Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Are guaranteed investments worth the premium?

Posted By |

Editor’s note: the piece below was written a few weeks before the market chaos of last Friday and this Monday, which only makes it  that much more relevant now. Even more prescient was a B&E guest post on August 13th entitled What you can do about the upcoming stock market crash.

MarieEngen
Marie Engen, Boomer & Echo

By Marie Engen, Boomer & Echo

Special to the Financial Independence Hub

The stock markets have shown some volatility this summer and this has concerned some investors who have been riding the latest “full steam ahead” bull market and think a market correction is imminent.

These concerns have increased interest in investment products that have a principal guarantee. But are they worth it? These guarantees come with a steep cost.

Market-linked GICs

Market-linked GICs, also called equity-linked GICs, are hybrid products that proclaim to capitalize on the growth potential of the stock market without risking your original investment. The return is derived from gains in the equity markets over the term of the GIC – usually 3 or 5 years.

The portion of the return derived from the equity markets depends on various components:

  • The benchmark used to calculate the return e.g. S&P/TSX Bank Index or Capped Utility Index, Nikkei 225 Index
  • Pre-set maximum return e.g. 6% for a 3-year term
  • Dividends are not included in the calculations

Interest income is paid on maturity. If the equity portion produces no return, you receive no interest at all. Pay particular attention to how the equity portion of the return is calculated.

Like conventional GICs they are guaranteed by the Canada Deposit Insurance Corporation to the maximum allowable limits and are available for purchase in registered and non-registered vehicles.

Segregated Funds

 A segregated fund is essentially an insurance product based on an underlying mutual fund that is offered by insurance companies. Under the insurance contract – usually for 10 years – part, or all, of the original principal amount may be guaranteed. In some cases there is the ability to reset the guarantee at a higher amount in future years. Continue Reading…

Three key investment strategies hidden in plain sight; #1 — Being There

Posted By |
paul_2-1500x994
Paul Philip CLI, CFP

By Paul Philip, CLU, CFP Financial Wealth Builders Securities

Special to the Financial Independence Hub

If you’ve ever dabbled in graphic design, you’re familiar with the concept of white space. When viewing an illustration, we typically pay the most attention to the visible ink on the page, such as a paragraph of text, a bar chart or an entertaining illustration. White space is the essential empty areas in between that are hidden in plain sight. We barely notice them … until they’re not there:

Pretty cheerful girl pointing white space over hands
Where’s the white space? (Deposit Photos)

When making investment decisions, most people likewise assume that the most eye-catching ink matters the most: an alarming economic forecast, an exciting Initial Public Offering, hot trading tips. But there’s a catch. This evident assumption does not hold up under evidence-based scrutiny. In reality, you have little or no control over how the most obvious news impacts your investments. The most exciting action has already been priced into any trade you might make well before you decide to make it.

Stop fixating on headlines

Instead of fixating on the headline news, consider that liberating financial white space. There, hidden in plain sight, you’ll find a number of powerful investment strategies that are freely available and far more within our control. In this series, we’ll introduce three of our favorite “plain sight” investment strategies:

  1. Being there
  2. Managing for market risks
  3. Controlling costs

Continue Reading…

Beware the sales pitch of “downside protection”

Posted By |
benfelix
Ben Felix

By Ben Felix, PWL Capital Inc.

Special to the Financial Independence Hub

I often hear the phrase protect your downside. It’s the sales pitch that a large part of the investment management industry thrives on, and it plays to the myopic loss aversion that most investors exhibit.

Myopic loss aversion is the tendency of investors to evaluate their portfolios frequently with greater sensitivity to losses than gains, causing them to act as if their time horizon is much shorter than it actually is.

Let’s look at the example of John, who wants to invest for his retirement 30 years from now. After happily watching his portfolio increase with steady returns for a few years, he panics when the market trends down slightly for a week. He knows he doesn’t plan to touch the money for a long time, but the thought of a decline, even over a relatively short period of time, makes him feel sick. He may even pull his money out of the market until things feel safe again.

Myopic loss aversion

An obvious path to safety would seem to be hiring a person or a company that knows how to protect your downside, and the investment industry has answered this calling. Continue Reading…

Another bad day on markets — try Meditation

Posted By |

41KxcsypMRL._SX356_BO1,204,203,200_Panicky stock markets in China are spreading to Asia and the rest of the world today. Over the weekend my Twitter feed provided links to various stories arguing the case against panic but clearly there’s extreme anxiety in the air and investors are going to do what they’re going to do.

At the Wall Street Journal, Jason Zweig described five things investors shouldn’t do right now. The New York Times advised Take some deep breaths and don’t do a thing. Here in Canada, the Globe & Mail’s Rob Carrick took a similar stance: Relax, a stock market pullback was overdue.

Deep breaths, relaxing? Sounds a bit like meditation. And that might be as valuable a thing to try right now than a belated attempt to lock the stock market barn after the horse has already escaped.

Here’s a review I did for the FP four years ago of the book illustrated to the left:  The Mindful Investor, Maria Gonzalez. The advice then was that the next time the markets crash, try to calm your mind with meditation. For a video interview I conducted with the author then, click on Mindfulness over Market Matters.

On page 152, the book specifically mentions how to deal with a stock market correction through a relaxation technique. “Once you feel calmer and more stable, you’ll be be better able to listen and make good decisions, ones that aren’t based on panic and fear.”

Of course, the more you watch the carnage through the media and web, the harder this is going to be. You might want to reread Steve Lowrie’s Hub post: Stop reacting to market noise.

Vanguard:  Consider doing nothing at all

Continue Reading…

“Of Course . . . But Maybe” — How to cultivate sober second thoughts on various financial decisions

Posted By |

By Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

Comedian Louis C.K. closed his 2013 comedy special Oh My God with a hilarious (albeit crude) bit called, “Of course . . . but maybe.” I thought it would be fun to apply the same thinking to personal finance and some of the situations we run into every day.

On sense of entitlement

Of course you deserve a vacation. You worked hard all year, and sure, while you didn’t make much progress paying off your credit-card debt, and your New Year’s resolution to reign-in the impulse shopping was busted by February, a week spent soaking up the tropical sun will re-charge your batteries and give you a fresh start on your financial goals.

But maybe you shouldn’t add to your debt-misery by putting that all-inclusive resort vacation on your credit card. Maybe burying your head in the sand won’t make your financial problems go away. Maybe you should hold off on the tropical vacation for a year or two while you get a handle on your finances. Maybe then you can truly say, “I deserve this.”

On education and doing what you love

Of course you should go to University and study whatever you want. Of course you should find your passion, however long it takes. You can be whatever you want. You can do whatever you want. Post-secondary education is an investment in your future.

Related: When doing what you love doesn’t pay the bills

But maybe spending $100,000 and eight-years of your life on that double-major in history and fine arts, only to spend the next few years working as a Starbucks barista, wasn’t the wisest use of your time and money.

On investing in mutual funds

Of course mutual funds offer an easy way for investors to put their hard-earned savings into a diversified basket of stocks and bonds. You can start investing with as little as $25 per month and build up your portfolio without any transaction costs.

But maybe you didn’t notice the annual management expense ratio eating into your returns. Maybe, as Vanguard founder Jack Bogle estimates, the 2.5 per cent a year in fees over a typical investor’s lifetime means that an astounding 80% of compounding returns ends up in the hands of the manager, not the investor. And maybe your financial advisor is really a salesperson in disguise, recommending funds that may not be in your best interest.

On insurance needs

Of course you should buy insurance to protect your loved ones in case something terrible should happen to you. Of course you want to provide for your dependents in case you die or become disabled.

Related: 5 myths about insurance

But maybe asking your insurance broker if you need insurance is like asking your barber if you need a haircut. Maybe if you are single and have no dependents you might not need life insurance. Maybe a simple term life insurance policy that pays off your debts and provides 5-10 years of income for your spouse and children is all the insurance you need. And maybe mortgage life insurance and balance protection insurance really just protect the bank at your expense.

On budgeting and tracking expenses

Of course you don’t need a budget. You have a great handle on your finances. You pay yourself first. You’re debt-free. You live within your means.

But maybe if you spent three months tracking your spending you’d discover several hundred dollars a month worth of unaccounted for expenses in categories such as dining out, gifts, and “miscellaneous.”

On home ownership

Of course you should aspire to own your own home one day. After all, you’re just throwing your money away on rent every month. Why not build up some equity of your own? And with house prices continuing to rise, of course it’s better to get into the market now before you’re priced out forever.

But maybe home ownership isn’t the panacea it’s made out to be. Maybe new expenses, such as property taxes, home maintenance, and lawn care cost more than you thought. A big-fat mortgage means you can’t afford to save for retirement, or even the odd dinner out. It turns out that maybe renting was a lot cheaper and gave you the freedom to pursue and achieve your other financial goals. (See also The Real Cost of Buying Your Home.)

RobbEngenIn addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on August 16th and is republished here with his permission. See also Boomer & Echo’s 5th Anniversary contest, with prizes galore (including a copy of Findependence Day).