great way to earn extra income. Improve the effectiveness of sponsored posts by utilizing strategized hashtags and interesting captions that draw users in.
Social Media Manager
The role of a Social Media Manager is to oversee posts, engagement, and branded content that goes live on a business’s social media accounts. Social media managers typically have a flair for analytics and aesthetics, as they know how to blend brand guidelines with audience trends and consumer data.
This may sound like a full-time gig, but you can balance your college work with social media management for small businesses. As a native user of social media sites, you already know the current trends and how to blend branded content with videos and images that inspire your audience. Continue Reading…
Over the past few years, there have been dozens of articles in magazines that are distributed to financial advisors about both the value and cost of financial advice.
Most are overly simplistic to the point of being inaccurate and downright misleading. As you might imagine, any publication that caters to financial advisors will have a decidedly pro-advisor editorial perspective. That’s all fine and well, but there are nuances that are glossed over too frequently that cause some observers to worry about the soundness of financial advice echo chamber that many advisors seem to live in.
Since I’m an advisor myself, it should be obvious that I am a strong proponent of quality financial advice. The concern that I have is that within my own industry, the financial media has taken that perspective a step further and is moving toward boosterism that is almost jingoistic. There are two things that the ‘for advisors only’ media seems to gloss over. In both instances, the short shrift is because a more fulsome discussion might be awkward for certain elements of the industry.
The two things “Advisors Only” media gloss over
The two issues are:
1.) The distinction between good advice and bad advice. This is admittedly subjective, but the media doesn’t ever seem to venture into making a distinction because it seems unwilling to alienate a segment of the advisor population. Surely to goodness, not all advice is good advice and not all advisors are good advisors.
2.) The ongoing focus on the cost and value of advice while simultaneously and conspicuously remaining silent on the cost and value of investment products. Clients pay for both advice and products, so why explore one aspect ad nauseum while saying almost nothing about the other?
Let’s begin by looking at the touchy subject of what constitutes good advice in the first place. Obviously, there is no single best set of answers to this matter. Continue Reading…