All posts by Financial Independence Hub

Subsidizing China’s Superpower aspirations

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By Jeff Weniger, WisdomTree Investments
Special to the Financial Independence Hub
 

Christine Lagarde, head of the International Monetary Fund (IMF), is warning that China’s Belt and Road Initiative — the potentially multitrillion-dollar network of roads, rails, pipelines and other infrastructure across Eurasia — risks saddling unstable governments with unpayable debt.

Because of the IMF’s concerns, it plans to fund the China-IMF Capacity Development Center (CICDC) to train the Chinese to minimize the headaches caused by this century’s Marshall Plan. If all goes according to plan, the Belt and Road project will connect land- and sea-based trading routes to cement China as the center of global commerce in a decade or two.

While China appears to be ascending into world superpower status in the coming decades, a $100 investment in “global” equities allocates just $3.51 to the country, if we track an index like the MSCI All Country World (ACWI).1 That seems remarkably low for a country that is going head-to-head with the U.S. on the global stage.

It was only last year that MSCI announced it would be adding Chinese A-shares, companies listed in Shanghai and Shenzhen, to its MSCI Emerging Markets Index. That is late for an economy whose size surpassed the U.S. in 2014, at least on a purchasing power parity basis (see chart below).

China & U.S. Shares of Global Gross Domestic Product

China & U.S. Shares of Global Gross Domestic Product

Covering China, wherever the Listing

While some Chinese companies are only available in Shanghai or Shenzhen, others are listed solely in Hong Kong. Still others have American Depository Receipts (ADRs) or are traded in Singapore.

The WisdomTree ICBCCS S&P China 500 Fund (WCHN) ETF tracks the S&P China 500 Index, before fees and expenses, covering stocks in all those bourses. This index currently holds over 50% in local A-shares. MSCI, by contrast, is only starting to add A-shares securities up to a 5% inclusion factor in 2018, a small starting point. It’s high time China has its own S&P 500, especially if President Xi Jinping has anything to say about it.

Going Out

Deng Xiaoping, ruler of China from 1978 to 1989, famously advised his country to “hide your strength, bide your time.” China’s great goal of the last four decades — development, development, development — was to happen quietly, with fingers crossed that the U.S., Japan and Western Europe wouldn’t get too frightened. Continue Reading…

How to teach your children good financial habits

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Special to the Financial Independence Hub

Teaching your kids sound financial habits when they’re young can help them learn to make wise choices about their money, and ease their reliance on you later.

Alison Tedford blogs about parenting at Sparkly Shoes and Sweat Drops, and at home is a dedicated mom who teaches her eight-year-old son Liam about finances, among other life lessons. We spoke with Alison as well as Jeannette Brox, CFP®, a senior financial consultant with Investors Group in Toronto, who’s affectionately called “The Money Lady” by her clients’ children.

The value of effort versus reward

To help instil a sense of the value of money in Liam, Alison enlists Liam’s help as she works on her blog and manages her social media channels, and ensures that he understands the financial value of each activity. “When he wants something, we tell him it’s the value of a blog post, or a Facebook Live video,” she says. “That way, he understands the value of the item relative to the effort he needs to put into it. Then he can make a judgement call as to whether the money should be spent or not.” When a larger contract comes in for Alison, they discuss how to use the money as a family.

This principle of making money choices can be adapted to your child’s age and situation. For example, a new iPad might be equivalent to 20 “regular” toys. Or, if your child receives an allowance, you can help them understand the length of time it’ll take to save for what they want and what they might need to give up in the meantime. It all adds up to an important money (and life) lesson about short-term compromise to reach long-term goals.

Jeanette Brox, CFP, Investors Group

In Jeanette’s practice, she gets her clients’ kids to start saving monthly at a young age. “It becomes meaningful for them,” she says. “When they get older, they understand the power of money accumulating instead of blowing it on stuff.”

She uses the same “save early and often” approach for children of different ages, although the situations will be different. “A six-year-old is excited when they’re saving to contribute to something they want. When they finally get it, they have pride of ownership.” She’s also helped kids save up for things they may want in their teenage years, such as a car, and advised teenagers who are buying sports equipment to get it off peak season to save money.

Jeanette also encourages kids to save for their own post-secondary education. “Even if parents contribute to an RESP, there may not be enough money to cover all of their university or college expenses.” And she recommends that children cover the cost of their own first year of school. “It makes them more responsible to have made that financial commitment,” she says.

Problem-solving helps form sound financial habits

Alison engages in proactive problem-solving to teach her son responsibility, even in situations unrelated to money. “For instance, it’s a common parenting challenge to have kids come to you with homework that didn’t get done that now has to get done in a short period of time,” she says.

Instead of jumping to do the task for Liam when this happens, Alison points him in the right direction by asking him to troubleshoot how he can help himself and to analyze what got him into the situation in the first place. “We look at contingency planning for the next time, such as setting reminders, tracking deadlines and so on.” Continue Reading…

Driving until you qualify vs. Condo Living

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By Sean Cooper

Special to the Financial Independence Hub

Are you in the market for a home and finding it tough to afford a decent-sized place? You’re not alone. The new mortgage rules certainly haven’t made it any easier. Homebuyers have seen their purchasing power reduced by about 20 per cent due to the mortgage stress test that came into effect January 1, 2018.

Under the new rules, homebuyers are required to qualify at a mortgage rate 2 per cent higher. If you’re looking to buy a home in big cities like Calgary, Ottawa, Toronto or Vancouver, your options can be quite limited, especially when you’re a first-time homebuyer.

So, you go out into the real estate market, look for the home you’d like to purchase, but can’t afford it. What’s a homebuyer to do? Don’t throw in the towel: there’s still hope! Two popular options are driving until you qualify and condo living. Let’s look at them both now.

Driving Until You Qualify

If you don’t like what you can afford in the big city, your first option is suburban living or what I like to call “driving until you qualify.”

Living in the suburbs does have its advantages. You can typically stretch your home-buying dollar further. Quite often in the suburbs you get more square footage for less than you otherwise would get in the city. Instead of only being able to afford a condo in the city, you might be able to afford a more spacious single-family detached home.

If you’re planning to start a family or have a dog, it’s hard to beat a big yard with a fence. Also, if you’re raising children, the city typically offers better schools. The suburbs also usually have a lower crime rate than the city centre.

Although you probably won’t have shopping at your doorstep, the ‘burbs make shopping easy with big box retailers. If you’re an outdoor enthusiast, you’ll often enjoy the suburbs a lot more. The suburbs usually have a lot more community centres, parks and swimming pools.

But living in the suburbs isn’t without its drawbacks. Perhaps the single biggest downside is the time it takes to commute if you work in the city. You could find yourself travelling for two hours or more a day. Make sure you’re ok with this before buying the property.

A good exercise is to try driving to work in the neighbourhood you’re thinking of buying in on a typical day to make sure the commute is tolerable. If you work from home this won’t be an issue, but don’t forget to factor in the added cost of not only buying a vehicle, but maintaining it as well.

Besides a longer commute, the other big downside is that you’ll be further from downtown. If you’re a millennial and enjoy the nightlife, make sure you’re ok with living further away from most of your friends. If you’re constantly downtown late after work, you may find it a real pain in the neck to commute back to the suburbs.

Condo Living Continue Reading…

Why simplicity beats complexity

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

Complexity. It’s hard to avoid.  Tune into the news, and something’s always breaking.  Even in your own life, how many “other” tasks get in the way of the good stuff?

I’m not suggesting you should only do what is immediately gratifying.  There’s considerable enjoyment to be found in taking on tough challenges.  But today I want to focus on why simplicity beats complexity, especially when it comes to your personal finances.

Simplifying your investments

When it comes to writing about investments why reinvent the wheel?  I agree with every point “A Wealth of Common Sense” blogger Ben Carlson makes in this excellent piece, “Why Simple Beats Complex.”  Instead of writing an overly repetitive post, I recommend you give this a read.  Basically, we are prone to using our oversized brains to over-complicate things, especially investments.  Simple advice:  Don’t do that.

Simplifying your finances

While I don’t want to split hairs, there is a subtle, but incredibly important difference between financial goals, financial plans and financial planning.  Knowing the difference helps simplify all three. Continue Reading…

Toronto vs Chicago housing: An Arbitrage for being under-weight Canadian bank stocks

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Figure 1: Chicago and Toronto Home Prices
By Jeff Weniger, CFA, WisdomTree

Of the major North American cities that feel most like Toronto, Chicago is clearly the closest fit. It’s Toronto’s sister. Chicago is the third most-populous city in the U.S., behind New York and Los Angeles. According to the U.S. Census Bureau, Chicago proper has a population of 2.7 million, almost exactly the same amount as Toronto.1 Both cities have several million more living in the immediate suburbs. Chicago’s money resides mostly on one side of the city, with most of its poverty found on the city’s south and west sides. Wealthy suburbs span almost to Wisconsin in the city’s “North Shore” suburbs, which consist of some of the wealthiest zip codes in the U.S.

Like Toronto, Chicago is a money centre. It is widely considered to be in that tier of financial hubs that includes Boston and San Francisco, behind the center of it all in New York. Its construction is dense; people take trains and buses to commute into the downtown core. Critically, as far as desirability of property goes, Chicago’s weather is miserable, just like Toronto’s. The two cities are also characterized by left-leaning politics, so there isn’t much of a difference on that front either.

When we engage Torontonians about the U.S. and Chicagoans about Canada, time and again the answer comes back: the city that is most like Toronto is Chicago.

Except in one way.

Chicago homes are one third or half of similar homes in Toronto

There is a major arbitrage just sitting there for anyone who liquidates Toronto property, hops on a 75-minute flight and purchases a mirror-image property for one-third or half the price in Chicago. Yes, Chicago is riddled with violence, but not in the neighbourhoods where someone would spend C$767,818, the average Toronto home price in February.2 In those neighbourhoods, the biggest risk is having a $500 stroller run over your toe.

Just what could C$767,818 get in Chicago?

According to the National Association of Realtors’ (NAR) Illinois chapter:

In the nine-county Chicago Primary Metropolitan Statistical Area (PMSA), home sales (single-family and condominiums) in January 2018 totaled 5,777 homes sold, down 8.0 percent from January 2017 sales of 6,277 homes. The median price in January 2018 was $224,000 in the Chicago PMSA, an increase of 7.2 percent from $209,000 in January 2017.

Converting US$224,000 to Canadian dollars at the January exchange rate of $1.231, that is C$275,856 for the median house in Chicago. Granted, U.S. housing data tends to be measured by the median, whereas the Canadian norm is to take the average, but there is still not much of a comparison; the gap is yawning, and this all started happening only in recent years. Continue Reading…