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).

What’s the real deal with Mutual Funds?

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By Anita Bruinsma, CFA

Special to the Findependence Hub

Mutual funds stir up heated debates all across the internet. Fund companies sing their praises while others say they are taking you to the cleaners. It can be confusing – are they good or bad? What’s the real deal with mutual funds?

A game-changer for investors

Mutual funds democratized the stock market, making investing accessible to more people, and this was a very good thing. Before the popularization of mutual funds in the 1950s, it was more difficult to get your money invested in the stock market: you needed a stock broker to buy stocks for you and you needed a fair amount of money. 

The idea behind a mutual fund is simple: collect money from a group of people and hire professional money managers to invest this pool of money into dozens of stocks, generating a return for the investors. It’s the pooling of money that is so powerful: it allows a fund to be diversified, giving investors exposure to a myriad of stocks instead of just a few.

As an individual investor, you’d need a lot of money to get that kind of diversification. And whereas a broker would charge a large commission for every trade, a mutual fund has economies of scale, making the costs lower overall. Plus, as a mutual fund investor you don’t need to know one single thing about the stock market. What a win for the masses!

The downside

So why do mutual funds get a bad rap sometimes? It’s mainly because sales practices around mutual funds have a muddied history. Investment advisors who are making recommendations to their clients about what to invest in might be influenced by sales commissions, possibly encouraging them to put their clients’ money into funds that pay them the most commission. Worse, these commissions (and other perks that used to be permitted) were not always properly disclosed to clients. Regulations have improved in this area, but sales commissions can still influence an advisor’s choice of funds. Continue Reading…

The Rule of 30

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By Michael J. Wiener

Special to the Findependence Hub

Frederick Vettese has written good books for Canadians who are retired or near retirement.  His latest, The Rule of 30, is for Canadians still more than a decade from retirement.

He observes that your ability to save for retirement varies over time, so it doesn’t make sense to try to save some fixed percentage of your income throughout your working life.  He lays out a set of rules for how much you should save using what he calls “The Rule of 30.”

Vettese’s Rule of 30 is that Canadians should save 30% of their income toward retirement minus mortgage payments or rent and “extraordinary, short-term, necessary expenses, like daycare.”  The idea is for young people to save less when they’re under the pressure of child care costs and housing payments.  The author goes through a number of simulations to test how his rule would perform in different circumstances.  He is careful to base these simulations on reasonable assumptions.

My approach is to count anything as savings if it increases net worth.  So, student loan and mortgage payments would count to the extent that they reduce the inflation-adjusted loan balances.  I count contributions into employer pensions and savings plans.  I like to count CPP contributions and an estimate of OAS contributions made on my behalf as well.  The main purpose of counting CPP and OAS is to take into account the fact that lower income people don’t need to save as high a percentage of their income as those with higher incomes because CPP and OAS will cover a higher percentage of their retirement needs. Continue Reading…

Value, Growth, or Both?

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Franklin Templeton/iStock

By Ryan Crowther, Portfolio Manager, Franklin Bissett Investment Management

and Yan Lager, Portfolio Manager, Equity Research Analyst, Franklin Equity Group

(Sponsor Content) 

For well over a decade, investors have focused on growth stocks: shares of companies expected to grow faster than the market average. But in recent months, the calculus has changed. Market volatility, driven by ongoing COVID-19 concerns, Russia’s invasion of Ukraine, rising interest rates and inflation, has led to a noticeable shift to value stocks. As investors focus on companies with strong fundamentals and comparatively lower-cost shares, do growth stocks still have a place in a diversified portfolio?

Financial Independence Hub: How would you describe the current landscape for growth stocks?

Yan Lager: We’ve been witnessing one of the most pronounced rotations from growth to value stocks in decades. In retrospect, following a multi-year run for growth-oriented equities that were clear beneficiaries of ultra-low interest rates, a rotation to value stocks as interest rates increase is not surprising to us.

Ryan Crowther: Looking at growth stocks generally, the terrain has become much more challenging in recent months, both in terms of the outlook for business fundamentals and a more discerning investor sentiment.

Have all growth stocks been hit equally hard?

Ryan Crowther: This is an important question, because when there’s a broad sell-off and a significant number of stocks drop sharply, they might all be considered “growth” stocks; but do they really share the same fundamentals? What risk versus return is the share price truly discounting? That’s where our GARP approach (growth at a reasonable price) has proven powerful for over 40 years, as it helps avoid focusing too much on whether a stock sits in the growth or value basket.

Which stocks have been most affected by the recent pullback in equity markets?

Yan Lager: Companies that benefited from the pandemic shift to working from home and the broader adoption of e-commerce, or persistently low interest rates, have seen their shares pull back due to profit-taking or concerns that future earnings performance may fall short of pandemic-high levels. Harder-hit stocks have included earlier-stage companies in the information technology sector, which have seen significant price and valuations fluctuations. We’re constantly reassessing the fundamental, longer-term investment theses and strategic merits of our investments.

What types of companies do you look for?

Yan Lager: In managing a global growth fund, we believe that owning a diversified portfolio of high-quality companies with strong secular growth drivers, unique competitive positions and capable management teams can deliver attractive returns, as ultimately share prices follow fundamentals. This is particularly the case if you’re investing for the long term, which we believe you should be if you’re investing in equities.

Ryan Crowther: We look for businesses with strong, consistent earnings and growing cash flow—attributes that will hopefully work to offset some of the factors that can challenge growth in the near term. In addition, a company’s valuations must also be attractive. We focus on combing through our investment opportunity set to find stocks offering a good risk-adjusted return profile over the course of an economic cycle.

Where are you finding opportunities these days?

Ryan Crowther: Focusing on mid- to large-cap Canadian companies, we’ve been active in securities that sold off as part of the broad weakness in growth stocks. We took advantage of that weakness to add new, quality companies at an attractive entry point. The shift — from the largely complacent and speculative equity market generally experienced throughout the pandemic — to the less forgiving market, characterized by a more rational mindset thus far in 2022, has created opportunities for us. Continue Reading…

Everything owned by Warren Buffett’s Berkshire Hathaway

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Warren Buffett of Berkshire Hathaway, which just held its first live annual meeting since Covid hit.

By Akshay Singh

Special to the Financial Independence Hub

You’ve probably heard of the multi-billion dollar company Berkshire Hathaway, owned by mega-billionaire and philanthropist Warren Buffett, but what does Berkshire Hathaway do exactly?

Berkshire Hathaway Inc. is a conglomerate holding company, meaning it does not produce goods or services and instead has a controlling interest in and owns shares of other companies to form a single corporate group.

That leads us to our next question: What companies does Berkshire Hathaway own to make it one of the most valuable companies on the planet? The team at Indyfin turned to the 2021 Berkshire Hathaway annual report to create this compendium of all of the Berkshire Hathaway companies. The holding company has a controlling interest in more than 60 companies and partially owns another 20 on top of that. You’ll recognize a lot of brand names from a wide variety of industries that make up the impressive Berkshire Hathaway portfolio.

Does Berkshire Hathaway own one of your favorite or most-used brands? Check out this roundup of Berkshire Hathaway companies from Indyfin to find out.

What Is Berkshire Hathaway?

Berkshire Hathaway is an American conglomerate holding company with a market cap of US$774.24 billion, making it the seventh most valuable company in the world. What is a conglomerate? A conglomerate is a combination of businesses from a variety of different industries that operate as a single economic entity under one corporate group. Conglomerates are usually large and multinational and generally include a parent company and many subsidiaries. The “conglomerate fad” was big in the 1960s due to low interest rates, rising prices, and a decline in the stock market, which led to large corporate conglomerates like Berkshire Hathaway forming. The parent company in this scenario is also referred to as the holding company, as it holds a controlling interest in the securities of all of the other companies. Holding companies do not produce goods or services; instead, they own shares of other companies to form a single corporate group. Holding companies are beneficial because they reduce risk for shareholders and can hold and protect assets like trade secrets or intellectual property.

What Does Berkshire Hathaway own? Continue Reading…

Why it might be time to rebalance the 60/40 Rule

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Investors follow the 60/40 rule because they are told bonds will protect capital while equities grow it. Why recent drops in bond prices should make us reconsider that rule. 

 

 

By Paul MacDonald, CIO, Harvest ETFs

(Sponsor Content)

From the moment they start putting money in the market, investors are told to follow the 60/40 rule. It is the broadly accepted wisdom that, for an average retail investor, a 60% allocation to equities and a 40% allocation to bonds will result in a robust portfolio. Equities should deliver growth prospects in the long term while bonds will offset downsides in equities by delivering uncorrelated returns. Bonds preserve capital, and equities grow capital. That’s the accepted wisdom. 

Countless investment fund issuers have packaged this logic into their balanced funds. These funds offer a specific allocation to equities and bonds, usually in line with the 60/40 rule, forming the core of a retail investor’s portfolio.

The problem with accepted wisdom is sometimes circumstances turn it upside down. In the past months we have seen volatility in equity markets and a significant drop in bond prices. That is because the investment landscape has changed. 

Why are bond prices dropping? 

After over a decade of historically low interest rates, followed by massive rate cuts by central banks at the onset of the COVID-19 pandemic, inflation has begun to set in. With rising inflation comes pressure on central banks to raise rates and market expectation that rates will rise, which is itself pushing interest rates higher.  Continue Reading…