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).

Stop checking your portfolio

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We’re halfway through 2022 and the year has not been kind to investors, to say the least. Global stock markets are suffering their worst prolonged losses in recent memory. The S&P 500 is down about 18.5%, international stocks are down about 17%, and emerging market stocks are down about 15%. Domestic stocks have fared better, but the broad Canadian market is still down about 4% this year.

Meanwhile, bonds have not been a safe haven as rising interest rates pushed bond prices down. A broad Canadian bond index is down almost 13% this year, while short-term bonds are also down about 5.5%.

What’s an investor to do?

For starters, stop checking your portfolio so often. Investors who focus too much on short-term performance tend to react too negatively to recent losses, at the expense of long-term benefits. This phenomenon is known as myopic loss aversion:

“A large-scale field experiment has shown that individuals who receive information about investment performance too frequently tend to underinvest in riskier assets, losing out on the potential for better long-term gains (Larson et al., 2016).”

Loss aversion is a cognitive bias – the idea that a loss is psychologically more painful than the pleasure of an equivalent gain.

Think of the your portfolio returns over the past three years (2019-2021). It felt good to see your investments increase by double-digits. Here are the returns for Vanguard’s Balanced ETF (VBAL) during that time:

  • 2019 – 14.91%
  • 2020 – 10.24%
  • 2021 – 10.27%

Fast forward to 2022 and VBAL is down 10% on the year. Loss aversion tells us the pain of these losses is felt twice as powerfully as the pleasure of the previous years’ gains.

Myopic loss aversion fails to consider the bigger picture

With myopic loss aversion, we focus too narrowly on specific investments without taking into account the bigger picture. You’ve experienced this if you’ve ever checked your portfolio a short time after a recent purchase and cursed your luck if the investment is down.

Professor John List was a recent guest on the Rational Reminder podcast and he co-authored a paper on myopic loss aversion. The paper found that, “professional traders who receive infrequent price information invest 33% more in risky assets, yielding profits that are 53% higher, compared to traders who receive frequent price information.”

When asked how often investors should check their portfolio, List said, “as rarely as possible”:

“I would say once every three, six months is fine. But the reason why I don’t want you to look at your portfolio is, because when you do and you see losses, even though they’re paper losses. You say, “My gosh, that hurts.” And you’re more likely to move your portfolio out of risky assets and into less risky assets. And as we all know, just look at the data. The data over long periods of time, that’s the equity premium puzzle, is that you get much higher returns, if you’re willing to bear some of that risk. Now, if you look at your account a lot and you have myopic loss of version, you’ll be much less likely to bear that risk. So, you’ll move out and you’ll be in inferior investments.”

This applies to both novice and experience investors. I coach clients regularly on the benefits of sticking to their investment strategy and ignoring short-term market fluctuations. But it’s hard when the daily news headlines are screaming in your face about how bad the market is doing and why it’s only going to get worse.

My worst moment was during the March 2020 crash. I had just quit my job three months before, and my investments were down 34% in a short period of time. It was a rough time when even I was questioning what to do. It didn’t help that I had no RRSP or TFSA contribution room – so I couldn’t even “buy the dip” to make myself feel better.

Related: Exactly How I Invest My Own Money

What did I do? I stopped checking my portfolio. I had no reason to log-in anyway, since I wasn’t making regular contributions. I reminded myself that my investments were long-term in nature, and that markets go up most of the time. Periodic declines are the price of admission for risky assets like stocks. Continue Reading…

What you need to know before investing in All-in-One (Asset Allocation) ETFs

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By Michael J. Wiener

Special to the Financial Independence Hub 

 

I get a lot of questions from family and friends about investing.  In most cases, these people see the investment world as dark and scary; no matter what advice they get, they’re likely to ask “Is it safe?”  They are looking for an easy and safe way to invest their money.  These people are often easy targets for high-cost, zero-advice financial companies with their own sales force (called advisors), such as the big banks and certain large companies with offices in many strip malls.  An advisor just has to tell these potential clients that everything will be alright and they’ll be relieved to hand their money over.

A subset of inexperienced investors could properly handle investing in an all-in-one Exchange-Traded Fund (ETF) if they learned a few basic things.  This article is my attempt to put these things together in one place.

Index Investing

Most people have heard of one or more of the Dow, S&P 500, or the TSX.  These are called indexes.  They are a measure of the price level of a set of stocks.  So, when we hear that the Dow or TSX was up 100 points today, that means that the average price level of the stocks that make up the index was up.

It’s possible to invest in funds that hold all the stocks in an index.  In fact, there are funds that hold almost all the stocks in the whole world.  There are other funds that hold all the bonds in an index.  There are even funds that hold all the stocks and all the bonds.  These are called all-in-one funds.

Most people know they know little about picking stocks.  They hear others confidently talking about Shopify, Google, and Apple, but it all sounds mysterious and scary.  I can dispel the mystery part.  Nobody knows what will happen to individual stocks.  Bold claims about the future of a stock are about as reliable as books about future lottery numbers.  However, the scary part is real.  If you own just one stock or a few stocks, you can lose a lot of money.

When you own all the stocks and all the bonds, it’s called index investing.  This approach to investing has a number of advantages.

Investment Analysis

Investors who pick their own stocks need to pore over business information constantly to pick their stocks and then stay on top of information to see whether they ought to sell them.  When you own all the stocks and all the bonds, there’s nothing to analyze or track on a frequent basis.

Risk

Owning individual stocks is risky.  Any one stock can go to zero.  Owning all stocks has its risks as well, but this risk is reduced.  The collective stocks of the whole world go up and down, occasionally down by a lot, but they have always recovered.  We can’t predict when they’ll drop, so timing the market isn’t possible to do reliably.  It’s best to invest money you won’t need for several years and not worry about the market’s ups and downs.

To control risk further, you can invest in funds that include both stocks and bonds.  Bonds give lower returns, but they’re less risky than stocks.  Taking Vanguard Canada’s Exchange-Traded Funds (ETFs) as an example, you can choose from a full range of mixes between stocks and bonds:
ETF Symbol     Stock/Bond %
      VEQT           100/0
      VGRO           80/20
      VBAL           60/40
      VCNS           40/60
      VCIP           20/80

Cost

Sadly, many unsophisticated investors who work with financial advisors don’t understand that they pay substantial fees.  These investors typically own mutual funds, and the advisor and fund company help themselves to investor money within these funds.  There is no such thing as an advisor who isn’t paid from investor funds. Continue Reading…

6 ways a Recession resembles a Bad Mood

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

There’s been a lot of talk about recessions lately: Whether one is near, far, or perhaps already here. Whether we can or should try to avoid it. What it even means to be in a recession, and how it’s related to current market turmoil.

To put market and recessionary concerns in perspective, it might help to describe six ways a recession resembles a bad mood. There are some intriguing similarities!

1.) There is no Precise Definition

We all know what a bad mood feels like. But there is no clear definition for a nebulous mix of real and perceived setbacks, and how they’re going to affect us.

Likewise, there is no single signal to tell us exactly when a recession is underway or when it’s over. Instead, recessions can trigger, and/or be triggered by a number of conditions connected in various fashions and to varying degrees. These usually include a declining Gross Domestic Product (GDP), along with rising unemployment, sinking consumer confidence, gloomy retail forecasts, disappointing corporate balance sheets, a bond yield curve inversion, stock market declines, and similar combinations of objective and subjective events.

In the U.S., the National Bureau of Economic Research (NBER) intentionally defines a recession rather vaguely as follows (emphasis ours):

“A recession is a significant decline in economic activity that is spread across the economy and that lasts for more than a few months.”

Closer to home, the Bank of Canada and/or the minister of finance typically let us know once we’re in a recession. As described here, they base their calls on guidance from the 2015 Federal Balanced Budget Act, economic indicators coming out of Statistics Canada, and economic analyses from Canadian economists such as C.D. Howe Institute’s Business Cycle Council.

Globally, the World Bank Group has stated, “Despite the interest in global recessions, the term does not have a widely accepted definition.”

2.) You usually can’t spot one except in Hindsight

How do you know when you’re in a bad mood? Often, you don’t, until you’re looking back at it.

Recessions are similar. Since a widespread downturn must linger for a while before it even qualifies as a recession, governments typically only declare one after it’s underway. For example, triggered by the abrupt arrival of the global pandemic, Canada and the U.S. alike entered into their shortest recessions to date, beginning and ending in first quarter 2020. However, neither government announced the news until July and August, respectively.

3.) Sometimes, we get stuck for a while

Hopefully, your bad moods come and go, resulting in more good times than bad. But sometimes, one misfortune feeds another until you feel gridlocked. It may take a while before improved conditions, a more upbeat attitude, or a blend of both help you move forward.

In similar fashion, recessions can become a self-fulfilling prophecy. As Nobel Laureate and Yale economist Robert Shiller describes, “The fear can lead to the actuality,” in which (for example) economic conditions might feed inflation, which inverts the bond yield curve, which signals a recession, which shakes corporate and consumer confidence, which leads to unfortunate reactions that further aggravate the challenges. And so on. When this occurs, a recession and its related financial fallout may last longer than the underlying economics alone might suggest.

4.) They’re Inevitable

It’s never fun to be in a bad mood, but we can all agree they’re part of life. It would be unhealthy, exhausting even, if we were endlessly giddy every minute of every day.

Similarly, nobody celebrates a recession. But it helps to recognize they aren’t aberrations; they are part of natural economic cycles. And while they may not be anyone’s favorite tool for the job, they can sometimes help rein in runaway spending, earning, and pricing for companies, consumers, and creditors alike. Continue Reading…

Artificial Intelligence can help investors and advisors alike

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By Fuad Miah and Justin Hacker

Special to the Financial Independence Hub

Financial and wealth-management advisors tend not to be big fans of robo-investing. No surprise there because service and understanding the client are front and centre in what they do.

But for many investors today, especially younger ones, robo-investing may be seen as a low-cost, low-maintenance way to grow their wealth. Robo-investing relies on algorithms to make investments automatically and this is with minimal human supervision at best. But there is no ‘expert’ service involved and that is not good.

On the other hand, how about using Artificial Intelligence (AI) to assist advisors in better serving their clients and, in the process, help those clients build better portfolios? Don’t look now but the technology is here and it can start with meetings. Nowadays people are slowly but surely returning to the office and financial advisors are even getting back to meeting face-to-face with their clients. But a face-to-face meeting is not always required.

A new world of hybrid meetings

Today, however, we are in a new world of meetings where firms big and small are adopting a mix of online, in-person and ‘hybrid’ meetings which utilize both the virtual and in-person variety. With AI an advisor can make this choice wisely.

It involves human-like AI that enhances the meeting experience for both the host and the attendees by allowing participants to focus on the meeting and forget about labour-intensive tasks like note-taking. How? A full transcript and recording of what transpired are automatically created and then crafted into a concise executive summary. And the technology can do even more by using what is called ‘collected telemetry’ (the conversation data that pertains to everything from context to emotion) to build an advanced analysis of performance and even  sentiment. Continue Reading…

Top Canadian Dividend ETFs

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub

What makes a great Exchange Traded Fund (ETF)?

What makes a great Canadian dividend Exchange Traded Fund? 

What are the top Canadian dividend ETFs to own?

You’ve come to the right site and the right post.

Top Canadian Dividend ETFs – what is an ETF?

An ETF (Exchange Traded Fund) is a diverse collection of assets (like a mutual fund) that trades on an exchange (like a stock does).

This makes an ETF a marketable security. It has trading capability. Since you and buy and sell ETFs on an exchange during the day, prices can change throughout the day as they are bought and sold.

ETFs typically have lower fees than mutual funds (although not always), which can make them an attractive alternative to mutual funds.

Based on my personal experiences approaching 20 years as a serious DIY investor, ETFs are easy to buy using a discount brokerage and offer a low-cost way to own dozens if not hundreds of stocks to diversify your portfolio.

Although you don’t need to buy equity ETFs, it is my belief that you’re FAR better off owning more equities than bonds over long investing periods.

The reason for this is rather simple: if you want predictable returns you’re going to have to live with lower, long-term returns that offer this predictability. If you want higher, long-term returns, you’re going to have to live with the short-term volatility that comes with higher-risk equities.

Simply put: learn to live with stocks for wealh-building.

If you’re just starting out your investing journey, you can learn more about ETFs here.

What goes into a good ETF? What should you consider?

Before we get into my favourite Canadian dividend ETFs, here are some elements that make up a solid ETF:

1. Style – ETFs can track an index, follow an industry sector, be rules-based like some smart-beta funds are, or be much more. For the most part, I prefer either plain-vanilla, broad market equity indexed ETFs or dividend ETFs when I share my favourites with readers or other investors. This is because the former provides market-like returns less skimpy money management fees. Dividend ETFs can provide income; tangible money you and I can use as we please while offering some long-term growth. I avoid other types/styles of ETFs based on futures, hedges or swap agreements. By and large those products tend to make the company offering those funds rich, not you.

2. Fees – Hopefully by now you know high money management fees kill portfolio values over time. When it comes to fund fees in particular, my bias is, I try to keep the management expense ratio (MER) (the fee paid to the fund’s manager, as well as taxes and other costs) low for as long as possible. That means I wouldn’t consider owning any ETF over an MER of about 0.50% – including any Canadian dividend ETF. You should also be considering investing in products with fees that are lower than that.

Further Reading: Learn about MERs, TERs and more about ETF fees here.

3. Tracking error – In short, tracking error is the difference between the performance of the fund (the ETF) and its benchmark (what it tracks). I would advise you to look at the fund’s prospectus before you buy it and strive to own ETFs with low tracking errors.

4. Diversification – Along the same lines ‘Style,’ you should be very mindful of the assets within an ETF before you buy it. ETFs are not created equal.

For a quick example, I’ve been a huge fan of Canadian broad market ETFs like XIU, XIC, ZCN, VCN, along with others over the years.

I like XIU in particular.

XIU holds the largest 60 stocks in Canada. XIU however has nowhere near the number of holdings that VCN has (214 at the time of this post) yet XIU has delivered stellar long-term returns better than most. Just because of the limited fund holdings, is XIU really an inferior product to VCN for our Canadian market?  Hardly.

Based on my personal experiences, diversification can be a great ally as a risk mitigation tactic against stock picking but that doesn’t mean it’s bulletproof. Indexed ETFs hold all the studs and duds in fact. Typically the larger the ETF equity holdings are, the better the chance you’ll own all the stock duds and studs as well. More stock holdings does not automatically equate to better returns.

5. Tax efficiency – If you never intend to max out your TFSAs, RRSPs, kids’ RESPs, or other registered accounts then this is a non-issue for you.

For some investors however, who invest outside registered accounts (such as the aforementioned RRSPs, RRIFs, TFSAs, RESPs, LIRAs) like I do, then you need to consider the tax efficiency of your ETFs.

Be wary of ETFs that have lots of turnover by the fund manager (through buying and selling securities) – those funds are likely to result in more costs to you.

In taxable accounts, I would advise you to look at the fund’s prospectus before you buy it and strive to own ETFs that are as tax efficient as possible.

Further Reading: How to invest for tax efficiency investing in taxable accounts.

6. History – While past performance is never indicative of future results unfortunately history is all we have since nobody can predict the financial future with any accuracy.

I think owning funds that have an established history of > 3 years or more is generally smart.

While new ETF entrants are fine, ETF tactics can change by the company that runs the fund at will – so buyer beware of any ETF niche products. This is yet another reason I believe sticking to plain vanilla funds or dividend ETFs that are easy to understand; something you can explain to a 10-year-old. Simplicity when it comes to investing is usually more value to you as the long-term investor.

What are my Top Canadian Dividend ETFs? Continue Reading…