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 Ins and Outs of Ethical Investing

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Image Pexels/Mikhail Nilov

By Anita Bruinsma, CFA

Clarity Personal Finance

Most people know that investing in the stock market is a good way to earn higher returns on their investments. Money in savings accounts and GICs doesn’t grow fast enough to keep up with inflation over time. To avoid eroding the value of savings, the stock market is the place to be.

You might agree that you need higher returns, but you might not want to support certain companies or industries for ethical reasons. When you buy a traditional mutual fund or exchange-traded fund (ETF), you will own dozens, hundreds or even thousands of companies. Not all of them will line up with your values.

The stock market is an efficient mechanism for companies to get access to the funding they need to grow – to develop new products, to offer more services, and to produce more goods. Like it or not, we are all part of this ecosystem. It’s impossible to escape. But what if you could earn higher returns while avoiding the worst of the worst companies, the ones you really don’t like?

Enter SRI and ESG investing.

What is SRI, ESG and impact investing?

SRI and ESG investing are terms used to describe ethical investing. Sometimes the terms are used interchangeably, but there are differences.

Socially-responsible investing, or SRI, is a way for investors to own companies that better align with their values, usually by eliminating certain sectors of the economy like oil, tobacco and weapons. Environmental, Social and Governance (ESG) investing is a little different – it applies a screen to companies to evaluate their practices as it relates to environmental, social and governance issues. The main difference is that with SRI you are avoiding certain industries, but with ESG you are investing in the “better or less bad” companies. There is a third term: impact investing. This takes things a step further and focusses on companies that are actively doing ethically-appealing activities, like funding community projects, enhancing solar energy technology, or financing local food producers.

For example, an SRI ETF might invest in the U.S. market index but eliminate companies in oil production and weapons manufacturing. An ESG fund might invest in the U.S. market index but exclude the bottom 25% of companies, as ranked by their ESG practices. An impact fund might invest only in solar energy companies.

Three things you need to know

There are some important things to understand about ethical investing before you jump in.

  1. You’re not always getting what you think you’re getting.

Would you be surprised to learn that your ESG fund owns Amazon, a seller of massive amounts of consumer goods that provides same-day, gas-guzzling delivery? Or Halliburton, one of the world’s largest fracking companies? Or Agnico-Eagle, a mining company? The reason they are in the ESG fund is that they are actively doing things to be less bad, or even do some good. They get points for writing a report outlining their environmental practices, like buying electric vehicles, using more green energy in their operations, and doing environment clean-up. Their operations might not be great for the world (although we all use oil and gas, metal, and probably Amazon), but they are offsetting some of the damage by doing good things. Continue Reading…

How 12 Business Leaders invest to Grow their Income

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From getting over the fear of starting to looking into REITs, here are 12 answers to the question, “Can you share your most recommended tips for how you can invest your money to grow your wealth and increase your income, specifically for financial independence through investing?” 

  • Get Started Right Now 
  • Maximize Tax-advantaged Investments
  • Avoid Trying to Time the Market
  • Remember Diversification is More Important Than You Think
  • Put Your Tax Refunds to work
  • Create a High-Yield Savings Account
  • Think of the Market as a Game
  • Prioritize Risk Management Over Chasing High Returns
  • Be Patient and Plan
  • Raise Your Savings Rate by 5% Each Year
  • Repay High-interest Debt
  • Try REIT Index Funds 

Get Started Right Now 

Investing is one of those things that seems like an insurmountable barrier to entry for many people. How can I invest when I don’t have thousands of dollars just kicking around is a common attitude I’ve come across, and in my opinion, it is one of the biggest mistakes toward actually growing your wealth and becoming financially independent. 

The thing is that you actually have to get started: even if it’s a few dollars at a time invested in penny stocks, you’ve got to make a start. Even if the amounts are negligible, you’re gaining invaluable experience in financial markets and financial literacy that will pay massive dividends down the line. — Dragos Badea, CEO, Yarooms

Maximize Tax-advantaged Investments

Both IRAs and 401(k)s have tax advantages [and the equivalent RRSPs and group RRSPs in Canada: editor]. You can choose to deduct your contributions from your taxes or contribute after taxes and avoid taxes when you withdraw during retirement. 

IRAs and 401(k)s are easy to set up. A 401(k) is offered through employers, so if your workplace offers one and matches a percentage of your contributions, take advantage of that matching benefit.

Anyone can start an IRA. You can open an account online today with Fidelity or another firm. Many people assume it’s hard to set up, but it’s not. You can do it in half an hour. 

With both options, you can set up automatic withdrawals from your paycheck. That option helps you succeed in saving because you don’t have to think about it. — Michelle Robbins, Licensed Insurance Agent, Clearsurance.com

Avoid trying to Time the Market

Almost 80% of active fund managers fall behind the major index funds. 

So if these financial professionals can’t beat the market, what chance do ordinary people like you and me have? 

This is why my best investing tip is consistently putting money into an index fund like the S&P 500 without trying to time the market. 

By putting a portion of your salary into an index fund every month for decades, your investments compound, allowing you to build unimaginable amounts of wealth. 

For example, if you put just $300 a month into an index fund growing 8% annually, you’ll have over one million dollars after 40 years. — Scott Lieberman, Owner, Touchdown Money

Remember Diversification is more Important than you Think

Portfolio diversification is a powerful tool that can help protect your investments against large losses due to market downturns. By selecting assets with low correlation, you are essentially increasing the safety of your portfolio while pursuing rewards. This strategy has become indispensable for individual investors and financial advisors alike: after all, who wouldn’t want some extra security for their hard-earned money?

If you split them between two different companies, such as Invest A and B — one providing package deliveries and another offering video conferencing services — you’ll have far less reason for worry in times of economic hardship or other disruptive events! Look at how gas shortages can fuel success with Investment B: when stock prices dip on account of limited resources, people switch to digital communication tools from home, which ultimately benefits Investment B’s performance. — Derek Sall, Founder and Financial Expert, Life and My Finances

Put your Tax Refunds to work

Using your tax refunds to invest is a wise investing tactic to consider that you may have never thought about: for many, the short-term sacrifice is worth the long-term benefits, especially as you settle into life after work. 

This is a great way to supplement your current income or even a retirement account, or jump-start a new investment account. Tax refunds can also be used for other pivotal financial reasons, including paying off debt, funding an IRA, building a health savings account, and creating an emergency stash. — Dakota McDaniels, Chief Product Officer, Pluto

Open a High-Yield Savings Account

While savings accounts aren’t exciting ways to grow your wealth, online banks are currently paying 3-4% interest. While 3-4% might not seem like much, it only takes a few minutes to set up an account, meaning you can earn interest risk-free while also keeping your money easily accessible. — Larissa Pickens, Co-Founder, Worksion

Think of the Market as a Game

For investing, I always tell people to think of the stock market as a big game of poker.

Invest in real estate: “I like to think of real estate as the gift that keeps on giving. With rental properties, you’re not just earning income from tenants, but also building equity over time.”

Start your own business: “Entrepreneurship is not for the faint of heart, but neither is settling for a mediocre 9-5 job. Starting your own business is like taking a leap of faith and trusting that you’ve got what it takes to make it happen. Just remember to pack a parachute.”

Invest in yourself: “Investing in yourself is like planting a money tree, except instead of watering it with H2O, you’re watering it with knowledge and experience. So, go ahead and take that online course, attend that industry conference, or volunteer for that new project. Your future self will thank you.” — Russ Turner, Director, GallantCEO 

Prioritize Risk Management over Chasing High Returns

Although even small returns can accumulate into significant wealth through compounding, a single failed investment can cause a substantial loss. 

To mitigate risk, I employ the dollar-cost averaging (DCA) strategy when investing in the S&P 500. The S&P 500 is already a diversified index, reducing the risk associated with individual stock investing. Furthermore, the DCA strategy further minimizes risk by investing fixed amounts of money at regular intervals, regardless of the market’s ups and downs.  Continue Reading…

Tawcan: 5 stocks we plan to buy this year

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Photo unsplash/Yiorgos Ntrahas

By Bob Lai, Tawcan

Special to Financial Independence Hub

A new year is here and many investing-focused Canadians like us are overjoyed. Because this means new contribution room for TFSA and RRSP.

If you look at our dividend portfolio, you’ll see that we currently own 50 individual dividend stocks and 1 index ETF. Interestingly, despite making an effort at reducing the number of holdings last year, we ended up now at the end of the year with the same number as we had at the beginning of 2022.

The individual stocks we own consist of a mix of US and Canadian stocks:

With the new contribution room for TFSA and RRSP, we are eager to purchase more shares of the stocks and index ETF that we already own, rather than initiate new positions. But again, plans are only plans and can change if a new potential new position becomes too attractive to ignore.

Here are 5 stocks we plan to buy in 2023 and our rationale for each:

5 stocks we plan to buy in 2023

Before we proceed further, please note that I’m not a professional financial advisor. Whatever I write and share on this blog is purely my personal opinion. It should not be treated as advice or recommendations. Please always do your own research and due diligence before buying and selling stocks or ETFs. Thank you.

1.) Apple (AAPL)

Despite only owning an iMac at home and no other Apple products, both Mrs. T and I like Apple a lot. We are probably one of the rare households that are not deeply tied into the Apple ecosystem despite owning a Mac.

For some reason, we continue to use Android-based phones and do not own iPad, Apple laptops, and other Apple products. But as I stated, we’re probably one of the rarities. Many people, once they purchase an Apple product, end up purchasing more Apple products and become deeply rooted in the Apple ecosystem. For example, it may start with a MacBook, then an iPhone. Soon the purchases of AirPods, an Apple Watch, and perhaps an iPad and even an Apple TV. And that’s not to mention all the Apple services the Apple users would end up using and paying for once they’re entrenched deep in the Apple ecosystem. For example, Apple Music and Apple cloud storage.

Why do we like Apple? Well, what’s not to like when the company makes billions and billions of dollars each quarter?

apple Q1 2023 income statement

While iPhones make up the bulk of Apple’s revenues, revenues from services have increased over the years as you can see from the chart below.

Apple revenues
Source: Statista

Yes, Apple’s Q1 2023 results look a bit disappointing – down 5% YoY, a bigger drop than many analysts expected due to iPhone supply issues. The EPS was $1.88 versus the $1.94 estimated, and down 10.99% YoY.

While the hardware revenues struggled in Q1 2023, services revenue finally broke the $20 billion mark after four straight quarters being in the $19 billion range. This is quite significant as Apple tries to transition and become a services-centric company.

We all know that Apple products are usually more expensive than its competition, yet people continue to buy them. Due to its brand name, Apple is able to charge a premium over its competition (aka the Apple tax) and as a result, enjoy a higher gross margin (in case you’re wondering Apple’s Q1’23 gross margin was 42.96%!).

Apple’s share price has struggled a bit in 2022, mostly caused by uncertainties in the rising interest rate environment. But Apple’s share price has continued to go up over the long term.

Apple share price

Apple has a 10-year dividend increase streak with a 10 year dividend growth rate of 25.26%. Although the dividend yield is extremely low, the overall total return has been quite impressive.

I believe 2023 will be a big year for Apple as we expect many new products to be announced. Just last month, Apple announced M2 Pro and M2 Max based MacBook Pro and Mac mini as well as HomePod.

One very important to note, as I pointed out in the tweet above, is that every Apple desktop and laptop (except Mac Pro) now all have integrated components. This means the desktops and laptops are not user upgradable at all. To-be-Mac-owners must decide whether to buy additional RAM and SSD storage at the time of purchase.

Let’s not forget Apple charges an arm and a leg for these upgrades! For example, going from 16 GB unified memory to 32 GB on a 14-inch MacBook Pro will cost you $500 CAD. And going from a 1TB SSD to a 2 TB SSD will cost you $500 CAD.

Did I mention that these laptops and desktops aren’t cheap to start with?

14 inch MacBook pricing
14-inch MacBook Pro pricing. Hardly affordable for students

It sucks to be an Apple customer when you have to buy a new laptop or desktop and need memory and storage upgrades. But this is really good news for Apple shareholders.

2.) iShares All Country World Ex-Canada International ETF (XAW)

Yes, XAW isn’t a stock, but rather an index ETF. Since we plan to add more XAW shares throughout 2023, I thought I’d include it on the list.

Why buy more XAW shares?

One word – diversification.

XAW holds more than 9,000 international stocks with more than 60% exposure to the US market, 6% exposure to the Japanese market, 4% exposure to the UK market, 3% exposure to the Chinese market, and exposure to other global markets. So by holding XAW, we are able to get an instant asset and geographical diversification. This kind of diversification is nearly impossible to do when holding individual dividend stocks.

Furthermore, XAW is also good for many Canadian investors who have an inherent Canadian bias, holding arguably an overly high percentage of their portfolio in Canadian stocks.

We plan to add more XAW throughout this year in our RRSPs and non-registered accounts and take advantage of the commission-free ETF purchase that Questrade offers.

At the time of writing, XAW is one of the top five holdings in our dividend portfolio. We are hoping to purchase more XAW so it can rise to be the top or second-place holding in our portfolio.

3.) Waste Connections Inc (WCN.TO)

We started buying WCN shares in late 2021 but didn’t get a chance to get more when the stock market was volatile in the latter half of 2022. Overall, I really like the business sector WCN is in – people will produce garbage and waste and companies like Waste Connections will collect, transfer, dispose of them, and make a profit.

Because people produce garbage regardless of whether it’s a bull or a bear market, WCN’s business should be quite stable. In other words, the waste management sector is a recession-proof area. Given a potential recession in the future, it makes sense to add more shares of WCN.

WCN’s dividend yield is below 1%, so many income-focused investors may ignore it. However, WCN has been raising its dividend for 13 straight years with a 10 year dividend growth rate of 14.4% and a 5 year dividend growth rate of 13.6%. Whichever you slice it, WCN’s dividend growth rate has been quite impressive. Continue Reading…

Timeless Financial Tips #2: Rising above the Noisy News

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Lowrie Financial: Canva Custom Creation

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…