All posts by Financial Independence Hub

Debunking myths about Smart Beta and ETFs

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By Jeff Weniger, CFA , WisdomTree Investments

Special to the Financial Independence Hub

This is part one of a four-part blog series addressing the attacks on smart beta and ETFs. Today we address the supposed academic consensus that the only recourse for investors frustrated with active management is to turn to market capitalization-weighted index funds.

“That’s the way it’s ‘always’ been done”

In much of our research we lay out our case that much of the impetus for trillions of dollars to continue tracking market capitalization-weighted indexes appears to be little more than “that’s the way it’s ‘always’ been done.”

In this blog series, we’ll address the most common lines of attack against smart beta and ETFs.

For clarity, our discussion of smart beta will refer to this excerpt from the Financial Times:

Smart beta strategies attempt to deliver a better risk and return trade-off than conventional market cap weighted indices by using alternative weighting schemes based on measures such as volatility or dividends.1

The truth is that the “active management versus passive market cap-weighted indexing” argument is a classic false dilemma. Continue Reading…

How Group Annuities can help employers protect Defined Benefit pensions

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Source: Mercer Pension Health Index published October 2, 2017

By Brent Simmons, Sun Life Financial

Special to the Financial Independence Hub

Recently, employees and retirees of Sears were stunned to learn they may not receive all of their defined benefit (DB) pension when it declared bankruptcy. They learned their pension plan was underfunded and the company had requested that it be allowed to stop making the contributions required by Ontario laws. The plight of Sears employees and retirees has left many Canadians wondering if their DB pension plan is healthy and if their DB pension is safe.

The pension challenge

With a DB pension plan, a company promises their employees a pension for life and is responsible for paying the pension: whatever the cost ends up being. The problem is that low interest rates and choppy equity markets have made the funding level of many pension plans look like a roller roaster ride. This can be seen in the chart at the top of this blog.

Another challenge facing pension plans is that Canadians are living longer, meaning that pensions need to be paid for a longer time. A common rule of thumb is that one year of additional life expectancy at age 65 can increase the cost of the pension plan by 3% to 4%.

In a tough economy, the need to contribute to a pension plan can often come at a time when a company’s core business is also facing financial difficulties. If a company becomes bankrupt, then the company likely won’t be able to pay the contributions owed to the pension plan and employees may indeed face a shortfall in its pensions.

How Group Annuities protect their employees’ pensions 

The good news is that a growing number of Canadian companies are taking steps to protect their employees’ pensions. They are buying group annuities to transfer the financial risk of their pension plans to insurance companies, which are subject to strict regulations and must have funds on hand at all times to pay promised pensions. With a group annuity, an insurer assumes responsibility for providing the pensions to a company’s retirees in exchange for a fee, and the retirees continue to receive their promised pension.

Continue Reading…

How Millennials’ financial priorities differ from previous generations

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By Gabby Revel

Special to the Financial Independence Hub

There is some truth and some fiction to the idea that millennials are not responsible with their finances. On the one hand, today’s youth is particularly adept at saving money and meeting their financial responsibilities on a monthly basis. However, millennials appear to have less foresight, as they’re not as interested in planning for their financial future as Generation Xers and Baby Boomers were.

Financial freedom

The most important element of a paycheck for millennials is the financial freedom it offers them. A study by Bank of America and Merrill Edge discovered that this generation is better at saving money compared to other generations, but what they choose to spend this money on differs greatly from older workers.

This same study discovered that 63% of millennials value financial freedom above all, meaning they set aside a certain amount of money to continue living their lifestyle of choice. This means planning for social trips or vacations, eating out at fancy brunch restaurants on Sundays and using Uber as one of their primary forms of transportation.

A survey by BMO Wealth Management found that 26% of millennials  —  ages 18 to 34 — believe “saving more” is their most important priority with finances. A further 25% value reducing and eliminating debt at the top of their list, while 20% want to invest effectively, 17% focus on budgeting and 5% believe in spending on personal needs or goals above all. All in all, millennials are reinventing the wheel in regards to where their finances should go, but they might pay the price moving forward.

Disregard for retirement

 A chunk of today’s youth has yet to begin planning for retirement, as they’re not thinking about what their needs will be in the future. Some believe Social Security (or in Canada CPP/OAS) will get them through their golden years, which only nets the average retiree about $1,300 per month nowadays. Others buy into the carpe diem or YOLO mentality that’s been instilled within millennials.

Continue Reading…

10 ways to spot investment opportunities before the herd piles in

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By Dakota Findley

Special to the Financial Independence Hub

If you learn how to spot investment opportunities early, you could significantly increase the profits you make. Fortunately, doing this isn’t as hard as many people believe. Here are the ten essential components of spotting investment opportunities before everyone else jumps on the bandwagon.

1.) Find a Problem Solver

In 2009, Professor Raffi Amit of the University of Wisconsin noted that “Customers don’t buy technology. Customers buy products that add value.” These two sentences are vital to understanding which investment opportunities are worth pursuing.

An effective problem-solver is a company that:

  • Has identified one or more problems that a potential market is experiencing,
  • Has a plan, product, or service designed to address that problem, and
  • Can implement their solution in a scalable and cost-effective manner

In other words, you’re not just looking for companies to invest in: you’re looking for businesses that will be selling what customers are looking for.

2.) Learn to Understand the Criteria for an Investment’s Success

A 2011 study found that firms receiving angel investments (capital provided mainly for business startups) were about 25% more likely to survive for at least four years than companies that did not receive such funding.

The reason this fact matters is that a good early investment is one that gets enough funding to succeed. If your investment isn’t sufficient to help an opportunity succeed and nobody else is buying in, then it doesn’t matter how good their ideas are.

3.) Assess Your Risk Tolerance

How much risk are you willing to take on? We’ll be blunt with you: many early investments fail. Perhaps they didn’t get enough funding to succeed, or they suffered from poor management by people who were good at making products but not so good at running a company.

Whatever the reasons for failures, though, you’ll need to learn how to ass                                ess both how risky a given investment is and how much you can afford to lose.

As a good rule of thumb, you should never invest more than you could safely afford to lose.

4.) Practice Patience

Continue Reading…

Is a HELOC right for you?

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By Alyssa Furtado, RateHub.ca

Special to the Financial Independence Hub

A home equity line of credit (HELOC) is a convenient way to access the value in your home. You might have seen commercials on TV or been offered one by your mortgage agent. Not only can you get a much lower interest rate than you can with an unsecured line of credit, you can also be approved for a sizeable loan. It’s tempting to have quick access to a lot of money, but is a HELOC right for you?

A HELOC is a secured line of credit that uses your home as security. As with a mortgage, the money you borrow is secured by your home. In Canada, as long as you can show that you can carry the debt, you can borrow up to 65% of the value of your home, provided you keep at least 20% of the value as equity.

For example, if your home is worth $1 million and you owe $400,000 on your mortgage, you can borrow up to $400,000 against your home ($1 million x 80% = $800,000 – $400,000 owing = $400,000).

There are many upsides to getting a HELOC. Depending on the value of your home, you can potentially borrow a large amount of money. Interest rates on HELOCs are significantly lower than on unsecured lines of credit (typically about prime + 0.5%). You can take out money or repay it at any time without penalty. And you can go up to 25 years before you have to pay back what you’ve borrowed.

One of the most appealing HELOC features is that the minimum monthly payment is just the interest that’s accrued. Using a HELOC calculator on that $400,000 line of credit example above, the monthly payment at today’s best HELOC rate of 3.7% is just $1,233. The minimum monthly payment on a traditional line of credit is typically 2% of the outstanding balance: $8,000 on a $400,000 balance. Even a traditional mortgage would require a much higher monthly payment. This feature alone is a big part of why HELOCs are so appealing.

Possible downsides of HELOCs

However, HELOCs also have their downsides.

Because the minimum monthly payment on a HELOC is just the interest, it can feel like it doesn’t cost you much to borrow money. But when you don’t repay the principal, your costs over the long run are actually much higher than with a traditional loan.

Let’s look at an example comparing a regular $50,000 loan with a rate of 4.7% repaid monthly against borrowing $50,000 at 3.7% from your HELOC repaid in a lump sum at the end the loan term.

If you pay the loan over five years, your monthly payment will be $936.83 and you’ll pay $6,209.80 in interest over that time.

Continue Reading…