We’ve recommended buying the five top Canadian bank stocks since the 1970s, but not everyone has agreed with that advice.
Canadian banks have gone through periodic and sometimes lengthy slumps, like any other stock group. They occasionally make costly management errors. On rare occasions, they have suffered from adverse regulatory decisions.
This is what pessimistic investors might say about top Canadian bank investments. But because these stocks have grown, paid high dividends and have generally been available at highly attractive prices, they’ve provided well-above average investment returns for decades.
Investor worry and the banks
Some investors fear the banks will lose out to “fintech” (upstart financial technologies, comparable perhaps to Uber or AirBnB). Or they wonder if the banks will get caught unawares when interest rates make their long-awaited upward move.
Our view is that the banks had a long time to prepare for the inevitable rise in interest rates, and the inevitable coming of fintech competition. In fact, they will probably wind up prospering in fintech, if not dominating it, as they did in stock brokerage, insurance and other financial areas that they have entered in the past few decades.
On the whole, investors have underestimated top Canadian bank investments for as long as I’ve been in the investment business. As a result, these stocks have often traded at attractive share prices. Because they were growing, and cheaper in many respects than other stocks, they gave conservative Canadian investors a near-ideal combination of pluses: above-average dividend yields and records; low-to-moderate ratios of per share price-to-earnings; and above-average long-term capital gains.
Look for top Canadian bank stocks with consistent dividends
We recommend that you base your investing for retirement on a sound financial plan. Here are the four key factors that your plan should address to ensure that your retirement investing generates enough income in retirement:
1.) How much you expect to save prior to retirement;
2.) The return you expect on your savings;
3.) How much of that return you’ll have left after taxes;
4.) How much retirement income you’ll need once you’ve left the workforce.
Stick with conservative estimates to account for unforeseen setbacks
As for the return you expect from investing for retirement, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume you can make money trading in bonds.
Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Aim lower in your retirement planning —5% a year, say — to allow for unforeseeable problems and setbacks.
Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.
One thing we encourage all investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.
For many investors, setting aside inheritance money for their heirs and loved ones is a natural part of retirement planning. But doing this successfully is not easy, and fortunes rarely last for long. In fact, long-term studies show that six out of 10 family fortunes get dissipated by the end of a second generation. And nine out of 10 are gone by the end of the third generation.In fact, there’s a good chance that at least one member of a couple in their 70s will live to age 90 or beyond. So the typical heir could be, say, age 60 before he or she gets a dime.Moreover, medical expenses soar in later years. That’s especially so now, with today’s faster pace of medical advances, many of which are hugely expensive. It may help to inform your heirs that your retirement planning doesn’t include cutting corners when it comes to keeping yourself alive, mobile and pain-free. Continue Reading…
Target-date funds are sold as offering great benefits for investors, but we don’t think you should accept the sales pitch.
Target-date funds go against one of TSI Network’s cardinal rules of successful investing. That is to invest mainly in simple, plain-vanilla investments. This rule limits your choices to two main categories: stocks and bonds (or ETFs that hold those investments). By confining yourself to these two investment categories, you still have all the investment choices you need. You also avoid the hidden risks and conflicts of interest that you’ll find in more complex products.
Target-date funds are mutual funds that take advantage of the widely held view that bonds are inherently safer than stocks, so you should gradually shift your investments out of stocks and into bonds as you near retirement. Target date funds do this for you automatically.
Complexity is not a benefit
The funny thing is that the promoters of complex investments describe the features of these investments as if they were benefits, disregarding the associated negatives. This marketing approach attracts investors who want to make a quick decision. These investors tend to accept the sales pitch at face value.
Canadian annuities offer a predictable source of income, but we advise against buying them.
An annuity may be worth considering for part of your assets, depending on your age, investment experience, the time you want to devote to your investments, your desire to leave an estate to your heirs and other aspects of your retirement investing.
But a key drawback to annuities is that annuity rates are closely linked to interest rates, which are at historic lows. In addition, annuities have no liquidity. If interest rates and inflation move up, your annuity payments would remain fixed and you would lose purchasing power. Plus, you would have no way to rearrange your portfolio. This is why we generally advise against investing in Canadian annuities.
There are basically three types of Canadian annuities:
1.) Term-certain annuities are payable to you, or your estate, for a fixed number of years. Your estate will receive the payments even if you die. You could outlive this type of annuity.
2.) Single-life annuities are payable to you for as long as you are alive. These annuities may come with a minimum number of years of payments. If you die while the minimum payment period is still underway, future payments would go to your estate.
3.) Joint and last survivor life annuities are payable as long as you, or your spouse, are alive.
3 Ways Canadian Annuities can hurt Your Retirement Investing