Tag Archives: diversification

10 ways to get retirement ready

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By Mark Seed

Special to the Financial Independence Hub

You’ve worked your entire life. You put some money away; invested, watched that money now and then over time.

Yet instead of living it up for everything you’ve worked so hard for you’re counting coins to make ends meet.

I don’t want this to happen to me. I don’t want it to happen to you either.

Inspired by an article I read some time ago, why retirement might not work out for you, I’m going to go on the offensive: here are 10 ways I plan to get retirement ready.

Retirees or prospective retirees please chime in!

1.) I will favour stocks over bonds

Most retirees are worried about out-living their savings. With inflation as a massive wildcard in our collective financial future, this fear is not unwarranted.

One way to combat inflation is to own more stocks (for growth) than bonds (for income security when equities tank) in retirement. You could argue that a 70/30 stock to bond split might be a good starting point to enter retirement with.

I own 100% equities in our portfolio now. We have that bias to equities because I consider my future defined benefit pension plan “a big bond.” Eventual Canada Pension Plan (CPP) and Old Age Security (OAS) payments in our 60s will also be part of our fixed-income component.

Got a pension plan?  Lucky you.  Consider that a big bond.

Here is when to take CPP.

Here are the facts about taking OAS you need to know.

While it might be scary (for some) to watch the volatility of your stock portfolio go up and down like a yo-yo short-term, owning a nice blend of stocks and bonds should help you combat inflation rather well.

What % of stocks and bonds and cash do retirees out there use today?

2.) I will embrace diversification

Diversification is important when it comes to investing because by doing so, you can enhance returns while reducing the portfolio risk long-term. A pretty great deal.

For most of us, diversification means an appropriate mix of stocks and bonds, a blend of small-cap, medium-cap, and large-cap stocks; owning various sectors of the economy; owning stocks from countries or investing in economies from around the world.

It can also mean owning assets that are not always correlated to common stocks, like real estate investment trusts (REITs).

Source: NovelInvestor.com

While diversification will never guarantee you big profits, it will help you eliminate the risk of investment losses given that not all assets move in the same direction at the same time.

When it comes to getting ready for my semi-retirement, I may consider owning some low-cost, all-in-one asset allocation Exchange Traded Funds (ETFs) to increase the diversification across my portfolio while simplifying my investing approach for my senior years.

These are some of the best all-in-one ETFs to own.

3.) I will consider a die-broke plan

My parents are very fortunate to have defined benefit pension plans and have a bit of RRSP/RRIF money to draw down in the coming few years. I’ll be working on their strategy this year.

They also own most (not quite all) of their home.

With good planning and careful spending in their 70s, they will definitely have enough money to live comfortably for a few more decades: thanks to their workplace pensions and government benefits.

However, they are not planning to leave any inheritance: and that’s more than OK with the kids (!).

They have a die-broke or at least a near die-broke plan to around age 95

I think this makes great sense.  Working backwards (from age 95), you can calculate a more measured approach to spending money now while earmarking some funds to fight any longevity risk.

At the end of the day, as our lawyer said recently to us when we closed on our condo purchase:  “it’s only money.”

Figure out your estate plan and work backwards.  I suspect in doing so that will help your retirement preparedness.

Do retirees reading this site have a die-broke plan or an estate plan?

4.) I will track my spending (in more detail)

Ideally, all any retiree would need to know is: is enough money coming in to cover what expenses are going out?

Consider the following as part of your back-of-the-napkin calculations:

  • Do you have a rolling monthly credit card balance? If so, you’re spending too much.
  • Do you have a growing line of credit balance? If so, you’re spending too much.
  • Are you able to keep a cash wedge or an emergency fund topped up with cash? If not, you’re spending too much.

To get to retirement in the first place, you probably needed a budget.  There is no reason why you shouldn’t keep one throughout retirement.

I plan to up my game in the coming years, to keep a more detailed tracking log of our spending as we enter semi-retirement.  This will allow me to better forecast any travel expenses we intend to incur.

For now though, I believe this is a better way to budget.

How do you budget?

5.) I will rely on multiple income streams

Canada Pension Plan (CPP) and Old Age Security (OAS) won’t be enough for us.  It might not be enough for you.

While a base-level of income security will be provided from both government programs, for most adults who have worked and lived in Canada for many decades, the sum of this income probably won’t be enough to cover all housing, food, transportation and health-related expenses.

By relying on multiple income streams, beyond government benefits, this will increase your chances to meet retirement income needs and wants.

Here are our projected income needs and wants in retirement.  Do you know yours?

6.) I will disaster-proof part of my life Continue Reading…

Why retiring baby boomers won’t destroy the stock markets

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Shutterstock

By Dale Roberts

Special to the Financial Independence Hub

It’s a fear or suggestion that we hear repeated quite often. The massive cohort of retiring baby boomers will need to sell their stocks to create income and that will crash the stock markets.

Or let’s just say it could cause a slow bleed, taking down or suppressing the stock markets over the coming decades. As you may know the the stock market is, well, a market: it simply lines up the buyers and sellers and when there are more sellers than buyers the price of the stocks will decline.

When we hear the numbers on the baby boomers and more specifically how many boomers will retire each day, it’s often the US numbers that are repeated. When it comes to financial markets it is often very US-centric.

From this from Forbes.com article …

There were 77 million Baby Boomers born between 1947 and 1964, roughly 4.5 million per year. Some doomsayers are predicting the Boomers will drain the equity markets of their capital once they retire. Should you worry? Are your equity portfolios at risk?

It’s now predicted that there are 10,000 baby boomers retiring (in the US) each day. Now when the AARP releases figures such as that they simply use age 65 as a retirement date. Perhaps that’s not a bad benchmark but so many will retire well before age 65, and many more will not retire until well into their 70s and beyond. Many will not retire at all; they’ll continue with part time work. Baby boomers are known for being quite entrepreneurial.

And then, not all retiring baby boomers are going to go out and sell all of their stocks on their 65th birthdays. The public and private pension managers are not going to aggressively sell out of their US stock positions. Pensions hold well-diversified portfolios of US and International stocks and bonds and that also includes massive exposure to private equity: assets that are not ‘in’ the stock markets.

Why the boomers won’t crash the markets

The markets are mostly efficient and they factor in all available information with respect to individual stocks, economies and larger trends. It’s not news that North America is getting ‘older.’ That’s already priced in to the markets.

There is a heavy concentration of US stock ownership by more wealthy US citizens. The challenge for many may not be how fast can they sell their stocks but what to do with all of this wealth. Also, baby boomers are about to inherit over $15 trillion over the next 20 years. That will reduce or eliminate the need to sell those stock shares. You’ll find that, and some other interesting baby boomer stats in this Fool article.

I’ve been writing on Seeking Alpha for quite some time, and the readership is largely quite affluent. Many of these American boomer investors write more of accumulating more stocks in the retirement stage. In Retirees Don’t Say No When The Market Offers You A Nice Bonus I linked to a study that confirms that more affluent US retirees don’t spend down their retirement assets. They even become ‘savers.’

It’s a continual theme as well that many of these retirees ‘live off of the dividends.’ They’re not selling shares; they are simply collecting and spending the dividends. They will not put sell pressure on the markets.

New buyers

The millennial generation is even larger than the Baby Boomers and they will enter their accumulation stage and will be buyers of stock assets directly and by way of their pensions. There will be demand for stocks from younger generations. The Washington Post stated that the millennials will overtake the Boomers in 2019. We also have those echo-boomers and Gen-X’ers stepping in.

Bond yields are low; investors and pension managers know that they need those stocks for the longer term growth potential. Of course, we can often get greater income (and growing income) from stock dividends compared to bonds. The low yield environment also affects those newer and current accumulators as well as they may choose to shun low yielding bonds and embrace more stock exposure.

In Canada we see investors in that Balanced Growth Sweet Spot.

What history has to say

And if we look to the past and to studies, historically the correlation between age and asset prices is weak according to this white paper … Continue Reading…

Norway: Divestment Trailblazer (Take Note, Canadians overweight energy sector)

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Oil drilling platform in Norway (Deposit Photos)

By Jeff Weniger, CFA, WisdomTree Investments

Special to the Financial Independence Hub

We gasped a few weeks back when DWS Group launched an environmental, social and governance (ESG) ETF that raised nearly US$1 billion from a Finnish insurance company.

Two doors down, the US$1 trillion Norwegian sovereign wealth fund made its own announcement: it has enough North Sea oil exposure, so it’s slashing its energy portfolio. The Scandinavians aren’t talking; they’re acting.

Norway’s oil wealth comes from “upstream” extraction, so that’s the focus of the divestiture campaign. It’s not a wholesale energy liquidation just yet. Integrated oils like Chevron are still fair game because they have downstream refining and can thus offer diversification. Nevertheless, Norway is sending a clear message.

The trailblazing fund is a force to be reckoned with, controlling 1% of global listed equities. When it bobs, you weave.

There are two takes here: the idealistic one and the realistic one.

1.) Idealistic: A progressive northern European country is leading the way on a megatrend, just as it did with state-provided health care, parental workplace benefits and gender roles (and if we stretch to the Netherlands, drug decriminalization and bicycling).

2.) Realistic: A society whose fortunes are levered to the oil price is diversifying concentration risk under the guise of ESG.

Take note, Canada.

This nation is the portrait of cognitive dissonance. Justin Trudeau was supposed to be this era’s incarnation of the Summer of Love, with a warm Canadian kiss on the Paris Agreement for greenhouse emissions. Puzzling, then, the prospect of a Trans Mountain pipeline expansion.

Meanwhile, having Big Oil reach Big Tobacco pariah status can happen faster than you can google “University Divestment 1980s Apartheid.” I’ll give you the Coles Notes: apartheid died once institutional investors started cutting ties.

If you don’t think Canadian oil interests are petrified of the New Left’s answer to Trump — e.g., American congresswoman Alexandria Ocasio-Cortez — visit Suncor’s website. You wouldn’t know it was in the oil sands business, because you can’t get past all the sustainability, climate change and photos of sunshine. That’s when it dawns on you: this is like Altria urging smoking cessation. Catch even a fraction of the so-called Green New Deal and one-fifth of the S&P/TSX 60 is in a real pickle.

As Oslo goes, so goes Ottawa? Norway’s sector trap is particularly acute, so it forges the path (figure 1). Canadian asset allocators, get your compass: Norway is drawing the map.

Figure 1: Index Energy Weight

Jeff Weniger, CFA serves as Asset Allocation Strategist at WisdomTree. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.

Important Risks Related to this Article

Commissions, management fees and expenses all may be associated with investing in WisdomTree ETFs. Please read the relevant prospectus before investing. WisdomTree ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

The importance of diversification

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By Noah Solomon

Special to the Financial Independence Hub

Harry Markowitz, recipient of both the 1990 Nobel Memorial Prize in Economic Sciences and the 1989 John von Neumann Theory Prize, referred to diversification as “the only free lunch in finance.”

As most investors are aware, diversification is an essential element of any well-constructed portfolio. Diversification across different markets and individual securities can lower volatility, mitigate losses in declining markets and produce higher risk-adjusted returns over the long-term.

Easier said than done: the temptation to chase returns

Of course, during times when one asset class or country outperforms for an extended period, this can lead to feelings of regret. Looking in their rear-view mirrors, investors often wish that they had been less diversified and had an overweight position in the outperforming asset class. This regret can result in FOMO (fear of missing out), whereby investors pour capital into those areas of the markets which have been outperforming.

The U.S. stands alone

Since the post-financial crisis market bottom of March 2009, the U.S. stock market has dwarfed those of other markets in terms of performance. U.S. stocks have produced almost double the return of emerging markets stocks, which have been the second-best performer.

Country Annualized Return Cumulative Return
U.S. 15.1% 381%
Emerging Markets 7.5% 199%
Europe 6.9% 189%
U.K. 6.1% 176%
Japan 5.7% 170%
Canada 4.9% 157%

 

Sources: MSCI, Factset Research Systems

Unsurprisingly, the outperformance of U.S. stocks, reflected in the table below, indicates that the U.S. market currently stands as the most richly valued market as measured by its cyclically-adjusted Price/Earnings Ratio (CAPE).

Country Cyclically Adjusted P/E (CAPE)
U.S. 32.1
Japan 27.2
Canada 22.0
Europe 19.4
U.K. 16.9
Emerging Markets 16.4

 

Source: www.starcapital.de

Punished for doing the right thing

The spectacular outperformance of the U.S. stock market means that portfolios that have been heavily concentrated in U.S. stocks have generated considerably higher returns than their more diversified counterparts. In other words, investors who have sacrificed diversification in favour of being overweight U.S. stocks have been handsomely rewarded. Continue Reading…

Solving the home country bias in Canadian portfolios

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Canadian investors tend to suffer from home bias – a preference to hold more domestic stocks over foreign equities. This is actually true of investors in most countries, but it’s particularly troubling in Canada where our stock markets are highly concentrated in the financial and energy sectors.

The federal government could be partially to blame for our home bias tendencies. As recently as 2005 the government imposed a limit on the amount of foreign content allowed in RRSPs and pension plans. This cap was introduced in 1971 to help support the development of Canada’s financial markets but was scrapped in the 2005 federal budget, freeing Canadians up to invest abroad.

Sizes of World Stock Markets

It’s well known that Canada makes up less than 4 per cent of global equity markets (2.7 per cent, to be exact), yet 60 per cent of the equities in Canadian investors’ portfolios are in domestic securities.

Even most model ETF and index fund portfolios have Canadian investors overweighting domestic equities, holding anywhere from 20 to 40 per cent Canadian content.

Canadian home country bias

The result is a portfolio that is more volatile and less efficient than one with international equity diversification. Indeed, investors with a Canadian home bias are taking risks they could have diversified away by increasing their allocation to global equities.

My two-ETF portfolio

So how does my portfolio stack up? When I switched to my two-ETF solution, made up of Vanguard’s VCN (Canadian) and VXC (All World, ex-Canada), I chose to have an allocation 20-25 per cent Canadian stocks and 75-80 per cent international stocks.

That allocation would be relatively easy to monitor and rebalance if it was simply held in my RRSP. Whenever I added new money to my RRSP, I’d simply buy the ETF that was lagging behind its initial target allocation.

But I complicated things recently when I started contributing again to my TFSA. I wanted to treat my TFSA and RRSP as one total portfolio and keep the same asset mix in place. Since my RRSP was much larger than my TFSA, I decided to hold mostly foreign content (VXC) in my RRSP while putting Canadian stocks (VCN) in my TFSA.

This worked out great for several years but now I’ve run into a second problem; I’m contributing to my TFSA at a much faster pace than my RRSP. That’s because I’ve maxed out all of my unused RRSP contribution room and, due to the pension adjustment, I get a measly $3,600 per year in new contribution room.

Meanwhile I still have loads of unused TFSA contribution room and so I’ve been socking away $12,000 per year for the past two-and-a-half years. I hope to continue at that pace for many more years until I’ve completely caught up on all that available contribution room.

The result is a portfolio that is becoming increasingly more tilted to Canadian equities. At this rate, if I continue filling my TFSA with VCN, my portfolio will have more than 30 per cent Canadian content in five years, and nearly 40 per cent Canadian content in 10 years.

My Home Bias Solution

I’m considering a change to my two-fund portfolio. With the introduction of Vanguard’s new all-equity asset allocation ETF – VEQT – I could turn my two-fund solution into a true one-fund solution and make investing even more simple. Continue Reading…