What Successful Investing and The Great Gretzky have In common

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Image courtesy Outcome/Shutterstock

By Noah Solomon,

Special to Financial Independence Hub

It’s been a long

A long time comin’, but I know

A change gon’ come

Oh yes, it will  

  • A Change Is Gonna Come, by Sam Cooke

Skate where the Puck is Going, not where it’s Been

Nicknamed “the Great One,” Wayne Gretzky has been called the best hockey player ever. Despite Gretzky’s unimpressive size and strength, his intelligence, stamina, and reading of the game were unrivaled. Gretzky himself credited much of his success to advice he received from his father as a young boy, which was to “skate where the puck’s going, not where it’s been.”

As is the case with the Great One, superior investment results stem in large part from anticipating future developments rather than simply positioning portfolios based on the past or current environment. To be clear, I am not referring to market timing, nor am I referring to predicting earnings, economic growth, inflation, or interest rates over the next quarter or year. As stated in past newsletters, such endeavours are highly unlikely to result in outperformance.

Rather, I am referring to significant changes in the investment landscape that (1) will likely persist for the next several years and (2) present both the risk of significant underperformance and the opportunity for material outperformance, depending on how one’s portfolio is positioned.

The most Powerful Force in Markets

Reversion to the mean is perhaps the most powerful force in markets: periods of higher-than-normal returns have been followed by periods of subpar returns, and vice versa. The postwar expansion and steady market gains of the late 1940s and 1950s were followed by stagflation and choppy, flat returns in the 1960s and 1970s. In similar fashion, the great bull run of the 1980s and 1990s ushered in the lost decade of the 2000s, when stocks delivered negative-to-flat returns.

This pattern is not coincidental but rather is firmly rooted in behavioural economics. For as long as modern markets have existed, people have overreacted, both in good times and bad. Following several years of strong economic and earnings growth, investors have repeatedly become overconfident that the proverbial party will continue indefinitely, causing stock prices to rise at a faster pace than earnings and multiples to reach unsustainable levels. At the other end of the spectrum, during periods of recession when earnings either decelerate or contract, widespread despondency morphs into predictions of eternal darkness with no possibility of improvement, resulting in lower than reasonable earnings expectations, multiple contraction, and fire sale asset prices.

The longer and stronger the expansion, the more irrationally exuberant people become, and the longer and darker the recession, the more illogically pessimism gets entrenched. Ironically, the most optimistic extrapolations reach a crescendo when they are least likely to be realized, and the most pessimistic ones become most widespread when they should be least so. The exact anatomy and causes of different booms and busts change from cycle to cycle, but the overall picture has remained tragically consistent. Plus ça change, plus c’est la même chose.

Markets have NOT been Normal

Investors today have grown accustomed to well-above-average returns. However, as the following table demonstrates, the past ten years have been highly anomalous from a historical standpoint.

Equity Market Returns: A Longer-term Perspective

 

Notwithstanding the daunting historical pattern of mean reversion, the post-global-financial-crisis environment has been highly supportive of equities. Increased globalization, moderate inflation, and low interest rates supported strong earnings growth and expanding valuation multiples, which in turn spurred above-average returns.

In contrast, today’s landscape is marred by trade frictions, stubborn inflation, ballooning sovereign debt levels, and rising interest rates. Importantly, these structural headwinds for earnings growth stand in sharp contrast to today’s elevated valuations, with U.S., Canadian, and European indexes all standing in the top fifth of their historical valuation ranges.

I have no idea whether markets will rise or fall over the near-to-medium term, let alone exactly when or by how much. However, given the historically inverse relationship between starting valuations and forward, ten-year returns, I am confident that average returns over the next ten years will likely be lower than long-term averages, and perhaps meaningfully so. History seems primed to repeat itself, if not rhyme.

Estimating returns requires sophisticated assumptions, and methodologies used to do so vary across asset managers. Yet, despite these differences, a common theme emerges: most asset managers forecast low future equity returns.

Annualized Equity Return Forecasts: Next 10 Years

 

What REALLY drives the Bus

It goes without saying that a portfolio’s individual stock holdings and sector weights are important determinants of its return. However, there is more than meets the eye with respect to performance attribution. Continue Reading…

Understanding Target Cash Flow ETFs: A new approach to Cash Flow Investing

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Looking for consistent cash flow without the guesswork? See how Target Cash Flow ETFs are redefining cash flow investing.

Image from Pixabay

By Darim Abdullah, BMO Global Asset Management

(Sponsor Blog)

For many investors, especially those approaching or in retirement, generating consistent cash flow is one of the most important goals in a portfolio. Traditionally, that meant relying on dividends, coupons, or systematic withdrawals. But these sources can fluctuate, making it difficult to plan with confidence.

A newer category of solutions, Target Cash Flow ETFs, has been launched by BMO ETFs to help address this challenge. These strategies shift the focus from simply “earning yield” to delivering a defined cash flow outcome.

What are Target Cash Flow ETFs?

Unlike traditional income funds, where payouts depend on underlying dividends or interest earned, Target Cash Flow ETFs take a more structured approach. They aim to deliver regular monthly distributions based on a predefined annual target (approximately 6% –15% depending on the ETF)1, rather than whatever cash flow the portfolio happens to generate.

This approach aligns with the broader rise of “outcome-oriented” investing where ETFs are built to meet specific investor goals, such as generating cash flow or reducing volatility.

How do they work?

The key difference lies in how distributions are generated.

  • Traditional cash flow ETFs generally pay out what the portfolio earns (dividends, interest, option premiums).
  • Target Cash Flow ETFs aim to pay out a set amount, regardless of market conditions.2

To deliver a more regular monthly cash flow, the distribution is built using a blended funding approach. Cash flow may come from the portfolio’s natural sources of return: dividends, interest, and (where applicable) option premiums, and may also include Return of Capital (ROC). ROC doesn’t create an immediate tax liability, but it does reduce your Adjusted Cost Base (ACB) over time, which can affect taxes when the investment is sold. And if ROC isn’t offset by portfolio growth, it can gradually reduce invested capital.

That’s why it’s important to assess the strategy through a total return lens, not just the cash flow. If the portfolio’s total return stays above the distribution yield, the client’s underlying capital can still grow over time; if it’s persistently below the payout, the likelihood of capital erosion increases.

With the above payout breakdown in mind, it is worth noting that the payout levels for the T series solutions were carefully selected after examining the historical long-term returns of the parent portfolios, with the aim of minimizing the return of an investor’s initial capital as much as possible. Over the long term, the objective is for the distribution levels to be supported by the total returns of the underlying portfolios.

BMO’s Target Cash Flow offering

BMO has been an early innovator in this space in Canada3, introducing Target Cash Flow Units (often referred to as “.T series”) across a broad lineup of ETFs.

These units are available on a range of existing strategies including:

  • Asset allocation ETFs (e.g., all-equity or balanced portfolios)
  • Covered call ETFs (both dividend and sector focused)

Rather than launching entirely new funds, BMO has added a new .T series of units to existing ETFs, giving investors the ability to choose between traditional distributions and a targeted cash flow approach within the same parent strategy. I

Key Features

BMO’s Target Cash Flow Units are designed to offer: Continue Reading…

Retired Money: the 4% Rule, Stock market Risk and the CAPE Ratio on Valuations

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Sequence of Returns Risk: Chart by Stefano Starkel

My latest MoneySense Retired Money column touches on a number of blogs that regular readers of Findependence Hub may already have seen, but ties together a few disparate threads that may warrant revisiting. Click on the highlighted headline here for the full article: The CAPE ratio, the 4% rule and retirement anxiety.

The focus is on the 4% Rule, Sequence of Returns Risk early in Retirement, and stock valuations measured by the CAPE Ratio.

The 4% Rule is one of those Personal Finance chestnuts, a topic we explored in Retired Money as recently as late 2025 (here.) My Findependence Hub blog on the 4% Rule appeared late in July here.

Robert Shiller’s CAPE Ratio: the Cyclically Adjusted Price-to-Earnings ratio (CAPE), is a measure of how fairly valued or overvalued stocks may be.   The blog on the CAPE Ratio ran late in August here. Both are under my byline: Each contains full raw quotes from a variety of business owners and investment professionals on both sides of the border, gathered on Linked In and a service called Connectively, formerly Featured.com.

A useful primer on the CAPE Ratio was provided by blogger Michael J. Wiener, on his Michael James on Money blog (from early August), also republished here on Findependence Hub in August. He says the CAPE Ratio is “just the current price divided by the average inflation-adjusted earnings over the past decade.”  Investopedia defines the CAPE Ratio as “a valuation measure that uses real earnings per share over a 10-year period to smooth out fluctuations in corporate profits.” You can find more on CAPE here on Wikipedia.

See also this recent Findependence Hub blog by Stefano Starkel titled the The Alternative to the 4% Rule isn’t a different number: It’s a different mechanism.  There, Starkel argues that “the fragile part of a fixed-withdrawal plan is Sequence-of-Returns risk.” He shows a chart [shown above] that demonstrates how early losses in Retirement can have a dramatically negative impact on returns and thus Retirement income.

Stay Calm

Sure, proper diversification and asset allocation should allow you to Stay Calm, which happens to be the title of a new book published early in September by David Booth: he’s a founder of Dimensional Fund Advisors (DFA), one of the better indexing companies out there. I have finished reading  it and plan to review it for MoneySense in the near future.

The main principles of the DFA approach to investing is to keep costs low by minimizing trading and using passive investing vehicles like ETFs, and above all trust the markets over the long term while avoiding picking individual stocks and attempting to time financial markets.

Tune out the Noise
Continue Reading…

How I bought stocks and left the ETF fees behind

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By Dale Roberts, Retirement Club/cutthecrapinvesting

Special to Financial Independence Hub

Exchange traded funds (ETFs) are likely the greatest advancement for investorkind. We can gain much-needed diversifcation and keep the fees super low. Compared to traditional actively managed mutual funds, ETFs are usually a 90% to 95% off sale. Over the decades this fee saving can amount to a life-changing event. But what if we go one step further and buy enough stocks to potentially replicate the index? Here’s how I bought stocks and left the ETF fees behind.

As always the following is not advice.

In most cases it might not make sense to sell an ETF to recreate the index. The fees can be next to nothing. An ETF such as XIC-T, which tracks the broad Canadian TSX Composite Index, offers investors an extremely low-cost way to gain diversified exposure to Canadian equities. With a Management Expense Ratio (MER) of just 0.06%, the fees are next to nothing. On a $100,000 portfolio, the annual cost is only $60.

ETF fees are peanuts

On a $500,000 portfolio the fees are just $300 per year. That’s peanuts. If you seek exposure to the broad Canadian stock market in cap-weighted form, XIC-T or similar is likely for you. Cap-weighted means that the largest companies, based on their market capitalization (total market value), receive the greatest weight in the index. For example, Royal Bank of Canada is one of the largest companies on the TSX by market capitalization, so it has one of the largest weights in the index. The larger a company becomes relative to the other companies in the index, the greater its influence on the index’s performance.

Related read: What is index investing?

Of course you can buy the markets for U.S. and International stocks in the same low-fee manner. For portfolio ideas check out the core global ETF portfolio models on Cut The Crap Investing. And as readers likely know, you can purchase an all-in-one global ETF portfolio at various risk levels. See the asset allocation ETF page.

In a recent Sunday Reads we looked at the performance of the core ETF portfolios.

Buying stocks leaving ETF fees behind

Of course, it’s a personal decision whether to buy an index fund or gain exposure to the Canadian market by way of a stock portfolio. The good news? We can keep it simple. Canada’s bluest-of-blue-chip companies have a long history of delivering excellent returns: and often beating the broader market.

Most Canadian self-directed investors build their portfolios around Canadian stocks, then add U.S. and international exposure through ETFs. That’s exactly what I do. And that’s also why you might want to check out Wealth Club for Canadians. It’s a premium service focused on wealth creation, with specific Canadian stock portfolio models designed to help investors build and manage their own portfolios.

In my personal RRSP portfolio I created a version of a Canadian Wide Moat portfolio. It has a blue chip focus, but sticks to the wide moat sectors:

  • Canadian financials
  • Railways
  • Grocers
  • Broader utilities (including pipelines and telcos)

I shared this wide moat (out) performance example on Twitter / X …

Yes, please. Follow me on Twitter.

In my personal RRSP portfolio I held a concentrated portfolio of banks, pipelines and telcos. It’s somewhat close to the Essentials Portfolio that has a nice history of out performance.

Hanging up on the telco sector

In the utilities camp I held BCE-T and Telus T-T. As we know the telco sector fell on hard times. In early 2024 I mostly hung up on the telco sector. The rules changed and higher borrowing costs caused by rate increases piled on.

And while my Canadian banks have performed very well, I thought I should seek exposure to the greater Canadian Financials sector. So, I kept most of RBC-T and bought XFN-T, iShares S&P/TSX Capped Financials Index ETF. The fund mostly holds the big 6 Canadian banks, the insurers and Brookfield BN-T.

I have also been fortunate to hold Canadian oil and gas stocks from about 600% ago. I also hold/held some gold and other inflation-fighting “stuff” such as PRA-T.

The “problem” is, XFN-T has an MER of 0.61%. We are paying $610 on every $100,000. I’m not complaining. The ETF delivered a ‘quick’ 100% or more. RBC had even greater returns for the period. Yes, we’ve all be treated very well by our Canadian financials. They are even trouncing U.S. tech in recent years.

What stocks did I buy to remove ETF fees?

I bought the big 4 Canadian banks:

You’ve filled your TFSA and RRSP. Now which Investment goes where?

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Most Canadian investors know they need to shelter investments from taxes as much as possible but these can be taxed differently depending on which account holds them. Professionals call this Asset Location. Here’s how to optimally place them in the most tax-efficient vehicles.

By Curtis Travis

Special to Financial Independence Hub

Most Canadian investors learn the first rule quickly enough: shelter it. Fill the registered accounts before a dollar goes into a plain taxable one. It is the single most valuable habit in Canadian investing, and if you read this site you have almost certainly done it.

Almost nobody does the second step.

Here it is: the same investment is taxed differently depending on which account holds it. Not the same investment in a different year, or bought at a different price: the identical holding, on the identical day, taxed differently because of the drawer it sits in. Professionals call this Asset Location. It costs nothing but a few minutes of thought, and getting it backwards can quietly cost you thousands over a couple of decades.

Three facts drive the whole thing.

The first is that the dividend tax credit — the break that makes eligible Canadian dividends so gentle in a taxable account — is lost inside a registered account. A TFSA or an RRSP isn’t paying tax in the first place, so the credit has nothing to offset. It simply evaporates.

The second is that American dividends arrive with tax already taken off the top. The United States withholds 15% under the Canada/U.S. treaty. In a taxable account you can generally claim that back as a foreign tax credit. In an RRSP the treaty exempts it entirely. And in a TFSA, an FHSA or an RESP it is gone for good: the treaty doesn’t recognise those accounts, and there is no tax return on which to recover it.

The third is that interest is taxed as ordinary income, the harshest treatment there is. It has the most to gain from any shelter at all.

Line those up and a rough map falls out. Not a clever one: the kind a CPA will refine but not overturn.

American dividend payers belong in the RRSP, where the withholding disappears. Interest-bearing holdings belong in a registered account too, because they are punished worst outside one. Canadian dividend payers are the natural residents of a taxable account, where the credit actually does its work; so when registered room is tight and something has to sit outside, the Canadian banks and utilities are, for most people, the last things that need sheltering. And your highest-growth, longest-held positions belong in the TFSA, where a large gain is not merely deferred but never taxed at all.

That last one is worth sitting with. A TFSA doesn’t defer the tax on a thirty-year compounder. It cancels it.

Now the part that catches careful people.

The RRSP exemption on American dividends only applies when you hold the American shares, or an American-listed fund, directly. A Canadian-listed fund that owns American stocks pays the withholding inside the fund, before the money ever reaches you. In a taxable account that is survivable: the fund passes the tax through on your slip and the credit is still yours. In an RRSP it is simply lost, and you will never see it on a statement.

This surprises people who did everything else right. They bought a Canadian-listed U.S. equity fund, put it in the RRSP because that is where American exposure is supposed to go, and quietly gave up the treaty benefit they were trying to capture.

Where good intentions get expensive

Two more pieces of fine print, because this is where good intentions get expensive.

The RRSP is a deferral, not an exemption. Everything that comes out comes out as ordinary income: capital gains and dividends included. A gain that would have been taxed at the favourable capital-gains rate in a taxable account is taxed in full when it leaves an RRSP. The deduction you took going in is what pays for that. And by the end of the year you turn 71 the account must be wound up, for most people into a RRIF, which from the following year pays you out on a schedule whether you want the money or not.

The TFSA has three habits worth knowing. Room you withdraw comes back: but not until the following January, so a withdrawal and a re-deposit in the same calendar year can quietly push you over your limit. The penalty is a tax of 1% per month on the excess, which is not a rounding error. And a TFSA is for investing: the tax agency has taken the position, and the courts have backed it, that an account run like a day-trading business can have its gains taxed as business income, tax-free wrapper or not. Buy well and sit still and you will never meet that rule. Continue Reading…