It’s that time of year. The leaves have started to shift to brilliant shades of crimson, orange, and yellow. The days are getting shorter. And, suddenly, it’s “jacket weather” again. For many Canadian families, the transition into cooler months signals a time to begin the process of reviewing their finances from the past year with the goal of being better prepared in the years ahead.
With the cost of living in Canada incrementally higher than it has been in recent memory, there is a renewed opportunity for families to ask a familiar question: what is a simple, one-step investment strategy that they can use to help stretch the most out of their money, both now and for the long haul?
Well, like the changing seasons, it may be a good time for families to consider changing up a dated investment approach in favour of one that will take their money a little further. That is, using a low-fee, low-touch, robo-advisor in place of costly mutual fund investments … and, here are a few reasons why:
Accessibility
Robo-advisors have ushered in a new era of accessible investing. Designed to be user-friendly from the get-go, they are an excellent choice for both novice and experienced investors. With just a few clicks, investors can select a portfolio that matches their risk tolerance and fund it with little to no hassle.
Diversification
A well-constructed portfolio needs variety. Robo-advisors excel at this by spreading investments across different asset classes, thus reducing risk. Mutual funds, while also diversified, often lack the customizability and personalization offered by low-fee robo-advisors.
Automated Rebalancing
Investing with a robo-advisor provides nimble, automated rebalancing, ensuring that investments stay aligned to goals, even as market conditions shift. Mutual fund investors often need to manually (and worse, reactively) adjust their portfolios, potentially missing out on market opportunities or exposing them to unnecessary risk. Continue Reading…
Investors are starting to notice that their portfolios have been treading water for a couple of years. Over the last two years, a global balanced growth portfolio would essentially be flat. Of course, move out to 3-year, 5-year and 10-year time horizons and we have very solid to generous returns.
At times investors have to wait. We build and springload the portfolio waiting for the next aggressive move higher. In fact, these holding periods can be beneficial: we are loading up on stocks at stagnating or lower prices. We’re able to buy more shares. The waiting is the hardest part for investors. But it is essential that we understand the benefits to sticking to our investment plan.
In January of 2021 I wondered aloud in a MoneySense post if the markets might not like what they see when we get to the other side of the pandemic. That’s an interesting post that looks back at the year 2020, the year the world changed with the first modern day pandemic. That suspicion is ‘kinda’ playing out as the markets stall and try to figure things out.
That’s not to suggest that my hunch was an investable idea. We have to stay invested.
Stick to your plan when the market gets stuck
Patience is the most important practice when it comes to wealth building. When done correctly, building life-changing wealth happens in slow motion and it is VERY boring.
Boring is good.
Waiting can be boring. But maybe it can look and feel more ‘exciting’ if we know what usually happens after the wait. Stock markets work like evolution. There are long periods of stagnation and status quo and then rapid moves and change.
Instead of boring, maybe it should feel like a kid waiting for Christmas. The good stuff is on its way.
Here’s an example of a waiting period, from 1999. The chart is from iShares, for the TSX 60 (XIU/TSX). The returns include dividend reinvestment.
And here’s the stock market ‘explosion’ after the wait.
That’s more than a double from the beginning of the waiting period.
And here’s the wait from 2007, moving through the financial crisis. Ya, that’s a 7-year wait. Talk about the 7-year itch, many investors filed for divorce from the markets.
It was a costly divorce.
Markets went on a very nice run for several years. Continue Reading…
When it comes to investment strategies, dividend or income investing holds a special place in the hearts of many investors, especially retirees. It’s not surprising, considering that dividends often constitute a substantial portion of a portfolio’s total return. Let’s dive into this popular approach and understand how Exchange-Traded Funds (ETFs) can be a game-changer.
The Dividend Advantage
Now, let’s dissect the significance of dividends in the realm of equity returns. Looking over the long-haul equity return expectations, the S&P has returned an average of around eight per cent over a 40+ year period[i]. In historical context, dividends have accounted for a significant portion of this return, ranging from three to four per cent. This underscores how dividends contribute almost half of the total equity market return annually[ii]. However, their true power lies in compounding. While you collect dividends each year, reinvesting them into equities sets the stage for exponential growth. This compounding effect is what propels your portfolio to higher echelons of growth.
Moreover, dividends are more than just monetary gains; they serve as a vital indicator of a company’s financial health. While not the sole indicator, companies with robust dividend policies often signal financial stability. It’s crucial to note, however, that not all dividends are created equal, a distinction we’ll explore further.
The Art of Portfolio Construction
We’ve witnessed a surge of interest in dividends: evident in the significant influx of investments into the dividend space. But what are the actual benefits of incorporating dividend investments into your portfolio?
From a portfolio construction perspective, the benefits of including dividend-paying stocks are evident. We’ve examined 32 years of returns across various companies in the Canadian equity market. Dividing them into dividend growers, dividend payers, dividend cutters, and non-dividend payers, a clear pattern emerges.
The standout performers are the dividend Growers, showcasing the potential of quality dividend-paying stocks. Over this period, they have consistently outperformed the broad index, offering a higher average return. Moreover, when it comes to managing risk, dividend Growers and high-quality dividend payers exhibit a slightly lower level of volatility compared to the broader market. This suggests that a focus on sustainable, high-quality dividend stocks can lead to both enhanced returns and a controlled risk profile, making them a compelling addition to a well-rounded investment portfolio. It’s worth noting that not all dividends are created equal, and a discerning approach is crucial for maximizing the benefits of dividend investing.
Ensuring Sustainable Dividends
One of the crucial aspects of dividend investing is ensuring the sustainability of the payouts. Stepping into the shoes of a prudent investor, it’s imperative to avoid falling into yield traps: companies offering high yields but lacking the financial backing to sustain them. Enter the analysis of a company’s overall health, a task made easier by assessing key metrics.
Cash as a percentage of total assets and payout ratios are key indicators of a company’s financial fortitude. In recent times, the top quartile of companies has seen a surge in cash reserves, an encouraging sign of their resilience. Moreover, evaluating the payout ratio provides insights into the sustainability of dividends. A company paying out more than it earns in the long run is walking on thin ice, whereas those with ratios in the 40-50% range are on relative solid ground.
Dividends in an Age of Inflation
Amid the specter of inflation, dividend strategies have shone brightly. Companies with robust dividend policies, characterized by stable cash flows, have weathered the storm far better than their growth-oriented counterparts. Inflation, while posing challenges to certain sectors, has not dampened the dividend-driven approach. In fact, historical data (monthly excess returns over the MSCI World Index for the last 45 + years) indicates that dividend-paying companies fare even better in high CPI environments, providing a reliable anchor for portfolios.
At the heart of the resilience of dividend-paying companies lies their ability to generate steady and predictable cash flows. These companies often operate in industries with stable demand for their products or services, which provides a buffer against the uncertainties associated with inflation. By virtue of their financial stability, they’re better positioned to maintain and perhaps even grow their dividend payouts, providing a reliable source of income for investors.
Historical data, tracked against the Consumer Price Index (CPI) reinforces the notion that dividend-paying companies can act as a reliable anchor for portfolios during inflationary periods. These companies tend to exhibit a degree of insulation from the market volatility often associated with rising prices. By consistently delivering returns through dividends, they offer investors a source of stability in an otherwise uncertain economic environment.
Methodology Matters
In the realm of Dividend ETFs, the choices are vast, and not all ETFs are created equal. Each comes with its unique methodology, impacting performance. Factors such as weighting methodology, sector caps, and company quality screenings play pivotal roles in the outcome. This underscores the importance of understanding the underlying strategy before investing. Continue Reading…
Why Harvest ETFs chose to launch its own U.S. Treasury ETF that offers the security of U.S. Treasury Bonds and high monthly income
Image courtesy Harvest ETFs/Shutterstock
By Ambrose O’Callaghan
(Sponsor Content)
The early part of this decade saw the introduction of significant monetary interventions that rivalled the policies pursued by central banks following the Great Recession of 2007-2009. Policymakers were able to resuscitate markets in the face of a global pandemic. However, the end of the pandemic saw the beginning of a surge in inflation rates not seen in many decades.
Central banks responded to soaring inflation with the most aggressive interest rate tightening policy since the early 2000s. Policymakers are encouraged with the result of inflation coming down, but a highly leveraged consumer base has been squeezed by the upward revision in borrowing rates. Moreover, the higher interest rate environment has spurred stock market volatility. That has led to a shift investors’ focus, with investors focusing on capital preservation instead of capital appreciation.
Harvest ETFs’ investment management team believes that we are at or near the peak of the current interest rate tightening cycle. In this climate, the prudent investment strategy will factor in high interest rates while preparing for the eventual downward move that many experts and analysts are projecting for 2024.
Why should you consider exposure to U.S. Treasuries?
Canadian consumers might not be celebrating the rise of interest rates. However, the switch to higher rates could be good news for Canadian savers. Continue Reading…
My book, Beat the Bank: The Canadian Guide to Simply Successful Investing, was published in September 2018. Five years later it continues to be a best seller among Canadian business/investing books.
The book, along with my website and various articles I’ve written have helped many Canadians learn to invest smarter and build (and maintain) larger retirement nest eggs.
Most Canadians continue to be directed by their banks and other advisors to invest through mutual funds. The vast majority of these mutual funds extract annual fees ranging from 1.5% to 2.5% from the value of the investment.
Not only are most Canadians unaware of these fees, very few investors understand the compound damage these fees do over time. Over a lifetime of investing, these fees can reduce retirement nest eggs by 50% or more.
At the same time, the investment industry, including the same banks that sell high-cost mutual funds, offer very low cost, very efficient investment funds (ETFs) that track market indexes. (There are many other types of ETFs as well. In my view most investors would be well served by sticking to simple index tracking ETFs).
Smarter investing means getting out of high-cost mutual funds and getting into low-cost investment products and services like index ETFs through do-it-yourself investing, using robo-advisors or finding lower cost traditional advisors.
A lot has happened in the world since Beat the Bank was published five years ago. Covid-19 did a lot of damage and led to a great deal of unanticipated change. Inflation spiked dramatically causing central banks to raise interest rates. The full impact of higher rates is yet to be fully felt, especially by homeowners whose mortgages will be renewing in the next year or two.
The good news for investors is that bonds and GICs are finally offering decent returns although we will have to wait and see whether earning 5% interest will outpace inflation. And, despite all the uncertainty and chaos over the past five years, the total return of S&P 500 was a pleasing 70% while the total return of the S&P/TSX was 42%.
What hasn’t changed?
Markets continue to be uncertain (this never changes!)
The majority of “advisors” are under no legal obligation to act in their client’s best interest
The majority of “advisors” put millions of Canadians into high-cost mutual funds
Many prominent mutual funds have not reduced their fees (Why would they lower fees when investors are unaware of the impact of fees?)
Mutual funds continue to underperform simple index ETFs
Regulators have made some progress but many critical investor protection measures have yet to be implemented
The Beat the Bank project, which was sparked 7 years ago by my sister’s experience with mutual funds, has been a gratifying experience. I have received hundreds of messages from readers over the past five years, the great majority with positive feedback.
You can get a sense of reader response by checking out Amazon reviews. I certainly have had negative reaction from some advisors and industry people generally, but most professionals recognize the shortcomings of the industry and want to see investors achieve better outcomes with simpler, more efficient investment products and services.
DIY investing not for everyone
Do-it-yourself investing it’s not for everyone. But if you are considering switching to DIY investing, whether you check out my book or other independent sources (books, blogs, podcasts, etc.), I strongly encourage you to take some time to learn investment basics.
Here are just a few tips from Beat the Bank readers for those considering making the move:
“I have found that ETF equity investing is better for me than buying individual stocks.” Continue Reading…
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