All posts by Financial Independence Hub

What the new Higher Stress Test means for Homebuyers

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Image courtesy of Loans Canada

By Sean Cooper

Special to the Financial Independence Hub

Ever since the start of COVID, the real estate market has been on fire. To help deal with the record level of activity in the real estate market and also keep things balanced, a new mortgage stress test was introduced June 1st. In this article we’ll look at the new mortgage stress test and how it affects you.

What’s the Stress Test?

The stress test is a measure that anyone buying a home, refinancing their mortgage or switching mortgage lenders must pass. Pretty much the only time you don’t have to pass the stress test is when you’re renewing your mortgage with your existing lender. Whether you’re buying a home with less or more than 20 per cent, it doesn’t matter. You’re affected by the stress test.

The stress test was introduced several years back to help protect homebuyers from becoming overleveraged and taking on too much mortgage debt. Prior to the stress test, you only had to prove that you could afford mortgage payments based on the mortgage rate when you first sign up for your mortgage. However, with Canadians spending more and more on homes and the threat of higher interest rates looming, the Canadian government decided to introduce the stress test in early 2018 out of precaution.

To pass the stress test, you need to show that you can qualify at the greater of your mortgage rate plus two per cent and the stress test rate (currently at 5.25 per cent). With mortgage rates currently somewhere in between the mid one percent’s and the mid two per cent’s for both fixed and variable rate mortgages, you’ll almost always have to qualify at 5.25 per cent as things stand today.

How has the Stress Test changed?

The new stress test rules came into effect June 1st. Prior to the introduction of the new stress test rules, the mortgage stress test rate was 4.79 per cent. That’s because it was based on the average of the big banks’ posted mortgage rates. However, the government decided to change how the stress test was calculated. Continue Reading…

Checking in on the Canadian Wide-Moat Portfolio

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It’s a trade-off. I hold a concentrated portfolio of Canadian stocks. What I give up in greater diversification, I gain in the business strength and potential for the companies that I own to not fail. They have wide moats or exist in an oligopoly situation. For the majority of the Canadian component of my RRSP account I own 7 companies in the banking, telco and pipeline space. I like to call it the Canadian wide moat portfolio.

Like many Canadian investors I discovered over the years that my Canadian stocks that pay very generous dividends were beating the performance of the market. You’ll find that market-beating event demonstrated by the Beat The TSX Portfolio. Eventually, I moved to the stock portfolio approach.

Over longer periods you’ll see that BTSX beat the TSX 60 by 2% annual or more. And as always, past performance does not guarantee future returns.

For the bulk of my Canadian contingent I hold 7 stocks.

Canadian banking.

Royal Bank of Canada, Toronto-Dominion Bank and Scotiabank.

Telco space.

Bell Canada and Telus.

Pipelines.

Canada’s two big pipelines are Enbridge and TC Energy (formerly TransCanada Pipelines).

My followers on Seeking Alpha or Cut The Crap Investing readers will know that I also own Canadian energy producers, gold stocks and gold price ETFs (holding gold) and the all-in-one real asset ETF from Purpose. I also own Canadian bonds and bitcoin.

We hold our cash with EQ Bank.

Related reads:

Investing in Canadian banks.

Investing in Canadian telco stocks.

For the U.S. component there is a basket of U.S. stocks. Here’s an update of our U.S. stock portfolio. That portfolio continues to provide impressive market-beating performance.

The performance update

Here’s the Canadian wide moat 7 from 2014 vs the TSX Composite. I slightly overweight to the telcos and banks. For demonstration purposes the portfolio is not rebalanced. When reinvesting I usually throw the money at the most beaten-up stock. That would be a reinvestment idea that seeks value and greater income, the general approach of the Beat The TSX Portfolio.

Charts courtesy of Portfolio Visualizer

Annualized returns and volatility

The Canadian Wide Moat 7 has delivered greater total returns and with less volatility and drawdowns in corrections.

And of course the portfolio dividend income is more than impressive. I did not create portfolio exclusively based on the generous and growing income, but it is a wonderful by-product. The following is based on a hypothetical $10,000 portfolio start amount. The starting yield is above 4%, growing towards a 9% yield based on the 2014 start date.

In the above, the dividends are reinvested. For example, the Telus dividend is reinvested in Telus. While I will take a total return approach for retirement funding, the generous portfolio income contribution will add a dimension that will help reduce the sequence of returns risk.

The Canadian wider moat portfolio

I know the concentrated portfolio can face criticism (rightly or wrongly). Certainly, don’t try this at home based on what this guy does. Given the concentration risk I did expand the wide moat list for readers on Seeking Alpha. I had offered up the Canadian railways and grocers. That is a nice combo of industrials and more defensive consumer staples. Continue Reading…

RBC finds young Canadians flocking to online DIY investing since pandemic

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By Lori Darlington, President & CEO, RBC Direct Investing 

(Sponsor Content)

I was asked a question recently that made me look at what we’ve been experiencing during the pandemic in a new way.

A colleague asked if we would look back someday and see this as a time when people took more direct control of their finances – driven in part by so much else that feels outside of our control.  Considering the surge in Canadians becoming self-directed investors over the past 18 months, there may be some truth there, but I think there’s more to it than that.

We’re seeing a new age group emerging within this wave of new online investors: increasing numbers of younger Canadians are becoming DIY investors. More than half of the new clients who’ve joined us at RBC Direct Investing over the past 12 months are under the age of 35.

I don’t think this is simply a pandemic spike. I believe this is a generational shift. These younger investors are comfortable with digital platforms and they enjoy doing their own research – two key aspects of being a successful self-directed investor.

What this means for us is that we need to ensure we’re providing comprehensive support for these younger DIY investors, to help them make informed online investing decisions.

Years ago, we realized we needed to connect with younger Canadians who might be interested in investing. We created our own editorial team to produce a digital magazine, Inspired Investor, which features quick reads that show how our everyday lives intersect with investing and to offer ideas and tips for both newer and more experienced investors. We also have a Getting Started Guide and how-to videos in our Investing Academy.

And you don’t need to be a Direct Investing client to access our Inspired Investor or Investing Academy resources. We want to help investors across Canada build their knowledge and ensure that they are making decisions that match their own risk appetite, so they can trade with confidence.

No-risk Practice Accounts

We also understand that each person has a different comfort level with trading online, so we provide a ‘no risk’ Practice Account. Just as it sounds, this account doesn’t use real money; we provide $100,000 in ‘pretend money’ so investors can test out making trades. You don’t need to be an RBC Direct Investing client to do this, but you do need to have an RBC Online Banking account. Continue Reading…

No one saw it coming in 1929 either

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The Roaring 20s

By John De Goey, CIM, CFP

Special to the Financial Independence Hub

Stock market bubbles are not as rare as many people think. They occurred throughout history, with multiple generations seeing large swaths of accumulated wealth evaporate in short order.  With very few exceptions, the shellshocked investors are left to survey the carnage while trying to discern what happened and why they didn’t see it coming.

There are behavioural explanations for this. They include herding (following the herd), optimism bias (my industry always says the markets will rise), recency bias (where people put too much emphasis on things that are top of mind and current), and confirmation bias (where people simply look for information that supports their own pre-existing views). There are others. It’s as if large swaths of people want to be collectively deluded into thinking the warning signs are not to be believed or – worse still – they simply refuse to acknowledge the signs at all.

Investing in a go-go market feels good until it doesn’t

If one were to choose a catch phrase for these people, it might be this – “if it feels good, do it.”  Investing in a go-go market certainly feels good. Until the day when it doesn’t. Warning people to take shelter before the pending storm is a bit of a fool’s errand, however. When times are good, people like to believe things will stay that way indefinitely.

Irving Fisher was unquestionably one of the greatest American economists of all time, but in the summer of 1929, he opined that markets had reached a state of permanently high elevation. In other words, he recognized the warning signs, but chose to dismiss and/or ignore them. The hallmarks of people getting overly optimistic about future returns were all around him and stories of shoeshine boys providing stock tips were just the tip of the iceberg for irrational investor exuberance.  Over ninety years later, little seems to have changed in how people can be duped into what amounts to a form of mass psychosis.

Jeremy Grantham is a Wall Street maven who manages billions of dollars for a firm he co-founded, GMO Capital. When asked where we are now in the market cycle, he suggested we are near a top. Grantham recently said: “Bubbles are unbelievably easy to see; it’s knowing when the bust will come that is trickier. You see it when the markets are on the front pages instead of the financial pages, when the news is full of stories of people getting cheated, when new coins are being created every month. The scale of these things is so much bigger than in 1929 or in 2000.”

Bitcoin, real estate and meme stocks

I’m just wondering, but has anyone noticed stories about bitcoin or real estate prices or the crazy trading activity in Gamestop?  Are those stories consistent with what’s been in the financial press – or do you think they seem a bit disconnected from reality?

The American stock market is in the stratosphere these days and pretty much all the rosy narratives noted about it are based in the United States. There are several metrics that demonstrate this. Warren Buffett’s favourite test is to compare total market capitalization to national GDP. The so-called “Buffett Indicator” now stands at over 200%, which is one of the highest readings of all time. In 1929, it took 22 years for stocks to recover to record highs, so the current reading certainly ought to provide pause, as another massive global downturn seems possible, if not likely. The stakes are enormous. Continue Reading…

10 ways to get Funding for your Start-Up

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What is one way to get funded as a start-up?

To help start-up owners get their projects funded, we asked business owners and investors this question for their best suggestions. From crowdfunding to generating user donations, there are several tips that may help you fund your start-up to scale your business and reach new goals.

Here are 10 pieces of advice for funding a start-up:

  • Seek Specific Funding
  • Know Your Price
  • Establish Key Partnerships
  • Join a Business Accelerator
  • Look Into Crowdfunding
  • Save for Self-Funding
  • Build a Customer Base
  • Reach Out to Your Network
  • Go to the Bank
  • Get User Donations

Seek Specific Funding

When researching the right path for getting funding for your start-up, consider seeking out sector-specific funding that is relevant to your business. Many lenders in the industry specialize in funding specific sectors in order to offer maximized support. Here at AVANA Capital, we actually specialize in the Renewable Energy sector. Our renewable energy lending products include pre-development, development, equipment, construction, and mini-perm financing, as well as distressed debt acquisition. — Allan J. Switalski, AVANA Capital

Know your Price

Funding is an incredibly important yet challenging part of being a founder. We mostly self-funded Kegelbell’s $160,000 that got us to market, including product testing, mold building, and FDA registration. Shortly thereafter, we took a few smaller investments as convertible notes that helped get us to where we are now. Today, we’re in the process of fundraising a larger amount that will help take Kegelbell to the next level. All that to say, I’ve run the spectrum in the world of start-up finances, and one thing I’ll definitely note is that you need to know your “ask.” Prepare and practice ahead of time and always have a success-oriented mindset. — Stephanie Schull, Kegelbell

Establish Key Partnerships

Get funding for your business through strategic partnerships. Especially for business owners with limited experience within the industry, particularly manufacturing-related industries, it makes sense to develop strategic partnerships with the best manufacturing and distribution companies to help secure the success of your business venture. With some stake in the game, these strategic partnerships are almost certain to win out when compared to other approaches. While not related to funding, in digital PR, we rely heavily on strategic partners to help grow companys’ online footprints. — Rronniba Pemberton, Markitors

Join a Business Accelerator

A great way to get funding for your start-up, especially if it’s a tech-heavy business, is to try a business accelerator or incubator. These are located across the country, mainly near colleges with business programs. Continue Reading…