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).

Timeless Financial Tips #2: Rising above the Noisy News

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By Steve Lowrie, CFA

Special to Financial Independence Hub

In investing and life, information overload, aka “noisy news,” has long been a thing. In fact, before the Internet came along, I used to publish a hardcopy newsletter called “Rising Above the Noise.” Because even then, investors seemed awash in TMI (too much information).

If media noise was a problem back then, imagine the implications today. Which brings me to today’s Play It Again, Steve – Timeless Financial Tip #2.

To be a successful investor, it’s as important as ever to dial down all the noisy news you invite into your head.

News versus Noise

These days, we’re all familiar with the term “clickbait.” Long before that term came along, the popular press already knew it could profit similarly by embracing an “if it bleeds, it leads” approach to delivering the news. The more eyeballs or clicks scored, the higher the potential advertising revenue.

Driven by profit motivations, popular newsfeeds have long been incented to showcase that which will elevate your excitement. They care more about whether you look, than what you’re seeing. This means our duty as informed consumers remains the same:

Consider the true incentives for any given news source.

Are they aligned with yours? If not, it’s best treated as noise rather than news.

Noise versus Knowledge

We’re not advocating that you stop learning. Rather, a successful, long-term investor’s goal is to tune out the pointless distractions, so we can tune into more thoughtful action. What’s the difference?

The noise we’re exposed to from never-ending newsfeeds is …

  • Demanding: New news arrives at a breakneck pace and insane volume that never lets up. Don’t you dare blink.
  • Distracting: The constant stream delivers endless lures to STOP whatever you’re doing and tune right in, lest you miss right out. (There’s a reason the popular media’s favorite crawler is: “BREAKING NEWS.”)
  • Fleeting: News is inherently new. By the time you hear it, something else has probably already happened to change it. Over and over again, forever.
  • Inaccurate: Given the speed of the spin, rumors and half-baked hunches are more frequent than facts. All the conjecture feeds on our fears and preys on our emotions.
  • Incoherent: Even when information is correct, it comes in so fast and furious, we can’t possibly make sense of it all in real time.

Where noise is loud, wisdom is quiet …

Acquiring knowledge calls for the opposite of all this commotion. Knowledge takes reflection. It takes selectivity. Perhaps most of all, it takes time:

  1. Time to translate the reams of random information into meaningful insights.
  2. Time to separate fact from fiction.
  3. Time to distinguish reputable sources from biased blather.

What’s the Problem with Noisy News?

In his post “Why You Should Stop Reading the News,” Knowledge Project podcast host Shane Parrish explains why news-based noise can be so damaging to an investor’s well-being:

“Our obsession with being informed makes it hard to think long-term. We spend hours consuming news because we want to be informed. The problem is, the news doesn’t make us informed – quite the opposite. The more news we consume, the more misinformed we become.”

Put another way, the more noise you encounter, the harder it becomes to make good investment decisions. Good investment decisions are the kinds guided by your own goals rather than market noise. They’re the kind you can more readily trust, because they’re grounded in solid evidence and feel built to last. They help you stay focused and on track. Continue Reading…

Losing an Illusion makes you Wiser than finding a Truth

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Image courtesy Outcome/picpedia.org

By Noah Solomon

Special to Financial Independence Hub

According to satirist Karl Ludwig Borne, “Losing an illusion makes one wiser than finding a truth.”

I have become completely disavowed of the illusion that:

1.) People are able to predict the future with any degree of accuracy or consistency.

2.) Investors can improve their results by forecasting (or by following the forecasts of others).

Not even the almighty Federal Reserve, with its vast resources, near limitless access to data, and armies of economists and researchers has been particularly successful in its forecasting endeavors. For example:

  • Near the height of the dotcom bubble in 1999, Fed Chairman Greenspan argued that the internet was bringing a new paradigm of permanently higher productivity, thereby justifying lofty stock price valuations and encouraging investors to push prices up even further to unsustainable levels.
  • In 2006, Chairman Bernanke brushed off the most pronounced housing bubble in U.S. history, stating that “U.S. house prices merely reflect a strong U.S. economy.”
  • In late 2021, the Fed determined that the spike in inflation was “transitory.” It neglected to combat it, leaving itself in a position where it had no choice but to subsequently ratchet up rates at the fastest pace in 40 years and risk throwing the U.S. (and perhaps global) economy into recession.

The following commentary describes the underlying challenges relating to economic and market predictions. I will also provide some of the reasons why, despite strong evidence to the contrary, investors continue to incorporate them into their processes.

The Three Enemies of Forecasting: Complexity, Non-Stationarity and People

There is a near infinite number of factors that influence economies and markets. The sheer magnitude of these variables makes it near, if not completely impossible, to convert them into a useful forecast. Further complicating the matter is the fact that economies and markets are non-stationary. Not only do the things that influence markets change over time, but so do their relative importance. To produce accurate forecasts economists and strategists not only need to hit an incredibly small target, but also one that is constantly moving!

For most of the postwar era, economists and central banks relied heavily on the Phillips curve to inform their forecasts and policies. An unemployment rate of approximately 5.5% indicated that the U.S. economy was at “full employment.” Until the global financial crisis, any declines below this level had spurred inflation. Confoundingly, when unemployment fell below 5.5% in early 2015 and hit a low of 3.5% in late 2019, an increase in inflation failed to materialize.

This problem is well summarized by former GE executive Ian H. Wilson, who stated “No amount of sophistication is going to change the fact that all your knowledge is about the past and all your decisions are about the future.”

Saved by 50/50

When it comes to economies and markets, it’s hard enough to be right on any single prediction. A forecaster who gets it right 70% of the time would be a rare (and perhaps even a freakish) specimen.

However, investment theses are rarely predicated on a single prediction. When a forecaster predicts that inflation will (a) remain stubbornly high, (b) rates will rise further, and (c) that these two developments will cause stocks to fall, they are technically making three separate predictions. Even with a 70% chance of being right on each of these forecasts, their overall prediction about the market has only a 70% chance of a 70% chance of a 70% chance of being right, which is only 34.3%! Continue Reading…

Coping with the Fear of Market Downturns

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Image courtesy RetireEarlyLifestyle.com/Kiplinger

By Billy and Akaisha Kaderli

Special to Financial Independence Hub

On our latest adventure, we were on the beach in Isla Mujeres, Mexico when a lady recognized us from our website RetireEarlyLifestyle.com. After some pleasantries, she asked if we could address the fears of the market declining and how to handle it.

We appreciated that input from one of our Readers.

Previous market declines

Since the surviving of the 1987 crash when the Dow Jones Industrial Average fell over 20% in one day, there have been other downturns including the recent ones of 2007-2008 and the Covid meltdown in March of 2021. We have learned from each of them.

They can be trying on one’s patience and confidence, so how is it best to handle them?

Noise, corrections and bears

First, let’s define these meltdowns.

Between a 5-10% decline in the averages is called noise and can happen at any time.

Many individual issues have these gyrations which is why we own the Indexes. They are more stable.

Over a 10% drop is called a correction, meaning it is wringing the excesses out of the markets. The markets are constantly being over-extended and under-extended and these 10% moves correct for those times.

If the averages drop 20% or more, it is considered to be a bear market and we tend to have these every 56 months.

On average, bear markets last 289 days or 9.6 months with an average loss of 36.34%. These can be painful for one’s financial health – or an opportunity – depending on where you are in the investment cycle.

A number of events can lead to a bear market including higher interest rates, rising inflation, a sputtering economy, and a military conflict or geopolitical crisis. Seems we have all of these presently.

If you are in the accumulation phase and buying more shares at cheaper prices, this can be a bonus for you. However, if you are now retired and living off your investments with your account values dropping, that can be difficult to swallow.

How to calm your nerves to prevent panic selling

It’s important to note the difference between trading and investing.

Traders drive the day-to-day activity, booking profits and hopefully taking losses quickly. We investors take a longer view to ride out these cross currents of the markets knowing that – over the long run – we will be fine. Continue Reading…

Hedged vs Unhedged ETFs explained

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Currency hedging can impact an ETF’s price and overall performance; learn about hedged and unhedged ETFs in Canada here.

 

By David Kitai, Harvest ETFs

(Sponsor Content)

The idea behind an ETF is relatively simple. At the most basic level, an ETF issuer creates a basket of securities and lists that basket on a stock exchange for investors to buy and sell. The ETF tracks the value of that basket and moves on the market accordingly.

The trouble is, nothing is ever quite so simple. Many Canadian investors want exposure to US securities, as US markets are the largest and most important in the world. What happens when the securities an ETF issuer uses are based in the US, and trade in US dollars, but their ETF will be listed on the TSX and trade in Canadian dollars?

Now, two factors are impacting the ETF: the value of its basket of securities, and the fluctuating exchange rate between USD and CAD. That means, regardless of the value of its holdings, if the USD goes up, the value of the ETF will also go up. If the USD falls, the ETF will also fall. This is called currency risk.

Some ETFs will employ a strategy called currency hedging to minimize the impact of currency risk on an ETF’s value. Those ETFs will usually be described as “Hedged CAD.”

What “Hedged CAD” means

Generally, when an ETF is Hedged to CAD its portfolio managers use a tool called a “currency forward” to lock in a specific exchange rate on a future date. In our Canadian ETF holding US securities example, if the USD has fallen by that date, the ETF makes a gain from the contract which offsets the value it lost from a falling USD on the portfolio holdings. If the USD has risen, the ETF nets a loss from the contract, which also offsets the value it gained from the rising USD.

The goal of currency hedging is not to maximize returns: the goal is to reduce the impact from currency risk as much as possible.

Harvest offers both hedged and unhedged ETFs in its lineup. A select group of Harvest Equity Income ETFs offer a Hedged “A” series and an unhedged “B” series to suit the goals of different investors. You can find a schedule of hedged and unhedged ETFs here.

Hedged vs Unhedged ETFs

So why would some investors want an unhedged ETF? The answer can vary somewhat. Currency hedging also comes with a small cost that is factored into performance over time.

Some investors may buy an unhedged ETF because they want to take on  exposure to currency risk. Some investors want to be exposed to certain currencies, and getting currency exposure through an ETF holding foreign securities is one way to achieve that. If an investor believes in the thesis behind a specific ETF, for example the US healthcare sector, and also believes the USD will rise against the Canadian dollar, then buying the unhedged “B” series of the Harvest Healthcare Leaders Income ETF (HHL:TSX) would give them exposure to both a basket of US healthcare stocks and the value of the US dollar against the Canadian dollar. Continue Reading…

Healthcare stocks promise maximum gains with least amount of risk

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Adding the Best Healthcare Sector Stocks to your Portfolio can Lead to Profits over Time, Especially when the Company Offers a Broad Set of Essential Services or Products.

 

Healthcare investments are stocks, mutual funds or ETFs involved in the healthcare industry.  Healthcare sector stocks involve a variety of industries, including hospitals, health insurance providers, medical devices and technologies, and pharmaceuticals.

If you are adding a healthcare investment such as a drug stock to your portfolio, you may want to consider a drug company that has been paying dividends, or one with a diverse portfolio.

Understanding the offerings within healthcare sector stocks

Drug stocks have a special appeal for many investors looking for healthcare investments. They assume that as the baby-boom generation goes through late middle age and beyond, demand for drugs will skyrocket. That’s undoubtedly true.

However, pharmaceutical companies are more speculative than many investors in healthcare investments realize.

Drug companies often invest tens if not hundreds of millions of dollars to create, test and secure regulatory approval for a single new drug. Even then, it may not manage to recover its investment before its patent expires.

Even when pharmaceutical industry research succeeds and creates new products worthy of healthcare investments, drug companies have to live with the constant threat of competition from breakthrough products that work better and/or are cheaper. But sometimes, drug company research fails to produce the hoped-for results. This failure may only become apparent with unsatisfactory results from the lengthy, costly drug trials required to gain regulatory approval.

Meantime, we continue to see attractive investment opportunities among the top medical device manufacturers. That includes Steris plc. It’s a market leader in the growing number of product categories in which it operates. That brightens the outlook for its investors.

Steris plc, symbol STE on New York, is an attractive buy for investors seeking long-term gains in healthcare sector stocks

Steris sells equipment and other products and services used in hospitals and laboratories.

These include anti-microbial and routine skin care products; biohazardous waste management systems; cleaning/decontamination systems; contract sterilization; environmental decontamination products; and food safety products.

Other products and services include high temperature sterile processing systems; low temperature sterile processing systems; microbial reduction services; patient positioning and transport systems; pure water systems; surgical lights; and surgical tables.

The company has approximately 13,000 employees worldwide and serves customers in over 100 countries. Steris moved its corporate domicile to Ireland in 2019 to benefit from that country’s lower tax rates. However, it’s headquartered in the U.S. Continue Reading…