Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

“So what do you make of bitcoin?” – question from a curious investor

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Bitcoin, blockchain, initial token offerings  … yikes!  As financial headlines dedicate an increasing amount of coverage to this relatively new area, it’s left many investors scratching their heads.  What is bitcoin?  Do I need to know about this?  Am I missing out on an opportunity?   Below we present a question and answer that we hope investors might find helpful.

From a curious investor: 

So what do you make of bitcoin?  I am interested in your views on it as both an ‘investment’ and as a game changer.  Much to my annoyance, although I believe the world banks are inflating the money supply and the price of hard assets, this has not shown up in the price of gold.

I do not understand it at all. A friend of a friend has become a millionaire and yes he sold enough to make it real money …

Our response

While we’re by no means experts, we’ve thought about this and where we’re at with bitcoin is that while it may be a game changer, we wouldn’t invest in it as an asset in its own right.

Let me back up a bit.

The underlying technology that allows for the creation of bitcoin and other crypto-currencies , blockchain, is complex but the concept is not complex.  Essentially, rather than having a centralized system such as an accounting system or bank where the data is all held and processed centrally, blockchain allows for the data and processing to be decentralized.

They refer to it as distributed ledger technology.   It’s out there on the web, accessible to anyone but encrypted and secure.  Digital or crypto-currencies are just a really interesting application of this blockchain distributed ledger technology.  Up until now, it’s really only been national central banks that have been able to issue currencies and lots of middlemen (banks, brokers, other lenders) have developed to help manage the system and they all take a little off the top to help keep the system running.  Digital currencies can be huge disrupters of this status quo, cutting out middlemen and removing the central banks from the process entirely (maybe).

Bitcoin just happens to be the leading crypto-currency at this point.  There are lots of other ones as well as what’s referred to as crypto-tokens which not only serve as a medium of exchange but also have some other utility attached to them like they allow you to buy something or to receive a service (loyalty programs are a bit like this).  It’s still very early days in terms of any of these being a reliable medium of exchange.  For example for bitcoin the average transaction settlement time is around 45 minutes and often can be days.  Imagine being at the grocery store and wanting to pay with bitcoin from your digital wallet and you have to stand there for 6 hours before the grocer gets confirmation that you have sufficient bitcoin and can transfer it to the grocer’s digital wallet.  Your ice cream would have melted by then.  People also want a medium of exchange to be stable.  Bitcoin and other crypto currencies are wildly volatile.

Blockchain is a game changer

That said, I do believe the people that say blockchain and the application of it to crypto-currencies is a game changer.   I don’t know where it ends up or even if bitcoin will remain as the main crypto-currency but this could be a massive change.  Continue Reading…

What is a Mortgage Vacation?

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By Sean Cooper

Special to the Financial Independence Hub

Do you enjoy going on vacation? Who doesn’t? So, the term “mortgage vacation” has to be something similar, right? When you hear mortgage vacation, you’re probably picturing yourself laying on a warm, sandy beach, drinking an umbrella drink. Well I hate to break it to you, but although you got the vacation part right, you forgot the most important part: the mortgage part.

A mortgage vacation is a feature that lets you skip paying mortgage payments for up to a few months, but with a catch. You have to prepay the amount in advance. In an era where savings rates are near record lows and household debt is near a record high, mortgage vacations have become a popular feature with mortgage lenders. Who needs to save for a rainy day when you have a mortgage vacation?

A mortgage vacation can help you out when you run into financial difficulty or when you want to use your cash flow towards something else. But as the saying goes, there’s no such thing as a free lunch. By planning ahead of time, you can avoid taking a mortgage vacation and still be on your way to burning your mortgage.

What is a Mortgage Vacation?

If you’re like most homeowners, you’re introduced to mortgage vacations in this way. You get a letter in the mail from your lender letting you know that you’ve been approved for a mortgage vacation. Yippee! The banks market mortgage vacations like they’re a privilege for their best clients, but as I mentioned earlier, there’s a catch. Hidden in the fine print is what happens when you skip your mortgage payment. Continue Reading…

U.S. Inflation: A case of high anxiety?

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U.S. CPI vs. U.S. CPI ex-Food & Energy Year-over-Year Change from 1/31/2010 to 1/31/2018

By Kevin Flanagan, WisdomTree Investments

 Special to the Financial Independence Hub

There is no doubt that inflation fear has reared its ugly head early in 2018, impacting the money and bond markets in rather noteworthy fashion. Some key headline-grabbing measures, such as wages and the Consumer Price Index (CPI), have come in above consensus forecasts to start the year, fueling a case of high anxiety for the fixed income arena. Naturally, the million (or should it be billion?) dollar question is: Are these heightened inflation fears warranted?

As we entered the new year, consensus forecasts for inflation were that readings at both the overall and core (ex-food and energy) levels would essentially remain unchanged. Interestingly, economists’ projections have been revised upward of late and now post slightly elevated readings. Indeed, the CPI is now expected to come in at a year-over-year rate of +2.3%, or 0.2 percentage points (pp) higher than the prior projection. The alternate measure, the personal consumption expenditures (PCE) price index, has been changed to a +1.9% increase (also up 0.2 pp), with the core PCE gauge being lifted 0.1 pp to +1.8%. The bottom line is that these revised estimates now all look for some modest increase from 2017 levels.

What about the Federal Reserve (Fed)? For now, all investors have to go by is the policy makers’ December projections. The March FOMC meeting, scheduled for March 21st, will be the Fed’s next chance to make any potential adjustments to their prior forecasts.. The preferred measure is the PCE price index, and the policy makers provide projections for both the overall and core PCE gauges. The Fed’s central tendency estimate is similar to the revised market consensus, with a range of +1.7% to +1.9% for each index. It should be noted that both the economists’ and the Fed’s current PCE projections still fall below the +2.0% target laid out by the policy makers.

Let’s take another look

So, let’s take another look at the aforementioned wages and CPI numbers. Continue Reading…

Millennial financial plans include emergency funds but not insurance  

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By Alyssa Furtado, Ratehub.ca

Special to the Financial Independence Hub

Millennials face financial insecurity through precarious work, soft wage growth, and student debt, but they do seem to be planning ahead for financial emergencies; they’re just not turning to insurance as a safety net, according to a new survey.

A poll of 1,000 Canadians by Ratehub.ca found millennials are saving an average of 35% of their pre-tax income, with 36% of respondents stating their emergency fund is a priority. By comparison, 33% of Generation Xers and 27% of Baby Boomers said an emergency fund is one of their key savings goals.

However, Canadian millennials aren’t as likely to turn to insurance as a source of emergency relief as their generational counterparts. Just 22% of millennial renters have tenant insurance (also known as contents or renter insurance), the survey found, compared to 31% of Generation Xers and 44% of Baby Boomers. Renters aren’t legally required to have tenant insurance, but many landlords will ask for proof of coverage before the lease is signed.

Tenant insurance not only helps renters protect the value of their possessions, but it can also cover the costs of repairing damage to their rental unit and the building. For example, if a renter’s toaster catches fire and causes damage to their unit and neighbouring units, tenant insurance could help cover the cost of the damages.

Millennials less likely to have health or dental coverage

Due to the fact that many millennials work part-time, are self-employed, or have contract positions, they’re also the least likely of the three generations to have extended health or dental insurance: 23% of those surveyed said they have this coverage, compared to 28% of Generation Xers and 32% of Baby Boomers. Continue Reading…

My journey to Passive Index Investing, Part 2

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By Dr. Networth

Special to the Financial Independence Hub

After reading My Journey to Passive Index Investing – Part 1, you may think that I have it in for financial advisors.  I don’t.   I believe the majority of financial advisors truly want to help their clients, but either their hands are tied or they have misguided beliefs.

The way financial advice compensation is structured creates a situation which, unfortunately, benefits the financial industry more than the individual investor.   There are also some financial advisors who truly believe active management beats out passive index investing over the long-term, despite high commissions/MERs and strong evidence which says otherwise.  Stay away from these financial advisors, since they have “drank the Kool-Aid.”

I believe a financial advisor with a CFP designation should have a fiduciary responsibility to create a comprehensive financial plan.  This includes insurance, estate planning, portfolio management (using low-cost ETFs/funds), as well as “holding your hand” during the inevitable market corrections.

Is advice worth 1 or 2% in fees?

How much is that worth?   This is a difficult question to answer. I don’t think it is worth the typical 1-2% in fees, which most banks and financial firms charge, especially if you have a large portfolio.  With the implementation of “Robo-advisors” and financial advisors that charge flat-fee or hourly-based (not tied to commissions on products), consumers are now beginning to have more choice for financial advice at a lower cost.

As you may recall, Part 1 ended with me as a newbie staff physician  in 2009 with little financial knowledge and an idea planted in my mind to “check out ETFs.”

It wasn’t until 2010 when I came across an article in the Globe and Mail, by Rob Carrick, where he rated the best personal finance blogs of 2010.  One of the blogs caught my eye: “Canadian Couch Potato,” written by Dan Bortolotti, which has been the best resource for index investing in Canada.

 

Through CCP, I came across another Canadian personal finance blogger by the name of Andrew Hallam, and his book “Millionaire Teacher.  The Nine Rules of Wealth You Should have Learned in School“, which was  originally published in 2011 (updated in 2017).

Hallam’s book is worth the price of admission,  since he has read a ton of personal finance/investing books, and has summarized succinctly in his book.  If you still have doubts whether passive investing beats active investing over the long-term those doubts will be put to rest after reading Chapter 3.   Physicians practice evidence-based medicine, because research backs it up.  The same concept should apply when it comes to investing. The enormous amount of evidence in favour of passive investing is, in my opinion, equivalent to a “Grade A” recommendation in evidence-based medicine. 

I have read my fair share of excellent finance books/blogs, but everything that you need to know about personal finances and index investing in Canada can be essentially found in these two resources.   If you read Hallam’s book and CCP’s blog (in particular his “Model Portfolios“), then you will:

  • Know more than the majority of financial advisors out there

  • Understand that the #1 determinant of your long-term investment returns is your asset allocation (% stocks: % bonds)

  • Understand that the #2 determinant of your long-term investment returns is to keep fees/MERs low by using low-cost index ETFs/funds, which will outperform the majority of actively-managed funds

  • Understand how to manage your own portfolio with low cost ETFs with minimal effort/time  

If you spend a bit of your time with these two resources, then you will eventually be able to save 1-2% MER each year by managing your own portfolio. 1-2% savings on a $1 million dollar portfolio will be $10,000-$20,000 per year, every year, for the rest of your life. That is a considerable amount of money which can be used on your family instead, such as taking 1 or 2 nice family vacation trips per year. For the equivalent amount, how many hours would you need to work at your job?

Once everything has been set up, you only require 30 minutes per month to manage this portfolio.  It really isn’t that difficult, as Loonie Doctor explains. However, taking that first step to managing your portfolio can be frightening and may fill you with self-doubt.   Comparable to a medical student learning a new procedure/skill – “See one, do one, teach one”.  These 2 resources will help you with the “See one” part.  At some point, you will need to take the plunge.   Follow that with sharing your knowledge with others, and you will become an “expert” in DIY passive index investing.

Analysis Paralysis

A point I would like to mention is the “law of diminishing returns” when it comes to learning about index investing.   After a certain point, any additional time spent learning about the nuances of index investing will probably not result in better returns, and may in fact, cause analysis paralysis: Continue Reading…