Hurricane Investing

Sunset After Fiona

We were very fortunate during Hurricane Fiona & suffered no loss or damage. Our power went out around 5am yesterday but it was back on again, just shy of 6pm, the same day. There are still hundreds of thousands of people without power, & worse, in Atlantic Canada. I hope things get back to normal for everyone quickly. Here, I’m looking at my small challenges of yesterday from an investing perspective.

My power is delivered by a division of Emera (EMA) & they had proactively engaged the assistance of power workers from neighbouring provinces & states in anticipation of the challenges that Fiona would bring to our doorstep. Fortis (FTS) was similarly preparing for events in PEI & Newfoundland. My Telus (T) cellphone remained my only source of information throughout the day & I was able to pick up the latest news from CTV Atlantic on my phone. CTV Atlantic is owned by the media division of BCE Inc. (BCE). A division of that company delivers my internet & cable TV services too. My home is heated by natural gas that comes from a division of AltaGas (ALA) & Enbridge (ENB) also has natural gas delivery infrastructure on the east coast. I filled up ahead of time but, during less stressful times, my local gas station is also a good stop for a coffee & a sandwich at the Circle K convenience store. This is operated by Alimentation Couche-Tard (ATD). Most of us gassed up ahead of the hurricane. Canada’s energy & pipeline companies (CNQ, SU, TRP & many more) all keep us moving. Emergency workers & us regular folk all need to be able to get to those in need, to family & friends, during & after an event like this. Though all the supermarkets in the immediate vicinity were closed, we found a Sobey’s about fifteen minutes away that was open & fully functional. Sobey’s is owned by the Empire Company (EMP.A). There were very few coffee shops open &, even in normal times, everyone is always desperate for a coffee. Those few Timmy’s that still had power had long lineups. Very long lineups! Tim Horton’s is part of Restaurant Brands International (QSR). While it’s always useful to have some cash, all the bank cards seemed to be working at any location with power. The banks (RY, BNS, TD, BMO, NA, CM) were doing their thing during the hurricane too.

Insurance providers, healthcare businesses, construction companies all have a part to play at times like this but I’ll stop now, you get where I’m coming from, eh? Sometimes, the companies we complain about during “normal” times are the ones we depend on when times get tough. I used to complain about paying the price for the products or services that these companies provide. But I moan a whole lot less when I truly need them. And, as a shareholder, the perspective changes too. I tend to complain less when I own a piece of the business. That doesn’t mean we can just buy shares in any company we like, any time we like. Nor does it mean that we can just buy shares in any company that we complain about. While many of these companies fulfill needs that are important to how we live our lives, we still need to figure out if the company offers value to us as an investment going forward.

Fiona made me think a little differently about some of the stocks in my portfolio. I don’t directly own shares in all those mentioned above, but I do hold many of them. And it wouldn’t surprise me if the missing ones are in an ETF I own.

Fiona is finally moving on. Thankfully. Here’s hoping the recovery process goes well for all those impacted by her passage. Stay safe out there.

Important – this is not investing advice, it is for entertainment & educational purposes only. Do your own due diligence & seek professional advice before investing your money.

Growth vs Income Investments

Crypto, NFTs, or Boring Old People’s Stuff!?!

A lot of new investors have found their way into the stock market since the pandemic started. My own kids included. It’s interesting to see the different strategies that these new investors are drawn to. I’m not surprised by their interest in the latest hot stocks. I’m not even surprised by their interest in crypto & NFTs. But I am surprised at how many are looking at high yielding funds. Some of the allure here seems to be wrapped up in visions of early retirement. I think I understand that one!

Are high yield funds a good approach towards achieving early financial independence? Are these funds good choices for those already retired?

I picked two funds that are popular with income investing groups to compare against the market. I wasn’t cherry picking here, I just went with a couple that are popular with some of the groups & blogs I follow online. Overall it came out as I expected, but there were some surprises in the detail. And the devil is always in the detail! For fun, I threw one of Canada’s big banks into the mix. Both fund selections are closed-end funds with high yields. The American-listed fund currently has a yield around 20% & the Canadian-listed one is about 10%. The bank’s dividend is a little over 4.2%.
Those are very different yield numbers but, let’s be real here, it’s hard not to like a 20% yield!

Usually, it’s older investors who are attracted to yield. There is a lot of psychological comfort in retiring with a portfolio that generates enough yield to live on. Without having to sell shares. Younger investors who dream of early retirement are usually more focused on growth. Once the target portfolio size is reached & retirement beckons, it’s then the focus switches to income. That seems to make sense. But some young investors, still in the accumulation stage, are buying these high-yielding funds long before they need an income stream. They are reinvesting the distributions during the accumulation phase & that makes for great income stream growth …

Income Stream with Dividends & Distributions Reinvested

That’s pretty cool, eh? The big yielding funds are crushing the bank’s income stream. And all three are growing the income stream very nicely. But that’s with all the dividends & distributions getting reinvested. When you retire, whether you do that at a young age or at 65, the income stream is now used to cover living expenses. In other words, the dividend reinvesting may stop.
This is what happens to the income stream when you stop reinvesting the distributions …

Income Stream with Dividends & Distributions Removed for Living Expenses

That’s a very different picture now. The distribution from the very high yield fund is dropping with each passing year, the distribution from the Canadian fund is flat, & the income stream from the bank is increasing year by year. In 2022, based on the performance up to now, the bank will likely surpass the income stream from both funds.

Which of these would you like to have as part of your portfolio going into retirement?

Let’s look at something that might be more important for the young investor … portfolio growth.

Here is the CAGR (Compound Annual Growth Rate) of the investments, compared to a low-cost ETF that tracks the S&P 500® index. This one shows the annual growth with all distributions reinvested. To be honest, none of these are too shabby, eh!

And this one shows the growth when the distributions are not reinvested.

In either scenario, going left to right, the better the return. When the distributions were reinvested, the lower yielding options still provided better returns. How could this happen? The US fund had a declining share price over those years. The Canadian fund share price finished 2021 slightly above the share price at the start of 2010. The bank & the index ETF provided the bulk of their returns from growth. I’m not suggesting that any of these investments are better or worse. That will depend on individual needs, which can also change over time. A young investor, with a long investing horizon, will usually have different requirements than an older investor going into retirement.

Even individual retirees will have slightly different needs. One retiree might maintain a growth focus on his personal investments because he has a decent DB pension. Just to maintain a standard of living, another might need a growing income stream to keep ahead of inflation, the big bank might appeal here. While a third might want to maximize income during the early retirement years, so high yield could be more important for this investor. Maybe her husband wants to go nuts travelling while they still can!
It’s possible that you’ll find any or all of the above investments in all three retirees’ portfolios. Though likely in different proportions.

I didn’t compare the results for other funds or stocks, nor did I look at the results over different time periods. When comparing investments, it’s worth checking from a variety of angles. It’s much more than comparing simple share price returns. Total return considers the share price appreciation (or not!) & the dividend income. Beyond that, consider the returns with & without dividends reinvested. This exercise is just one example of why these comparisons are important. Understanding the implications of different investments can help develop a stronger investing strategy. One that might better match what you are trying to achieve. But every contender for a spot in a portfolio should probably be reviewed from a total return perspective. Investigate & evaluate. Carefully!

For a young investor that can tolerate the roller-coaster ride of the market, over the timeframe this example covers, it looks like the advice of Messrs. Buffett & Bogle came out ahead. The index tracking fund provided the greater total return.

Important – this is not investing advice, it is for entertainment & educational purposes only. Do your own due diligence & seek professional advice before investing your money.

Get Rich in One Hour a Week?

The fruits of the labour of others!

Okay, that title is clickbait. It is true though, you can grow a significant portfolio by investing one hour’s income a week. But this approach takes way more time than the optimistic results promised by the typical get-rich-quick scheme you’ll find online.

The US stock market has returned close to 10% annually for about a century now. Though it can be a choppy ride, it still looks like the best game in town for growing wealth. Nobody knows what the market returns will be going forward. But you could do worse than sticking some money into a low-cost S&P 500® index-tracking fund every week. There are no guarantees here but if nothing else, over the long haul, the odds are that it will provide a better return for more people than would buying lottery tickets. It would certainly be a better use of money than smoking or vaping!

It’s easy to talk about investing for big returns if you have a big salary. What if you’re on minimum wage? Sure, the size of the cheque can change the game. But it is the length of time you’re in the game for that produces the best result, regardless of how much you can invest. Starting early is a really big deal with this approach. The less money you make, the more critical it is that you start sooner. Let’s be real here, we would all rather have the bigger paycheque. But you’ll find some highly-paid people hitting retirement age in poor financial shape too. A kid finishing high school starts working & making money years ahead of someone who commits to a primary degree, a masters & a doctorate. Imagine our high school graduate living at home for those same years. While our university student is borrowing money to pay for an education. If our high-schooler starts working & investing earlier, & it doesn’t have to be a huge amount, it is possible for that kid to retire with a bigger nest-egg than the university graduate. Is this just a pipedream?

Okay, let’s look at it another way then.

The average minimum wage across Canada’s provinces & territories, by the end of 2022, will be about $14.36 per hour. Starting at age 20, saving & investing the equivalent of one hour’s work a week could turn into more than half a million dollars by retirement day. That’s not too shabby, eh!
Yes, I know it’s tough to save on minimum wage. But a kid who can save & invest, even a little, but consistently, all the way to age 65, might look forward to a more comfortable retirement. Can you save & invest the equivalent of one hour’s work a week to grow your wealth? If you want to boost your returns, get more invested while you are younger. What it would be like if you saved two hours wages a week from an early age? Imagine how it might turn out if you also invested more of your bonus money, your raises, or your tips?

Don’t imagine, test drive some numbers on a compound growth calculator. You don’t have one on your phone yet? Fix that!

The chart below shows how little you need to save, represented by the grey shaded area, to grow your retirement nest egg significantly. The orange area is the market growth contribution to the portfolio over time. Consistently saving & investing that one hour’s pay, every week, totals about $34k invested over a working lifetime. The market can turn those savings into a retirement portfolio worth about $650k. Amazing what can happen when you have 500 companies working for you! This chart uses the $14.36 per week, compounded quarterly, with a 10% rate of return. You’ll see that the real juice of compounding comes on over time. The earlier you start, the better the chances of a good result.

Juice Your Portfolio – this is a linear extrapolation, the real road will have more bumps & potholes, so the graph would be more squiggly & results can vary significantly. The only thing we know for sure is that investing nothing will produce zero return!

The unfortunate thing with this approach is that does take time. It feels like it’s not doing a whole bunch of anything in the early years. It’s just not exciting. In fact, it can be downright boring. Especially if your buddy is making a fortune in crypto or whatever the current meme stock is. Though market crashes can introduce a little excitement to the mix from time to time! This is one of those things that you need to set & forget. And keep on keeping on. But we’ll get to more about all that in another post.

Important – this is not investing advice, it is for entertainment & educational purposes only. Do your own due diligence & seek professional advice before investing your money. All the above assumes investing inside a tax sheltered account, with low or no transaction costs & no additional fees outside of those inside the low-cost index tracking fund.

Buy American in Canada!

Dad’s Decompression Zone!

As a Dad, I feel obliged to answer any of my kids’ questions as best I can. Naturally, I want my kids to think I’m a great Dad. But more often it’s because I don’t want them to make the same mistakes I did along the way. Recently, one of my kids asked me which version of the Vanguard S&P500® index funds they should buy. The choices were between VOO, on the US exchange, & VFV or VSP on the Toronto Stock Exchange. VFV is a Canadian dollar version of VOO. While VSP is the same thing, but currency hedged. I thought I knew the answer to this question.

The general comparison goes something like this …

Buying VOO from Canada incurs currency exchange fees. We need US$ to buy VOO. It’s not just the exchange rate, but we pay a fee for our brokerage to convert Canadian dollars to US dollars. You could try Norbert’s Gambit to reduce those costs. But there are still some added costs. Even with those costs, VOO should still outperform over time, since its expense ratio is 0.03%, compared to 0.09% for VFV & VSP. If VOO is held in an RRSP account, the American 15% withholding tax on the dividend is saved. Thanks to the tax treaty between the two countries. That does not work if you have American dividends being paid inside a Canadian ETF, like VFV or VSP. ETFs must pay the withholding tax. That’s two strikes against the Canadian ETFs. For a young investor, with a long investing horizon, going with VOO sounds like a no-brainer already, eh?

Investing outside an RRSP, both would suffer the withholding tax, but VOO would still have the lower fee advantage. Currency hedging, as with VSP, attempts to reduce the influence of currency exchange rate fluctuations between the US & Canadian dollars. Using currency hedging requires a little extra management, but the expense ratios of VFV & VSP are the same.

I was about to suggest that my kids learn how to do the Norbert’s Gambit thing & buy VOO inside an RRSP account. But I decided to run the numbers & compare all three.

This is what happened …

These are the results for a nominal $10k investment in each, made in November 2012. It’s important to note these are nominal dollar amounts for comparison, they do not take the different currencies into account. VFV returned at an annual rate of over 16%, while VOO was just over 14%. The currency-hedged VSP came in at an annual rate of 13%. Since VFV holds VOO, how could it possibly outperform VOO by that much?

To be perfectly honest, I would have done better putting some money into VSP back at the end of 2012, instead of some of the other choices I made! But, after looking at these numbers, what do you think I should suggest my kids do?

And why?

It wouldn’t be the first time I missed seeing the forest because of the tree pollen in my eye!

Dreams of Being Rich!

Wake up!

Okay, this is just one of those dreams I can’t make sense of. No, not the dream of being rich, but an actual dream I had last night. One that I can’t make sense of. I’m not making this up, I really had this dream last night & I think you’ll be tickled with the kicker at the end of the story.

I like to read my way to sleep but I happened to listen to an audio book last night. It’s a book on a high-yielding, income-fund investing strategy. This is an investing approach that I don’t really buy into. But that’s why I need to learn more about it, I could be wrong. It might work for a chunk of a retiree’s portfolio, so maybe I’ll want to use it down the road. I was pausing the book periodically, to jump over to the browser on my phone. I compared the total returns of some of the recommended funds against those of one of the Canadian banks. And that’s about when I fell asleep …

Now I’m at my dream-desk. I had a list of four funds that I wanted to compare & I was reviewing these on screen when I was introduced to a new employee. Next thing you know, I’m sharing a sheet of paper with the new guy. It started out with the ticker symbols of the four funds on it, but now it is a list of four of my brilliant suggestions for design improvements on a reflow oven. A reflow oven is a big, industrial version of the oven you might find in sub sandwich restaurant. You know the kind with the flat conveyor belt? It toasts those open-faced sandwiches.

Anyhoo, an industrial reflow oven solders electronic components onto printed circuit boards. It’s one of the machines that helps manufacture the electronics inside your phone, TV, laptop, & so on. This machine has been part of my day job for decades already. I probably know more about reflow ovens than I do about investing in high-yielding funds! I’m talking about my brilliant ideas with the new guy & I invite him to join me at a meeting I’ve scheduled to share these suggestions with the engineering department.

Next thing I’m sitting in the meeting room opening up my laptop. The new guy is sitting to my left & … wait for it … Warren Buffett is sitting to my right. I’m not kidding, I dreamed of Mr. Warren Buffett, the Oracle of Omaha himself! We’re all waiting for the design engineer to show up for the meeting. As I open my laptop, I glance out the window. I don’t know why I’m not surprised that the office window is looking out over the park in the small Irish town I grew up in!

The design engineer finally shows up. A tall, smiling man. With his shaven head, he looked more like a martial artist than any design engineer I’d ever worked with. He is 6″ 8″ tall & I have to look up, a lot, as I shake his hand. His name is Do, but pronounced dough! I introduce him to the new guy, whose name I couldn’t drag back from dreamland, but Mr. Buffett needed no introduction. I guess we were used to working together! LOL

I fired up my laptop & was about to review the list of the four items with the group, but then the recollection fades.

Bummer!

After a solid eight hours of sleep, I woke up. Exhausted. I took my morning coffee out to the balcony, in the dark, & tried to gather as many threads of the dream as I could. But, try as I might, I could not remember if The Oracle had passed judgement on the four ticker symbols on my list. I finally gave up & carried on with my daily ritual. I usually play the day’s Wordle® game as I enjoy my coffee.

You won’t believe the word that proved to be today’s solution to the Wordle® puzzle!

And I’m not telling you the answer!
Go to The New York Times Wordle® website & play it yourself.

And then tell me that isn’t just weirdly, wonderfully, mystical … or something.
I don’t know if I’m supposed to buy these funds when the markets open. Or run away screaming!

Okay, if you don’t play the game, just search for Wordle® #337 online for the answer.