All posts by Financial Independence Hub

The seven money myths that stand in the way of a good financial plan

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Financial Literacy Month is natural moment for a reality check-up

By Jennifer Cook, EPD, PFA, PFA™, QAFP™

For the Financial Independence Hub

On the path to financial security, there are natural peaks and valleys that can be navigated via the help of a good advisor.  It’s the map in the form of a personal plan that can help guide an individual toward their goals, whether it is saving for a house, planning for retirement or protecting against unforeseen events.  But more than any other hazard along the journey, is when road signs are misread or misunderstood.

Financial literacy is key to unlocking an individual’s ability to realize their dreams, and that is why Financial Literacy Month in November is so important to us at Co-operators.  It’s a moment for all of us to fill in some of the gaps in our knowledge about planning.

Many of us have developed habits or rely on inherited ideas about finances, so I look at financial literacy as an opportunity to put to rest some of the myths that can affect good financial planning.

As Canadians face year-end decisions on investments, taxes, and RRSPs, we at Co-operators have identified common gaps in financial preparedness stemming from the spread of money myths. There are many myths that can derail planning, but I’d like to talk about the top seven and offer a remedy in the form of a reality.

Myth 1: Saving is safe. Investing is risky.

Reality: As Canadians feel the impact of raising interest rates and inflation, it’s tempting to embrace the idea of “safe” or “lower-risk” investment options. But this strategy comes with a risk of considerable lost earning power. Investing in a diversified portfolio that matches individual needs with the help of a Financial Advisor can build long-term returns, while managing risk.

Myth 2: Single, young people don’t need insurance.

Reality: No one is free from the risk of loss or liability. When budgets are tight, tenant or renters’ insurance can provide critical coverage for unforeseen events like theft, fire, or water damage. Young people can also take advantage of lower insurance rates that provide continuing benefits as their lives develop and their needs grow.

Myth 3: RRSP season starts in mid-February.

Reality: Though the typical RRSP frenzy may suggest otherwise, there is no rule that says lump sum payments must be made to RRSPs before the annual March 1 deadline. Canadians can contribute to their RRSPs (up to individual contribution maximums) at any time of the year. The March 1 date is used to determine how tax benefits will apply to the previous year’s income. Depending on a person’s situation, a Financial Advisor may recommend contributing smaller amounts to an RRSP on a weekly, bi-weekly, or monthly basis.

Myth 4: Those who invest in mutual funds have sufficiently diversified portfolios.

Reality: Today’s spectrum of mutual funds is widespread. It’s not easy to gauge whether an individual investor is appropriately diversified. And that can leave some people vulnerable to losses from sectors. Leveraging the expertise of a Financial Advisor can help investors make nuanced adjustments to ensure their portfolio has the right balance of diversification aligned with their risk tolerance. Continue Reading…

12 unique ways to Change your Spending Habits

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What is one unique way someone can change their spending habits for the better? 
To help you improve your spending habits, we asked CEOs and business leaders this question for their best tips. From trying to not purchase anything online for one month to trying the envelope method, there are several unique tips to help you change your spending habits for the better.

Here are 12 unique ways to change your spending habits: 

  • One Month No Online Purchases
  • Check How Long You Can Go Without Something
  • Change Paid Activities to Be Cost-effective
  • 30-day Challenge
  • Track Your Spending for One Week
  • Buy from Your Local Market
  • Reduce Impulsive Purchases
  • Shop With Lists Only
  • Ask a Friend
  • Use Cash as a Payment Option
  • Set Savings Milestones and Rewards
  • The Envelope Method is One Way to Change Spending Habit

 

A Month with no Online Purchases

My wife and I recently did a one-month challenge on not purchasing anything online. The breaking point was coming home after a long weekend and finding over 10 packages on our doorstep between the two of us ordering online. We heard of a challenge where you don’t purchase anything for a month, but knew that wouldn’t work for us. We decided just not to purchase any items online. If we needed something we had to go to the store and purchase the item. We realized we didn’t have to buy as much stuff as we were previously ordering online. After the challenge month was over, we did both change our spending habits and don’t buy nearly as much as we previously did online. We also found out that the physical store tends to be less than purchasing your items online. –– Evan McCarthy, President CEO, SportingSmiles

Check how long you can Go without Something

When you’re contemplating buying something, the best way to evaluate your intentions is to check how long you can go without it. If you decide on a date until which you believe you will not need this product or service, postpone your spending until that date. Once the new date arrives, ask yourself the same question and set another date. Do this thrice, and chances are the futility of adding it to your list of purchases will finally hit. It’s also highly probable that you won’t even choose to remember the later dates and forget all about spending your hard-earned money on something you never required in the first place. —Riley Beam, Managing Attorney, Douglas R. Beam, P.A.

Change Paid Activities to be Cost-effective

Going out for drinks, going bowling with friends, dancing at the club: these are all fun activities that are definitely worth your time and money. These expenses, however, add up in the long run and one way to still enjoy yourself but save a little money in your wallet is to substitute some activities with cost-effective alternatives. For example, instead of going to a bar for drinks, create a makeshift bar at home. Try hiking or scope your community newsletter for other free, public events. — Adam Shlomi, Founder, SoFlo Tutors

30-day Challenge

One unique way someone can change their spending habits for the better is by doing a 30-day challenge. One of the most significant barriers to saving money is impulsive buying. It’s easy to fall for an online advertisement that claims to anticipate your needs and wants. But there is a workaround:
– Take a screenshot of the ad rather than clicking on it.
– Create a folder on your desktop to store all these screenshots.
– Check the folder after 30 days to see if you still wish to purchase that item.


The 30-day challenge is also applicable to offline purchases. Write down what you want to buy, give yourself 30 days, and then decide if you still wish to purchase. After a 30-day wait, you may be shocked by the items that no longer interest you. —Tiffany Homan, COO, Texas Divorce Laws

Continue Reading…

Young Investors vs Inflation

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By Shiraz Ahmed, Raymond James Ltd.

Special to the Financial Independence Hub

Until recently young investors were not terribly concerned with inflation. Why should they have been? It was so low for such a long time that we could predict with pretty good accuracy what was around the corner, at least, in terms of the cost of living. But those days are long gone.

Simply speaking, inflation can be defined as the general increase in prices for those staple ingredients of daily life. Food. Gas. Housing. What have you. And as those prices rise the value of a purchasing dollar falls. When these things are rising at 1% a year, or even less, investors can plan and strategize accordingly. But when inflation is rising quickly, and with no end in sight, that is very different and this is where we find ourselves today.

Someone with hundreds of thousands of dollars to invest, but who must wrestle with mortgage payments that suddenly double, is into an entirely new area. It happened back in the early 1980s when mortgage rates went as high as 21%. Many people lost their homes. But even rates like that pale in comparison to historical examples of hyperinflation.

In the 1920s, the decade known as The Roaring Twenties, the stock market rose to heights never seen before and for investors it was seen as a gravy train with no end in sight. But that was not the case in Germany where a fledgling government – the Weimer Republic – was desperately trying to bring the country out of its disastrous defeat in World War I. Inflation in Weimer Germany rose so quickly that the price of your dinner could increase in the time it took to eat it!

Consider that a loaf of bread in Berlin that cost 160 German marks at the end of 1922 cost 200 million marks one year later. By the end of 1923 one U.S. dollar was worth more than four trillion German marks. The end result was that prices spiralled out of control and anyone with savings or fixed incomes lost everything they had. That in no small way paved the way for Adolf Hitler and the Nazis. Let us also not forget that the gravy train of the Roaring Twenties eventually culminated in the stock market crash of 1929 which led to the Great Depression.

Continue Reading…

Should I hedge? Hedged vs. Unhedged ETFs in Canada

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By Bob Lai, Tawcan
Special to the Financial Independence Hub

 

When you look at the TSX composite, you will notice that the financial and energy sectors make up a large percentage of the index. In fact, the financial sector constitutes over 30% and the energy sector almost 15% of the TSX. If you want a heavier weighting in the consumer staples, consumer discretionary, technology, or health care sectors in your portfolio, it almost always means you have to invest outside of the Canadian market.

For most investors, the easiest way to diversify outside of Canada is utilizing one of the many low-cost index ETFs available. When investing outside of Canada, one of the things to consider is currency exchange rates because they can either work for you or against you.

Hence, investors must answer this very important question: should you utilize currency-hedged ETFs? Or should you ignore the currency exchange rate risk and go with unhedged ETFs?

Hedged vs. unhedged ETFs, which one should you choose? It’s an important and complicated question. Let’s take a closer look.

What is currency hedging? 

I’ll be honest. When I first started doing DIY investing, I didn’t understand what currency hedging meant. The term confused me for a very long time.

Think of currency hedging like buying car or house insurance. You’re buying and paying for the insurance to protect yourself from an unforeseen event that could cause you to lose a lot of money.

In layman’s terms, currency hedging is a strategy to reduce the effects of currency fluctuations. You’re betting that the foreign currency, usually the US dollar, will weaken against the Canadian dollar. In other words, currency hedging allows you to hold foreign equities without worrying about currency fluctuations and impacting your overall return.

Say you decide to invest in the broad US equity market and the market returned 15% over the past year. During the same year, the US dollar weakened against the Canadian dollar by 10%.

If you invested in an unhedged US broad equity market index ETF, you’d only see a return of 5% minus expenses. The overall return is not 15% because the 10% currency fluctuation has eaten into your returns.

In this scenario, you’d benefit from investing in a hedged US broad equity market index ETF and end up with a return of 15% minus expenses.

Currency hedging isn’t all sunshine and rainbows though. Just as it can work in your favour, as with the above example, it can also go against you. For example, if the US dollar strengthens against the Canadian dollar by 10% during that same time period, you’d end up with a return of 25% minus expenses with an unhedged ETF but only a return of 5% with a hedged ETF. That’s a significant difference!

How do ETF managers hedge currencies? 

How do ETF managers hedge and manage risk caused by currency fluctuation? Can’t the average investors like you and me do the same, deploy similar strategies, and avoid paying the ETF management fees?

Well, ETF managers hedge by purchasing assets and instruments to offset currency exposure. ETF managers can buy forward contracts by entering into an agreement to exchange a fixed amount of currency at a future date and a specified rate. They can also use future contracts, currency options to hedge against potential currency risks. These assets and instruments are usually adjusted every month to ensure proper exposure to currency exchange rate risks.

If all that sounds complicated to you, well it is. This is why hedging isn’t something the average investor can easily do. Hedging, as it turns out, is best to leave it to the experts.

Are currency-hedged ETFs good? Should you always invest in currency-hedged ETFs so you don’t have to worry about currency fluctuation and can sleep like a baby?

Well, the answer is complicated. Turns out, there are many factors that investors need to evaluate before deciding whether to use a currency-hedged ETF or not.

Before we go through these reasons, let’s take a look at the pros and cons of currency-hedged ETFs.

Pros of currency-hedged ETFs

The biggest advantage of currency-hedged ETFs is that you are protecting yourself from any unforeseen (major) currency fluctuation. Essentially, what you see is what you get – you get the true value of the underlying holdings without having to worry about currency exchange rates. This is one of the advantages of CDRs.

For many investors, this can provide peace of mind and simplify investing in foreign markets.

Cons of currency-hedged ETFs 

As you can imagine, there’s a cost associated with buying and selling forward and future contracts, options, and other derivatives to offset currency exposure. As a result, currency-hedged ETFs typically have higher management fees compared to their unhedged counterparts.

For example, VSP, the CAD-hedged Vanguard S&P 500 index ETF, has an MER of 0.09%. Meanwhile, its unhedged counterpart, VFV, has an MER of 0.08%.

Even if management fees are the same between hedged and unhedged ETFs, there are potential hidden costs like higher turnover rates.

For example, even though the hedged and unhedged Vanguard US Total Market ETFs, VUS and VUN, have the same MER, VUS, the hedged version, has a portfolio turnover rate of 23.38% while VUN the unhedged version only has a portfolio turnover rate of 8.31%. Higher turnover rates typically mean more transaction costs, which can lead to lower returns in the long run.

Furthermore, currency hedging doesn’t always work for you. When the currency fluctuation goes the other way, currency hedging can lead to a lower return. So be careful when people claim that currency hedging will eliminate all currency risks and that you should ALWAYS invest in currency-hedged products! In my opinion, when it comes to investing, there’s no such thing as ‘ALWAYS.”

Why invest in currency-hedged ETFs? 

Given the pros and cons, who is best suited to invest in currency-hedged ETFs? As it turns out, it depends on your risk tolerance and your investment timeline. Here are a few reasons why you’d invest in currency-hedged ETFs.

If we look at the US dollar and Canadian dollar, the all time high was 1.600 in January 2002 and an all time low of 0.948 in October 1959. Over the last 30 years, the historical average has been 1.243.

As of writing, the exchange rate is 1.275 which is stronger than the 30-year historical average.  But only slightly! This means there’s a decent chance the US dollar will weaken against the Canadian dollar. However, there are far too many geo-political and geo-economic factors that could possibly arise that no one can accurately predict which way the exchange rate will go in the near, and certainly, in the more distant, future.

If your investment timeline is short, you probably want to protect yourself from the potential weakening of the US dollar. Therefore, it may make sense to pay the extra management fees and use currency-hedged ETFs to smooth out currency fluctuations. On the other hand, if you have a longer investing time horizon, it is probably wise not to go with the hedged option.

2. If you hold a large percentage of foreign equities

If your portfolio is largely allocated to markets outside of Canada, fluctuation in foreign exchange rates can quickly decrease your returns. Using currency-hedged ETFs is a simple way to potentially lock in your returns and not worry about the inverse effects of adverse currency fluctuation.

3. You have low risk tolerance

If you are risk averse, currency hedging can potentially reduce the volatility caused by currency exchange rates. By removing currency exchange rates out of the equation, it’s one less thing to worry about for risk averse investors, allowing them to sleep better at night.

Why invest in unhedged ETFs 

On the flip side, there are many reasons why one may want to consider investing in unhedged ETFs. Continue Reading…

Relationship between Inflation and Asset Price Returns

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By Myron Genyk,  Evermore Capital

Special to Financial Independence Hub

You see lots of people on business channels and investing blogs talking about the types of things to invest in when inflation is high – energy stocks, material stocks, value stocks, dividend growth stocks, floating rate bonds, inflation bonds, oil, copper, gold, silver, crypto, etc. OH MY! – and what types of investments you should avoid.  On the surface, it’s pretty reasonable advice. 

“Of course!!  I should be invested in something that does well when inflation is high!  Inflation is high now!  And everyone says it’s going to continue like this for a long time!  And I want my investments to grow!”  But before we go leaping and investing in whatever it is that’s great during inflationary times, let’s explore the soundness of the argument itself.

The Tautology of it all

I’m always a little amused when people say things like:

“When market variable X is high (or low), that will cause thing Y to happen, which will cause thing Z to occur, which will cause some asset A to go up (or down).  And so when market variable X is high/low/whatever, then buy (or sell) asset A.  Easy peasy!”

There’s a lot happening there, but at its core, it’s just a chain of events:  X leads to Y leads to Z leads to A going up (or down).  At each step, there are assumptions baked in, assumptions that aren’t exactly baked into the fabric of the universe, but let’s leave that for now.  Because what is more interesting here is that the expression above can be simplified as follows:

“When asset A is going to go up, you should buy asset A.”

This is much cleaner.  It removes all the unnecessary hand-waving (but, perhaps the hand-waving IS necessary … but by whom?  And for what purpose?) and lays bare what is actually being said:

“Buy things before they go up in value.” Continue Reading…