Tag Archives: Financial Independence

Cheering for Daniel-san to crane-kick the FAANG stocks

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Figure 1: Share Price Performance, YTD 2018

By Jeff Weniger, CFA, WisdomTree Investments

Special to the Financial Independence Hub

FAANG. What an acronym. A FAANG stock, cobra logo on its uniform, is like the antagonist in the classic 1984 movie The Karate Kid.

The FAANG (Facebook, Apple, Amazon, Netflix and Google-parent Alphabet) is unstoppable as he sweeps the leg and kicks the proverbial “value stock,” Daniel-san, in his broken ribs. No mercy. Miyagi, Daniel-san’s mentor, cannot help him.

At least that was the situation until a few months ago, when both Apple and Amazon reached valuations north of $1 trillion.

When I wrote about the top-heaviness of FAANG stocks in market capitalization-weighted indexes earlier this year, these five stocks alone accounted for about one-eighth of the U.S. stock market. Since then they have been cracked, with Facebook and Netflix taking the hardest hits.

Not many of us have issues with Netflix as an organization. But the other four FAANGs’ public reputations are on tenterhooks.

Amazon gives millions of small businesses sleepless nights, while its employees complain of poor working conditions. Want to talk about business risk? Wake up one morning to President Trump doing a Teddy Roosevelt trust-buster impersonation. You’re unstoppable until Daniel-san gets into the crane position.

Or look at the half-dozen reasons that reasonable people hate Facebook. One of them is probably our collective inability to prevent hundreds of images of our children from being plastered on its site, even if we are not “on Facebook.” If you don’t like it, tough luck. The BBC cites an Ofcom study finding that 70% of people do not think it is OK to share images of others without permission. It’s that other 30% that the rest of us have to worry about.

But there’s so much more.

Facebook is beset by accusations about “fake news” and political biases.  Also, how about your high schooler’s shrinking attention span and growing self-doubt as friends post solely their life’s highlights?

Stock market sentiment is a fragile thing: $408 billion is a lot to pay for a company that you and your next-door neighbour dislike.

And while we’re talking about aiding and abetting our society’s mass experiment with device-addicted zombie scatterbrains, there’s Apple. It sells the pipe to the smoker.

There is no shortage of people itching for Daniel-san to kick some of these companies in the face, in the interest of civil society. Our industry wants to talk about environmental, social and governance (ESG) screens. Great. Let’s talk candidates.

Google cannot be forgotten. The internet was supposed to be a utopia of free discourse.  Free discourse, unless the Chinese Communist Party’s censors give you heat.

When a company like Sears or Woolworth’s rolls over, most of us feel bad, nostalgic even. But there is something unsettling when the top of the S&P 500 is populated by companies that are dinner table pariahs.

If Daniel-san is doing that awesome crane pose and kicking some of these FAANGs across the face, there are value-investing “Miyagis” out there watching from the sidelines, giving a slow nod of approval.

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.

 

FP: Enhanced CPP too late for Boomers but a boon for younger generations

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CPP enhancement will occur in two phases: fin.gc.ca

My latest Financial Post column has just been published, both online and on page FP6 of the Friday paper. You can click on the full piece by clicking on the highlighted headline: Everything you need to know about the enhanced CPP — from how much you’ll pay to how much you’ll get.

It summarizes the new enhanced Canada Pension Plan regime, which has (as of this month) started to show itself in slightly higher payroll deductions for both employers and employees.

Won’t fully kick in for 45 years

But as the piece explains, the enhanced CPP won’t fully kick in until 45 years from now, and most Baby Boomers will be retired before feeling any benefits beyond that of the normal practice of delaying CPP till age 70. And as one source explains, even the expanded CPP still isn’t as generous as Social Security is in the United States. Not only do they pay slightly higher payroll premiums to fund Social Security, but they also pay based on a much higher level of income.

U.S. Social Security still more generous

US contributions are up to US$132,900 in income, compared to about half that in Canada: a Year’s Maximum Pensionable Earnings limit (YMPE) of $57,400 in effect in 2019. CPP was originally designed to “replace” about 25% of the average worker’s income but the enhanced CPP will take that up to about 33.3% once it’s fully implemented. Gradually, the limit will rise to $65,400 (rounded down, 2019 dollars.)

While the full payout is 45 years away, benefits start edging up this year. Until now, the maximum CPP benefit at the traditional retirement age of 65 was $1,154.58 assuming earnings at or beyond the YMPE, according to Doug Runchey, of Vancouver Island-based DR Pensions Consulting.

The maximum benefit will be $1,207.83 in 2026, and eventually reach $1,753.78 by 2065. That’s a whopping $21,045 a year!

Too late for the Boomers

Still, Runchey says, “if you’re thinking of applying for your CPP earlier than 2025, the enhanced CPP will be of little value for you.”

As I said at the outset, that’s unlikely to be helpful for Baby Boomers at or on the cusp of retirement. Even so, the combination of an enhanced CPP and the decade-old Tax-free Savings Accounts (TFSAs) is something most Boomers wish they had when they were young!

For more on the enhanced CPP, go to the Government of Canada’s website here.

 

Make Investing great again …. one day? Part 2

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By Aman Raina, Investment Coach, Sage Investors

Special to the Financial Independence Hub

In Part 1, I shared some thoughts on a recent report by the Ontario Securities Commission (OSC) outlining the challenges the financial services industry is having in getting Millennials to invest. The OSC report had a great opportunity to address those investing pain points, but like so many financial literacy initiatives, the messaging is not clear, consistent, and understandable. The report identifies solutions, yet they are separate and not integrated and use a lot of industry jargon that people just won’t connect with. They emphasize processes over results. What is the outcome we want Millennials to achieve with investing?

Another way?

In this post, I’d like to share from my experience as Investment Coach and as someone who works with people to develop their investing competencies, some approaches that I found have better motivated people and not just Millennials into becoming more engaged with investing. They address the pain points people have with expressed about investing which include; being scared of investing, feeling overwhelmed by the process, feeling paralyzed when trying to make a decision, and not knowing how to start and take that first step. These are my takes and perspectives. They are by no means the most definitive and all encompassing. 

The First Step: Define the investing path

The OSC report identified taking the first step in investing as a major pain point for people. For most people, after they have the epiphany that they should start growing their savings and invest, the most common series of events that occur include opening a brokerage account, buying some books or researching investing on the Internet or simply doing what their peers are doing. They buy a few stocks and some work out and some don’t and that’s where the fear pain point comes in.

The default for investing seems to be buying stocks, but does this really apply to everyone? In Part 1, I said that investing can be a very boring, repetitive, and time consuming process. Investing in stocks requires a major time commitment to analyze and evaluate stocks and managing the portfolio. For a lot of people, they really couldn’t be bothered to learn about investing because they have other more pressing priorities in their life … and that’s OK.

There are different investing paths we can take but ultimately we want to be on an investing path that compatible our life situation. If I don’t have the time to invest maybe I should consider working with a financial advisor, maybe use a robo-advisor service. Maybe buying a basket of Exchange Traded Funds (ETF’s) is a better path than buying individual stocks. 

Why are you investing?

It is critical that at the people define right away the appropriate investing path they want to travel. It begins with defining what the end of the path looks like (Why am investing?) as well how the road will be travelled. Will I travel it alone (Do-It-Yourself) or with someone else?

Once you’ve been able to answer these questions and defined a path, then you will have defined and reduced your scope of investments that you will use and begin work on building your investing competencies. Why learn about investing in stocks when you will be investing in ETFs?

The investment industry doesn’t really take the time to work with people on defining their investing path because they established a default that people that come to them want to invest in stocks when in reality they may have no interest or tolerance for it. The starting point is such a difficult pain point for many because once they begin to follow an investing path that was not compatible with their life and quickly they fell off it and into a ditch, it becomes harder to emotionally get back at it. These type of conversations need to happen before opening a broker account or signing up for an investing course.

Building investing competencies

I view financial literacy to be more about building competencies, more specifically investing competencies. From my experience, the people that have this investing thing pretty figured out possess three competencies. My role as an Investment Coach is to help people develop these investing competencies. 

Competency 1: Education – Principles versus Formulas

Once we have defined an investing path, we can target our learning to focus on developing our investing competencies in those areas. If we are committed to investing in individual stocks then we should focus our education on learning that area. Most investing education focuses on the mechanical aspects of investing and those mechanics which involve formulas, spreadsheets, and math trigger people’s pain points of finding investing overwhelming. Continue Reading…

Safer investments for Retirees: How to retire with less stress

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Retirement planning is becoming more difficult for Canadians because they’re living longer and need larger retirement nest eggs. This often manifests itself in “pre-retirement financial stress syndrome.” That’s the malady that strikes when it dawns on you that you may not have enough money saved to be able to earn the retirement income stream you were banking on.

To alleviate this worry, we recommend Successful Investors base their retirement planning on a sound financial plan. Here are the four key variables that your plan should address to ensure you have sufficient retirement income:

  1. How much you expect to save prior to retirement;
  2. The return you expect on your savings;
  3. How much of that return you’ll have left after taxes;
  4. How much retirement income you’ll need once you’ve left the workforce.

Note, though, that if you’re heading into retirement and are short of money, you should move your investing in the direction of safer, more conservative investments. That’s a far better option than taking one last gamble.

Moving into “too safe” investments for retirees can sharply cut your long-term returns

This applies as well to “risk-reducing strategies,” of which there are many. One of the most common is the urge to “go into cash” (also known as “taking money off the table”) when you foresee a market downturn. Like all risk-reducing strategies, this one can seemingly work from time to time, by getting you out of the market before a drop. But it’s even more effective at ensuring that you are out of the market when prices are shooting upward.

In the stock market, downturns do come along from time to time. But they are far less common than fears of downturns, which are virtually non-stop.

Safer investments for retirees: How to use RRSPs and RRIFs to add to your long-term investing success

RRSPs (Registered Retirement Savings Plans) are a great way for Successful Investors to cut their tax bills and maximize returns of their retirement investing.

RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year. March 1 is the last day you can contribute to an RRSP and deduct your contribution from your previous year’s income.)

When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income.

If you want to pay less tax on dividends, interest and capital gains while you’re still working, investing in an RRSP is the way to go.

Converting your RRSP to a RRIF is clearly one of the best of three alternatives at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities (see the pros and cons of annuities at TSI Network) or a lump-sum withdrawal (which in most cases is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income).

Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert—you just transfer them to your RRIF.

Safer investments for retirees should assume conservative yield estimates to account for unforeseen setbacks

As for the return you expect from investing for retirement, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume there will be increases in the value of the bonds.

Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Aim lower in your retirement planning — 5% a year, say— to allow for unforeseeable problems and setbacks.

Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.

One thing we encourage all Successful Investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.

Do you believe in safer investments? What do you consider a type of safe investment?

What kind of investments do you have in place as part of your retirement plan?

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was last published on Sept. 18,  2018 and is republished on the Hub with permission.  

U.S. Growth stocks: You’d better be Seabiscuit

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This is Part 2 of a two-part blog series on the prospects for Growth and Value Stocks.

Read Part 1 Growth Stocks: Where’s the Beef?

By Jeff Weniger, CFA, WisdomTree Investments

Special to the Financial Independence Hub

When your starting point is a 1.4% dividend yield,1as is the case with the S&P 500 Growth Index, the group of stocks that make up the basket need to have long-term dividend growth that performs like Seabiscuit, the super horse. No tripping out of the gate or getting bumped in the stretch.

Latching on to the concepts in my white paper, Dividend Growth’s Drivers: Picking Apart Quality, we present figure 1, which shows the interrelationship between the percentage of earnings that are retained (as opposed to paid out as dividends) and the return on equity (ROE), which is net income as a percentage of shareholders’ equity.

This relationship is thedriver of dividend growth, and as the years go on, concepts like figure 1 have become core tenets of second-decade WisdomTree.

Figure 1: The Critical Equation

The Critical Equation

Figure 2 uses the critical equation to calculate long-term dividend growth at prevailing profitability levels.

As it stands, the S&P 500 Growth Index’s 23.2% ROE implies long-term dividend growth of 16.8%. That could happen, yes. Anything canhappen. But here’s a better idea: expect downward revisions instead.

Figure 2: Implied Dividend Growth Estimate 

Implied Dividend Growth Estimate

After all, look at the historic record in figure 3. There isn’t a single five-year period that had growth stocks’ earnings running forward at a 16.8% clip, not even in the roaring 1990s. In contrast, value stocks’ implied dividend growth is on planet Earth. 

Figure 3: Dividend Growth Rate, 5-Year Periods, 1995–Present 

Dividend Growth Rate 5Year Periods 1995Present

Does anything jump out in figure 3? Look at the dividend growth experience of growth and value from 2010 to 2015 and from 2015 to the present.

Those growth stocks start to look less like Seabiscuit and more like also-rans if recent years are any indication. Granted, value indexes are dominated by banks, and the period from 2010 to 2018 was characterized by the benefit of their reinstated dividends. Nevertheless, if growth stocks were only able to increase their dividends at a high single-digit rate during this period of irrepressible economic expansion, what happens if recession hits? Let someone else pay 22 times earnings to find out. 

Slow and Boring? Better than Growing Out of 1%

The S&P 500 Value Index has a dividend yield that is about double that of the S&P 500 Growth Index (2.7% vs. 1.4%). This kind of gap makes it nearly impossible for the latter index to ever grow out of its valuation.

If U.S. growth could not differentiate its … ahem … dividend growth relative to value from 2010 to 2018, what makes anyone think the next several years will be different? For growth stock skeptics, the WisdomTree Fund that hits value is the WisdomTree U.S. High Dividend Index ETF (HID/HID.B). 

It retains 38% of its earnings, pays out the other 62% as dividends and has an ROE of 13.5%. That ROE is satisfactory enough. Using the “critical equation,” it has long-term implied dividend growth of 5.1%, which is less than the levels of the S&P 500 Growth Index. But when the starting point is a 1.4% forward dividend yield, companies that populate indexes like the S&P 500 Growth Index would have to run up their dividends at a 15% or 20% annual pace for a long time before the math even thinks about shifting in their favour.2

For investors who do not want to commit to value because they keep getting burned, a fund like the WisdomTree U.S. Quality Dividend Growth Index ETF (DGR/DGR.B), which tracks the WisdomTree U.S. Quality Dividend Growth Index CAD, seeks to target companies that rank well on our ROE x earnings retention framework. 

Critically, its dividend weighting methodology also checks valuations at the door. That gives it a starting dividend yield of 2.7%, about 130 bps more than the S&P 500 Growth Index. It also has an explicit screen for ROE and return on assets (ROA). Its 15.8x forward earnings multiple is 3.3 multiple points below the S&P 500 Growth Index.

Over the next 5 or 10 years, we’ll take DGR.B or HID.B over S&P 500 Growth Index. This is where the rubber meets the road, when the cap-weighted U.S. large-cap growth indexes start to be priced like they’re Seabiscuit, when in reality they’re an underlay.

1Sources: WisdomTree, Bloomberg, as of 11/15/18.

2Sources: WisdomTree, Bloomberg. Unless otherwise stated, all data in this blog as of 11/15/18.    

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.