All posts by Financial Independence Hub

2024 Monetary policy: Pick a Lane

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Image by Pexels: Lalesh Aldarwish

By John De Goey, CFP, CIM

Special to Financial Independence Hub

There seems to be some confusion around what to expect for monetary policy in 2024. There’s a strong consensus that cuts are coming, but what is far less certain is how many – and why they are implemented.

Let’s assume that all cuts are of the traditional 25 basis point variety.  Since the bank rate is adjusted every six weeks, there will be eight or nine opportunities to adjust it in 2024 in both Canada and the United States.

There are as many as three narratives making the rounds about what might be in store.  Each narrative has a combination of rate cuts for monetary policy and corresponding outcomes for the broader economy. I attended a luncheon last week hosted by Franklin Templeton,  where senior representatives outlined three possible scenarios with three different narratives accompanying them. A similar perspective was offered earlier this week by the Vanguard Group.

The three narratives are as follows:

#1 We have a soft landing.

The soft landing involves the economy remaining relatively robust, employment remaining strong, delinquency is modest, and rates are normalizing at a level close to but somewhat lower than where they are right now. Most people would suggest that scenario involves no more than two cuts in 2024.

#2 We have a routine recession.

To be more precise, the second narrative involves a garden-variety recession that lasts perhaps a couple of quarters that involves only modest reductions in economic activity over that time frame.  Nonetheless, this scenario includes five or six rate cuts to stimulate the economy to the point where things can become stable going forward.

 #3 We have a severe recession.

The final narrative involves massive cuts that are made out of desperation to keep the economy from plunging into an abyss. This scenario is not only the most drastic, but also seems to be the least likely. Nonetheless, if things get really ugly, seven, eight or nine rate cuts might be needed to stanch the bleeding. One or more of those cuts might even be for 50 basis points or more.

While I accept the logic associated with all three scenarios, I cannot help but notice that much of the financial services industry is conflating those scenarios in a way that strikes me as being intellectually inconsistent. The financial services industry has long been overly optimistic in the way it portrays outlooks and forecasts. It routinely engages in something I call bullshift, which is the tendency to shift your attention to make you feel bullish about the future.

There can be little doubt that stimulative cuts are positive developments for capital markets. What the industry seems disinclined to acknowledge is that cuts are often made out of desperation. People need to look no further then what happened throughout the entire industrialized world in the first quarter of 2020. Central banks in all major economies cut rates to essentially zero by the end of March of 2020 in the aftermath of the COVID pandemic. At the time it was seen as being both necessary and reasonable, given the severity and breadth of the challenge.

Reining in Inflation

As we all know, inflation became the primary public policy challenge by the beginning of 2022. Central banks needed to take what looked like draconian measures to rein in inflation, which had risen to generational highs and needed to be brought under control lest a sustained period of inflation like what was experienced in the 1970s were to recur. By the end of 2023, inflation is still higher than the high end of the range that is deemed to be acceptable for most central banks.

There is still work to be done, yet many pundits seem eager to take a victory lap, as if a reduction in inflation is somehow akin to bringing inflation under control. Much has been done over the past 20 months, but more work is needed. The admonition that rates will have to stay higher for longer is a very real constraint on economic activity and long-term growth prospects. We head into the new year on the horns of a dilemma. Bond market watchers are now suggesting that rate cuts will come no later than Q2 2024, whereas central bankers are insisting that those cuts will be modest and will only begin in Q3 of 2024 at any rate. They cannot both be right.

It gets worse. Most commentators have taken to suggesting that we will have both a soft landing and five or six rate cuts in the New Year. That strikes me as being fantastic – not to mention intellectually inconsistent. If we have a soft landing, it will likely entail the economy being remarkably resilient as it has been throughout 2023. There is absolutely no reason to have a parade of rate cuts in such an environment.

Stated differently, the financial services industry needs to pick a lane. If it believes we will have a soft landing in 2024, it should also be anticipating a very small number of very modest cuts in the second half of the year. Conversely, if it believes a recession is on the horizon, it should be forecasting multiple cuts only after it is clear a recession is underway. These would likely be needed to stimulate the economy in an environment where inflation will likely be modest as a direct result of economic weakness.

To hear the industry tell it, the economy will remain strong, but we’ll get multiple rate cuts anyway. You can’t have it both ways. I call Bullshift.

John De Goey is a Portfolio Manager with Designed Securities Ltd. (DSL). DSL does not guarantee the accuracy or completeness of the information contained herein, nor does DSL assume any liability for any loss that may result from the reliance by any person upon any such information or opinions.

Harnessing Findependence: The Power of Podcasts

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Jon Chevreau and Canada Podcasts’ Philip Bliss:  https://canadaspodcast.com/findependencehub/

By Philip Bliss

Special to Financial Independence Hub

In an age where knowledge is easily accessible, podcasts have emerged as one of the most potent tools for personal development.

Findependence [aka Financial Independence] is a goal many aspire to, but achieving it often requires a solid understanding of money management, investments, and entrepreneurship. This is where podcasts shine, providing a wealth of knowledge and inspiration that can be instrumental in your journey towards financial freedom.

This new tool is particularly valuable in the fast-paced world of entrepreneurship, where the quest for knowledge and inspiration is ceaseless. In this digital age, Canada’s Podcast has emerged as a game-changer, becoming a cornerstone for Canadian entrepreneurial development and a key to enabling Findependence. Let’s explore why these audio/video gems are so critical to the journey of every aspiring entrepreneur.

1.) Education at your Fingertips

Podcasts offer a wide array of financial knowledge, from personal finance basics to advanced investment strategies. By tuning into podcasts, you can learn about budgeting, saving, and investing while going about your daily routine. Whether you’re commuting, exercising, or doing household chores, these audio programs allow you to convert idle time into a valuable learning opportunity.

Some popular finance podcasts like “The Dave Ramsey Show” and “BiggerPockets Money” offer practical advice on budgeting, getting out of debt, and achieving financial freedom. These shows are like having a personal finance mentor guiding you through the intricacies of money management.

2.) Diverse Perspectives and Ideas

Findependence is not a one-size-fits-all goal. Everyone’s journey is unique, and podcasts reflect this diversity. Podcast hosts often bring their personal experiences and perspectives to the table, offering a rich tapestry of ideas and approaches to achieving financial success.

You can listen to real-life stories of people who have achieved findependence, learning from their triumphs and pitfalls. This diversity of experiences can help you tailor your approach to fit your own circumstances and goals.

3.) Investing Insights

For those looking to grow their wealth through investments, podcasts can be a treasure trove of valuable insights. Whether you’re interested in stocks, real estate, cryptocurrencies, or other investment avenues, there’s likely a podcast that caters to your interests.

Podcasts like “Invest Like the Best” and “The Motley Fool” provide deep dives into various investment strategies, market analysis, and expert interviews. By regularly listening to such shows, you can stay updated on market trends and make informed investment decisions.

4.) Motivation and Inspiration

Findependence can be a long and challenging journey. At times, you may find yourself discouraged or unsure about your financial decisions. Podcasts can serve as a source of motivation and inspiration, reminding you of the benefits of findependence and keeping your goals in focus.

Many findependence podcasts share stories of people who have achieved their financial goals against all odds. These tales of perseverance and success can fuel your determination and keep you on track, even when the path seems daunting.

5.) Building a Supportive Community

Podcasts often come with dedicated communities. These communities provide a space to discuss financial topics, share experiences, and seek advice from like-minded individuals. Engaging with these communities can be a valuable source of support as you work towards findependence. Continue Reading…

 Timeless Financial Tip #10: Making Legacy Planning more Meaningful

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By Steve Lowrie, CFA

Special to Financial Independence Hub

Let’s face it: When families list their favorite financial planning projects, legacy planning rarely makes the cut. It may feel as if you’re putting the emphasis exclusively on death and taxes, rather than your lifetime pursuits such as building a career, pursuing your personal interests, stewarding your kids into adulthood, and retiring in style.

Then again, I believe the term “legacy planning” is misleading to begin with. It sounds so dry and formal — as if it’s only for uber-rich, multigenerational dynasties, or the tail end of your lifespan.

No wonder most people put off planning for it.

In reality, legacy planning can be worthwhile for almost anyone. And it’s not just for later in life; key aspects of it can help you enjoy a more enriched life today. In today’s Timeless Tip, we’ll cover the possibilities.

What is Legacy Planning?

Instead of treating legacy planning as a tedious, end-of-life chore, I like to think of it as being more like a bonus round of lifestyle planning across four core quests:

  1. Family Ties: Legacy planning helps you keep more of your wealth in the family. Importantly, it lets you define who your family is, in a world where multiple marriages and blended families may more often be the norm than an exception to the rule.
  2. You or your Heirs: Legacy planning can also be defined by what it is not. If your top priority is having enough to enjoy your retirement in style, your legacy planning will differ from someone who dreams of leaving the largest possible inheritance to their heirs.
  3. Charitable Giving: Legacy planning also helps you chart out how and when you’d like to support your causes and charities of interest. Hint: You don’t have to wait until you’re gone to leave a legacy.
  4. Tax Reduction: Even if you’re fine with letting inheritance laws guide how your estate will be distributed, most of us would prefer a tax-efficient transfer. Legacy planning strategies abound here.

How do you define “Family”?

First, let’s address the piece most of us associate with legacy planning: Who gets what stuff after you’re gone? If your estate seems perfectly straightforward, you may be tempted to just let your heirs sort it out. Unfortunately, this can leave you and your loved ones uneasy — not just moving forward, but right now.

Unintended Consequences: Check your provincial inheritance laws, and you may be surprised by what will happen to your assets if you die intestate (without a will). Your preferences may differ dramatically from the government’s.

Unresolved Heirlooms: Resolving which loved ones are to receive which treasured heirlooms and other portions of your wealth, can bring you and your family more peace — today, and moving forward.

The Angst of Uncertainty: Most of us also feel better knowing we’ve done what we can to spare our heirs the pain of having to untangle an unplanned estate at the same time they are grieving a profound loss.

The logistics of estate planning need not be extensive. They can range from essential to more advanced:

Wills: A basic will might suffice if you simply want to ensure particular people directly inherit particular pieces or portions of your estate, as permitted by law — especially when your preferences differ from provincial law.

Trusts and Foundations: You may want to up the ante with targeted trusts to cover additional nuances in your life. For example, trusts can provide for underage heirs, an heir with special needs, or other complexities, such as if your family owns a business in which some, but not all family members are involved. Private foundations come into play if you are interested in increasing the scope of your multigenerational charitable giving.

Insurance: Life insurance is also an often-overlooked tool for providing gap funding to cover taxable wealth transfers, especially when family businesses are involved.

Bottom line, making plans today for your wealth transfer to happen with minimal muss, fuss, costs, and complications can free you to better enjoy your assets throughout your life.

Spending or Preserving?

As we covered in “Retiring Reliably, Leaving a Legacy or Balancing Both?, ” another key question is: Do you want to earmark excess wealth for your optimal retirement, an optimal legacy, or a balance of both? Different lifestyles call for different legacy plans.

You may not think of investment management as part of traditional legacy planning. But you’ll be better at both if you combine forces. For example, if you want to emphasize leaving a legacy, your investment portfolio’s average expected return should exceed your withdrawal rate, so inflation doesn’t eat away at the balance. This usually means keeping more of your investments working in the markets, while also arranging for a way to take out cash on a regular, tax-efficient basis. Continue Reading…

In the pursuit of financial security for all, we can’t overlook older widowed women

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Image by Pexels: Andrea Piacquadio

By Christine Van Cauwenberghe

Special to Financial Independence Hub

Canada has a bold vision – to build a more accessible, inclusive and effective financial literacy ecosystem for all. The five-year plan, laid out in the National Financial Literacy Strategy 2021-2026, is an important step forward to achieving sweeping financial literacy. But one cohort is noticeably absent from this ambitious strategy – older widowed women.

During Financial Literacy Month in November, we had an opportunity to cast a light on financial education and empowerment for this often overlooked and underserved, but statistically significant, group. In 2022, there were approximately 1.5 million widowed women compared to the roughly 472,000 widowed men, reports Statista Research Department. As our nation nears “super-aged” status, where 20 per cent of our population will be 65 years or older, these numbers will continue to climb.

Longer life expectancies for women, paired with women generally marrying or partnering with older men, leaves them more likely to spend at least some of their retirement in widowhood. As such, it’s estimated that 90 per cent of women will become the sole financial decision-maker at some point in their lifetime, representing a substantial segment of Canada’s wealth management sector.

Lower financial literacy than male counterparts

However, this same group generally reports lower levels of financial literacy than their male counterparts. While many reasons account for this disparity, traditional societal norms play a significant role – older generations of women were more likely to stay home and rear children while men typically joined the workforce, granting them greater financial exposure.

Now, we have an opportunity and a responsibility to change this. Widespread financial literacy matters, but in our effort to educate the masses we can’t leave certain groups behind. By narrowing the knowledge gap, we can empower widowed women from and after the Silent Generation with a voice – we can give them a say in their own financial future.

Women will soon control half of accumulated Wealth

By 2026, women in Canada will control roughly half of all accumulated financial wealth, estimates Strategic Insights, up from one-third a decade earlier. While this is a welcomed shift, many women’s’ lack of core financial understanding and involvement is sobering. Too often, it’s men who assume a leading role in personal wealth management, specifically retirement and estate planning. This despite the fact that women, on average, survive their husbands by roughly five years. Yet, only 17 per cent of women in Canada over the age of 65 have an up-to-date will, according to a survey from LegalWills Canada. Continue Reading…

The Power of Low-Fee Core Bond ETFs in your Investment Portfolio

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By Alizay Fatema, Associate Portfolio Manager, BMO ETFs

(Sponsor Blog)

The latest economic data unveils a captivating narrative of a strong and resilient economy in both Canada and the U.S. The current inflation stickiness and robust job market numbers make a solid case for the central banks in both countries to keep interest rates higher for longer.

Towards the end of September 2023, markets basked in record-high yields. However, earlier this month, based on the current situation in the Middle East, bond yields fell owing to an increase in demand for safer assets and caused longer-term bond prices to surge.  U.S. consumer prices remained elevated for the month of September and a pullback in demand for a treasury auction pushed longer-term yields higher again, resulting in 10-yr U.S Treasury yields touching their highest point since 2007. On the contrary, the recent CPI printed lower than expectations in Canada, yet the yields remain high as hot economic data continues to build pressure south of the border.

Source: Bloomberg

Given the current two-decade-high interest rates, yields on Aggregate Bond ETFs have surpassed 5%, making them an interesting avenue for fixed-income investors. Before we dive in further, let’s discuss some aggregate bond ETFs in detail along with their benefits.

Aggregate Bond ETFs as the Core of your Investment Strategy

Aggregate bond ETFs are exchange traded funds that aim to track performance of a diversified portfolio of bonds. These ETFs are referred to as core because it reflects their status as a foundational building block of a well-rounded investment portfolio. These ETFs can help investors achieve diversification, steady income & stability within their investment portfolios. BMO currently offers two Aggregate Bond ETFs:

  • BMO Aggregate Bond Index ETF (ZAG) aims to replicate the performance of the FTSE Canada Universe Bond Index. This ETF primarily invests in a Canadian investment-grade fixed income securities consisting of Federal, Provincial and Corporate bonds, with a term to maturity greater than one year.
  • BMO US Aggregate Bond Index ETF (ZUAG) tracks the performance of the Bloomberg US Aggregate Bond Index. It invests in U.S. investment-grade bonds such as U.S. treasury bonds, government-related bonds, corporate bonds, mortgage-backed pass-through securities, and asset backed securities with a term to maturity greater than one year. ZUAG is also offered as hedged to CAD (ZUAG.F) and in USD (ZUAG.U).

Source: BMO Asset Management.

These aggregate bond ETFs have proven to be an extremely viable investment solution owing to their key features:

  • The Symphony of Diversification: Aggregate Bond ETFs provide exposure to a broad spectrum of bond market offering diversification across the curve, various sectors and segments, maturities, issuers, and credit qualities; making them resilient for any market environment.

For example, in the current high-interest rate environment, exposure to short duration bonds might provide some down-side protection. On the other hand, if central banks start cutting rates, then longer duration can provide some upside potential.

Aggregate Bond ETFs can also be considered an equity market hedge. Given the inverse correlation between equities and bonds, they can provide a cushion against market turbulence and can potentially outperform stocks during selloffs.

  • Harnessing Cost Efficiency through Lower Fees: These ETFs are passively managed with the aim to track performance of the aforesaid indices. Their expense ratios are lower as compared to some actively managed funds, thereby reducing overall investment costs and improving net returns for investors. BMO is currently charging a Management Expense Ratio of 0.09% for both ZAG & ZUAG.  
  • Liquidity & Ease of Trading: Like all other ETFs, ZAG & ZUAG are traded on stock exchanges, enabling investors to easily buy and sell shares throughout the trading day, allowing them to see real-time prices. The bid-ask spreads on these products are lower in contrast with the underlying bonds which enhances their liquidity compared to traditional bonds, making them a cost-effective way to attain the exposure to the aggregate bond market.
  • Navigating Risk Management through High Credit Quality: Aggregate Bond ETFs are perceived as a stable and safer investment option as they provide exposure to investment-grade bonds, which are considered to have lower risk as opposed to high-yield or junk bonds. In the current rising interest rate environment, the credit quality & relative stability of the investment grade bonds make them an appealing choice for investors seeking to minimize risk & preserve capital.

Combined with the key features mentioned above, these Aggregate Bond ETFs provide investors with a low-cost core in any investment portfolio. They distribute monthly interest payments, providing a steady stream of income. These ETFs emphasize on preservation of capital and provide transparency and visibility into the funds’ composition and their underlying assets. Continue Reading…