Monthly Archives: December 2015

How to reduce portfolio overlap

Adrian
Adrian Mastracci, KCM Wealth

By Adrian Mastracci, KCM Wealth

Special to the Financial Independence Hub

“Many portfolios are overloaded with same or similar investments. Few investors know about overlap.”

A frequent investing theme is owning more than 15 different mutual funds:
purchased over the years with little thought as to how the collection fits together, if at all.

Owning several funds can create a significant “overlap” of securities.
That is, individual holdings within the mutual funds are often the same, or very similar.

While fund names may differ, their holdings do not.
For example, mutual funds buy from a short list of Canadian stocks, like banks.

Having several accounts can also have you owning many of the same stocks in each.
This may tilt your portfolio in one or more asset type or sector. However, you hardly see anything written about portfolio overlap. Most investors have little or no knowledge of the implications of overlap, such as:

• Owning a collection of funds heavy on overlap reduces your portfolio diversification.
• Overlap increases if you choose funds from similar investing styles and sectors.
•  Portfolios that overindulge on overlap can also be affected in their long-term results.

Some portfolios have more than 40% overlap.
Problems can arise with as little as 10% overlap. Continue Reading…

Timing of CPP benefits: Get both a bird in the hand and two in the bush

BirdinhandBy Doug Dahmer, Emeritus Retirement Solutions

Special to the Financial Independence Hub

Canadians from across the country are starting to look at their Canada Pension Plan with the respect it deserves.

The reaction to our CPP Optimizer research report has been overwhelming. In a nutshell, the CPP benefit for a couple can be in excess of $700,000 over their lifetime and the study demonstrates that the difference between starting your benefit at the least beneficial date and starting at the best date is more than $300,000.

Taking benefits too early can be costly

Unfortunately, not everyone knows these statistics. From comments in social media, I can see that many people are trapped in the old school, conventional wisdom that you should take your benefit as soon as you retire. “A bird in the hand …” is a common thread of discussion. For some people, this choice will be a mistake of enormous proportions. Continue Reading…

How to choose the best investments for children

patmckeough
Patrick McKeough

By Patrick McKeough, TSInetwork.ca

Special to the Financial Independence Hub

Investors sometimes ask us how to select the best investments for young children. If children are under the age of 18, they cannot yet invest as adults. However, there are a couple of savings and investment options available.

The first option is for you (or the child) to open a bank account in the child’s name. Interest paid on small balances may range from zero to, say, 1.05% annually, paid monthly. All of the major banks have special bank accounts for children, usually without service fees on basic transactions. However, once the child has accumulated $500, he or she could move the money into an interest-paying guaranteed investment certificate (GIC).

In-trust accounts offer low cost, flexibility

If you want to build up an investment portfolio for a child, then an informal in-trust account is a low-cost and flexible option. Continue Reading…

The real cost of bad habits

MarieEngen
Marie Engen, Boomer & Echo

by Marie Engen, Boomer & Echo

Special to the Financial Independence Hub

This is the time of year when people take stock of their lives and vow to start the new year with a change of habits: stop smoking, exercise, eat better, take care of finances. And yet the majority will fail to keep up with the changes within the first month. Bad habits have both a financial cost and a personal cost, but they also have personal benefits that make them so hard to change.

Being Overweight

Obesity is becoming the norm in North America. It’s partially the result of bad eating habits aided and abetted by fast food supersizes and the cheapness of the least healthy grocery choices. Yes, it’s easy to turn into the fast-food drive-thru when you’re stressed, busy and haven’t taken out anything for supper. Continue Reading…

Vanguard applauds Fed’s move to hike short-term interest rates

Fed funds rate-2By Joe Davis

Special to the Financial Independence Hub

Vanguard applauds the Federal Reserve’s decision to raise short-term rates by 25 basis points. It marks the beginning of the normalization for a U.S. economy, which has made considerable progress over the past six years. Very rarely (if ever) have central banks successfully exited the zero bound and quantitative easing; we believe today’s U.S. Federal Reserve will ultimately prove the first to do so.

Dovish tightening cycle expected

We expect a “dovish tightening” cycle that will likely leave the fed funds rate below the rate of trend inflation for at least a year. Specifically, our non-consensus view is that we will likely see an extended pause near 1%, regardless of the near-term outlook. Reasons for an extended pause in the fed funds rate would include slower-than-expected growth—given still-fragile global economic conditions and the self-limiting impacts of further U.S. dollar appreciation—and the need and desire for the Fed to begin tapering the size of its balance sheet.

An unequivocal positive for savers and long-term investors

As this has been a widely anticipated decision, we do not expect any material impact on financial conditions in the short term. Indeed, we view the Federal Reserve’s decision as an unequivocal positive for both long-term investors and for savers.

In our opinion, those who claim that raising rates is a “policy mistake” that may derail the U.S. recovery underappreciate the still-accommodative stance of monetary policy and the resiliency of the U.S. economy. There is little to no empirical support showing a strong and material link between a 25 basis point rate hike and future U.S. economic conditions given the still-negative real fed funds rate.

Low-rate environment is secular, not cyclical

For bond investors who fear a marked rise in long-term U.S. interest rates, we believe that the low-rate environment is secular, rather than cyclical, and that credit risk in bond portfolios may be a more important factor in 2016 than duration or interest-rate risk.

Davis_Joe_10_aJoe Davis is Chief economist and global head of Vanguard Investment Strategy Group.