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).

The Greatest Paradox

Image Outcome/Public domain CC0 photo

By Noah Solomon

Special to Financial Independence Hub

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…

Timeless Financial Tips #5: Trust the Evidence

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Lowrie Financial: Canva Custom Creation

 

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:

three key portfolio construction decisions

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…

Social Media Side Gigs: How Students are Using Social Media for Financial Freedom

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By Beau Peters

Special to Financial Independence Hub

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…

The Value of Advice

 

John DeGoey, CIM, CFP

Special to the Financial Independence Hub

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…

A Self-Checkup on your Financial Health to help your Mental Wellbeing

Image courtesy FPCanada

 

By Sahar Abdul Zahir, BlueShore Financial

Special to Financial Independence Hub

Many people view money as simply numbers that get you from point A to point B, and may not make a connection between how finances can also impact mental and physical health. However, FP Canada’s 2022 Financial Stress Index survey found that 38% of Canadians believe finances are their biggest source of stress, ahead of both health and relationship issues. More alarmingly, FP Canada’s study also found that 43% of respondents had lost sleep over financial anxiety.

There are a variety of reasons why many of us do not seek professional advice for our financial problems, ranging from not thinking we need the help, to being embarrassed, or not knowing where to go. Regardless of the reason, there is a clear link between finances, anxiety, stress, and mental health, and avoidance of the problem is not the answer. The good news is, there are many steps you can take today to help get yourself back on track.

Understand your relationship with money

Many people still believe that talking about money is taboo, or feel embarrassed to discuss financial troubles, even with a professional. Financial literacy should begin at an early age and continue as a lifelong learning process. Having an open dialogue around finances and money management as a family can be a good thing as your experience with money, or lack thereof, in your childhood can impact your attitude and emotions towards money later in life. Make note of impulse buying behaviour and what may trigger it: perhaps a hard day at work, or an argument with your partner. Understanding these spending patterns will allow you to find better ways to manage these stresses and adjust accordingly.

Financial health checkups

Just like doing a regular physical health checkup, having periodic financial wellness checkups is important for detecting any areas that you should focus on. This can be done by completing a thorough audit of finances, budgets, and plans with an advisor. An annual checkup can help you better prepare for the future and minimize the impact of any surprise events. Also utilizing online advice tools such as BlueShore’s Financial Wellness Checkup tool can help get you started, by providing an assessment of how you are doing, and advice on where you need to improve along your path to financial wellness.

Small cuts for long-term impact

We have all heard the latte-a-day and avocado toast analogy. While these items can seem like small expenses that are not likely to make a big impact on our overall financial health, they are really representative of our spending habits. Cutting out your morning coffee is not going to make you wealthy, but you may have some ongoing small expenditures that quickly add up and could affect your long-term financial goals. Continue Reading…