All posts by Financial Independence Hub

Which are better: Bonds or GICs?

Posted By |

By Mark and Joe

Special to the Financial Independence Hub

Even for seasoned investors, during times of market volatility, there is a tendency for investors to shift their mindset from capital growth to capital preservation.

So, for capital preservation, are bonds or GICs better? Which is better, when?

We’ll unpack that a bit in today’s post and offer our take on how we manage our portfolios, along with insights from clients too!

Bonds 101

What are bonds?

We’d like to think of bonds as an “IOU.”

Bonds are very similar in fact to GICs (Guaranteed Investment Certificates – more on that in a bit), in that governments or financial institutions issue them to raise funds from investors willing to lend in exchange for interest. However, a major difference between the two is that in most cases, bonds are publicly traded, meaning investors have liquidity even if their principal is locked for the bond’s tenure (length of time invested). As a result, bond investors are exposed to capital gains/losses as bond prices are affected by various factors such as equity market performance, the prevailing interest rate, foreign exchange rates, and other economic factors.

We can see this playing out right now. There is lots of talk about bond prices effectively going “nowhere” anytime soon with interest rates rising.

Interest rates reflect the cost of borrowing money. General lending and saving money practices amongst institutions and retail investors alike make the economy go round!

If the economy is growing quickly or if inflation is running hot, then our central bank (Bank of Canada) may increase interest rates. This triggers retail financial institutions to raise the rates at which they lend money, pushing up the cost of borrowing. When this happens, institutions may also raise their deposit rates, which makes the incentive to save money and keep savings intact more attractive for folks like us too.

Bond prices and interest rates as they relate to GICs

So, we have summarized that bond prices have an inverse relationship with interest rates.

Rates go up, bond prices come down.

Understanding and accepting interest rate risk is generally part of the game when you own bonds.

Bond pros and cons: 

1. Liquidity – bonds (bond ETFs in particular) offer investors liquidity as they are publicly traded, you can get your money back without paying hefty redemption penalties less any transaction costs typically.

2. Lending options – you’ll read below that GICs are only issued by financial institutions and government-backed entities (for a reason!), but bonds can be issued by even corporations. So, you have many options – a portfolio of bonds can include different issuers, with different maturities, with different ratings (i.e., quality of the bond issuer subject to default) which can help bond owners increase their returns.

3. Bonds have volatility – we believe bonds are not “as safe” as GICs since they are exposed to capital gains and losses; market factors mentioned above.

There is of course much more to any bond story but this primer is meant to draw a snappy comparison of which is better, when, below!

GICs 101

GICs, by nature of their very name, offer more stability given they are backed up by the Canadian government – so they can be considered a lower-risk, lower-reward fundraising tool.

Like bonds, interest rates offered by GICs can vary over different maturities, between institutions, but rates are generally higher over longer periods of investing time.

Guaranteed Investment Certificates (GICs) are considered lower-risk investments because the guaranteed part means you are guaranteed to get back the amount you invest — the principal — when your GIC matures.

Ideally then, you buy a GIC, hold it to maturity, and get your principal back AND interest as well. This is not unlike a saving account: except that your money is locked in to grow for a predetermined period of time. When the investment matures or reaches the end of that time period, you get your money back plus the agreed-upon amount of interest.

As long as you let your GIC mature, you are guaranteed that money. However, if you withdraw the funds earlier than the certificate contract allows, you will be penalized and may lose some or all of the interest.

Beyond the nuts and bolts of some GIC products, here are some considerations below.

GIC pros and cons:

1. Safety – while bonds (and bond ETFs in particular) offer investors potentially higher investment returns, because GICs are safer, they tend to deliver lower returns for the risks-taken; based on the guarantees provided. Your GIC is insured if you bought it at 1) any major Canadian bank – banks are members of the Canada Deposit Insurance Corporation (CDIC),or 2) a credit union or Caisse Populaire. (This means you will get your money back if the financial institution where you bought your GIC closes down, defaults or the institution is unable to pay you when the GIC matures. Coverage depends on the value and type of GIC you hold.

Click here to see some very important term coverage information on CDIC!

Bonds vs. GICs – Which is Better?

Now, the drumroll … bonds vs. GICs – which is better?

We believe bonds can be great for many investors.

The key reasons to own bonds, in our opinion, is as follows: Continue Reading…

Infrastructure as an Alternative Investment

Posted By |
BMOETFs.ca

By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Blog)

At a time when market volatility, rising rates and high inflation are a common denominator, investors are looking for alternative solutions that can boost returns, while diversifying their asset mix away from traditional assets and fixed income.

In 1991, an investor with a portfolio of only Canadian bonds could have earned an annualized return of ~11% over 5 years. [1] Investors have increasingly had to look to alternative assets to add diversification, for growth and income generation, and enhanced returns with more challenging market environments

Alternative investments include non-traditional assets, like real estate and infrastructure. Investors can access these types of investment through ETFs that invest in public securities to give exposure to alternative investments offering greater diversification to a portfolio.

Infrastructure defined

When focusing on infrastructure as an alternative investment, it is important to first define what infrastructure actually is. One way to think of it is that infrastructure is the essential underpinning of modern industrial societies: all the core physical structures that allow us to function and enjoy modern life. Examples of such modern physical structures are transportation (roads, bridges, railroads etc.), energy infrastructure (energy transmission lines and pipelines), telecom infrastructure (cell phone towers) etc.: the things that allow all commerce to occur across the globe.

These core assets to modern life are staples for society and you don’t see demand vary much with the economic cycle. This lends to a few key attractive characteristics that makes infrastructure good to look at from an investment perspective.

So why Infrastructure?

One of the aspects that makes Infrastructure a good hedge or offset to the cost of inflation is the nature of the underlying business. These businesses are often supported by long-term contracts with governments, municipalities, or cities. This could lead to relatively steady cash flow with a potential yield component. Another important aspect to consider is that the high barrier to entry in the marketplace which does not encourage competition to emerge easily (mostly monopolistic businesses).

In a lot of the cases, contracts are linked to inflation or the operators have the ability to pass on the inflation to the end consumers. Because of the nature of the services being provided, people aren’t going stop paying the costs associated with services and products. You can rely on income being generated. So essentially, there is baked-in inflation protection.

Continue Reading…

Post Ethereum Merge, will Crypto survive or thrive?

Posted By |

By Jacky Goh

Special to the Financial Independence Hub

According to a recent report from CNBC, Ethereum has just completed its “final dress rehearsal” for the so-called Merge, which will shift the second-largest cryptocurrency by market value from a “proof of work” validation protocol to “proof of stake.” As CNBC notes, this upgrade has been years in the making and is considered “one of the most important events in the history of crypto.”

The reason is simple: efficiency. Moving to “proof of stake” will reduce Ethereum’s carbon footprint over 99.5% per its internal estimates, and also significantly lower its “gas” prices, i.e. the cost of transactions. Carbon emissions and the cost of converting crypto to fiat currencies (or other crypto currencies) are the two major criticisms of Ethereum, in particular, and crypto, in general.

Network will be more secure and less prone to manipulation

The Merge is not only important to the investing public, however; it’s a critical upgrade for the crypto community. The Ethereum network will now be more secure and less prone to manipulation. For example, anyone who wants to take over 51% of the network will now need to hold half of the total staked amount in ETH, rather than 51% of the mining hash power, as was the case previously. What this means is that the platform is guaranteed to be controlled by those who have a long-term interest in its success, ergo the term “proof of stake.”

But it’s the lower “gas fees” that will probably attract the most attention: and have the most profound effect on adoption. As the cost to process any transaction on the Ethereum blockchain goes down, more adoption will occur, meaning more people will be more open to participate in Ethereum blockchain projects. Think of how stock trading took off in the 1980s after US markets were deregulated and the world’s first discount stockbroker, Charles Schwab, opened for business. More recently, Robinhood spurred another surge in trading by reducing the cost of stock transactions to zero. This is commonly referred to as the “democratization” of investing. With the Merge, a similar revolution is coming to crypto. Continue Reading…

Can you retire with a $500,000 RRSP?

Posted By |
Image Courtesy of Cashflows & Portfolios

By Mark and Joe

Special to the Financial Independence Hub

Many people feel you need to save a bundle for retirement, and that can be true, depending how much you intend to spend. So, can you retire with a $500,000 RRSP? Can you retire without any company pension plan?

Read on to learn more, including how in our latest case study we tell you it’s absolutely possible to retire with no company pension while relying on your personal savings.

Financial independence facts to remember

You may recall from previous case studies on our site while achieving financial independence (FI) is desired by many it may not be possible for most to achieve.

Realizing FI takes a plan, some multi-year discipline, and ideally one or both of the following:

  1. For every additional dollar you save, you can invest that money so it can grow your wealth faster, and/or,
  2. You can realize financial independence by consuming less.

Here at Cashflows & Portfolios, we suggest you optimize both options above: if you can.

Check out these previous, detailed case studies, to see if you fall into any of these retirement dreams:

Check out how Michelle, a 20-something software engineer, plans to retire by age 40, including how much she’ll need to save to accomplish that goal.

This couple plans to retire by age 50 by using their appreciated home equity.

Here is how much you need to save to retire at age 60 rather comfortably.

There are different roads to any retirement

Members of our site have already learned the powerful math behind any retirement plan:

The more you save, the faster you are likely to achieve your goal.

However, life is not a straight line. Everyone has a unique path to retirement. Twists and turns abound. Depending on the path you took in life, including what decisions you made, your retirement planning work could be vastly different than anyone else’s.

Can you retire with a $500,000 RRSP?

Not every person has a high savings rate. In fact, most don’t.

Not every person has a company pension plan to rely on either. In fact, increasingly, many don’t!

Our case study participant today was unable to have a high, sustained savings rate and he didn’t have any company pension plan to buy into either. Is he doomed for retirement? Will $500,000 saved inside his RRSPs in his 60s be enough (in addition to $100,000 in his TFSA)?

Let’s look at his case study.

In our profile today, is Tom.

Tom is aged 63 and wonders if he can retire with $500,000 invested inside his RRSP and $100,000 in his TFSA. Here are some snippets from his email to us:

Hi there,

I was hoping you can help since I know you perform some financial projections for clients … I was just wondering if you have any articles or would you know the answer to this question. I’m a single guy with a simple life. Let’s say I have only my RRSP (for the most part) to rely on for retirement beyond government benefits. I have almost $500,000 invested there. I have no non-registered account although my TFSA is maxed and now worth $100,0000. (I don’t want to use my TFSA for retirement spending right now, I consider it a big safety net as I get older so maybe you can help me run some math?) Anyhow, I am wondering if I could start taking money from my RRSP, and retire soon. Any money I don’t need for retirement, I would move in-kind into my TFSA. (I know from reading your site I cannot make a direct transfer from my RRSP to TFSA – thanks guys but I will take any excess cash I don’t spend and likely move it there. We’ll see.) I have very modest spending needs. I have no debt. I own my home in rural, small town Ontario.

What do you think?

I make decent money now, definitely not $100,000 per year but “enough” to meet my needs and to continue to invest inside my RRSP and TFSA for the next couple of years. 

Do I have enough to retire and spend about $3,000 per month well into my 80s and 90s?

Thanks very much!

Thank you Tom!

 

To help Tom out in the future, we shared some low-cost investment ideas for his TFSA and RRSP:

  1. Everything You Need to Know about TFSAs.
  2. Everything You Need to Know about RRSPs.

Here are the cash flow and investing assumptions for Tom beyond what he told us above. Continue Reading…

Learning from my own Investment Mistakes

Posted By |

By Bob Lai, Tawcan

Special to the Financial Independence Hub

Like many Canadians, early in my investing career, I was investing in high fee mutual funds and the high fees were eating into my returns. I started dabbling in DIY investing but I didn’t get very serious about it until around 2010.

When it comes to DIY investing, I would group DIY investors into two categories. Investors in the first category are people that rely completely on low cost index ETFs. They purchase ETFs on their own and re-balance them regularly. In the past few years, the emergence of all-in-one ETFs like VGRO and XGRO and all-equity ETFs like VEQT and XEQT have significantly simplified the investing process for these investors.

DIY investors in the second category are people that invest in individual stocks and possibly index ETFs as well. These investors study and research individual stocks and make the requisite buying and selling decisions.

As you’d expect, we fall in the second category. We manage our own portfolio and invest in both index ETFs and individual stocks. We have adopted this approach because we want to be more involved with our money and have more control over it. I also enjoy learning about investment-related topics and how to analyze stocks.

I will admit that I have made A LOT of investment mistakes throughout the years. However, investing mistakes are inevitable. The important thing is that we learn from them. That is the absolutely crucial thing as we all make mistakes; it is the learning from those mistakes that distinguishes the good/great investor from the mediocre/poor one.

So, I thought I’d share my learning from my investment mistakes and hopefully help readers to avoid the same mistakes.

Here are some investment mistakes I have made since I started managing our investment portfolio. They are not specific to only dividend growth stock investing.

Note: These mistakes aren’t in any particular order.

Mistake #1: Not doing proper research 

When we first started with dividend investing, I knew very little about how to analyze dividend growth stocks. Like many new dividend investors, I was very much focused on only one metric – high yield. I was not paying any attention to other key metrics like payout ratio, dividend streak, or dividend growth rate. I certainly wasn’t keeping a dividend scorecard.

I stumbled onto a high yield dividend stock called Liquor Store in 2012. At first, I was overjoyed to find a dividend stock in the alcohol industry. Without doing my own research, I assumed that Liquor Store owned and operated all the liquor stores in Canada. I bought $1,500 worth of Liquor Store thinking I had hit the jackpot.

The first couple of years, I was really happy collecting dividends but the share price stayed flat. Upon further research, I learned that I was deeply mistaken. Unlike what I initially assumed, Liquor Store operated privately owned stores. The company operated 230 retail liquor stores in Canada and the US. In other words, the company was competing against Crown-owned liquor stores.

The business certainly wasn’t as rosy as I originally anticipated. The stock price then took a beating when BC introduced legislation to allow licensed grocery stores to sell BC wine.

Due to the deteriorating business environment, Liquor Store cut its dividend in 2016 and we exited this position shortly after, taking around 50% loss, not counting dividends collected.

Although I was deploying the be an owner strategy, I didn’t do my due diligence and learn more about the company. I failed to understand that the company was operating privately owned stores. I also failed to realize the Liquor Store only had a small fraction of the market share and was competing against Crown-owned liquor stores in Canadian provinces.

The biggest mistake? I foolishly assumed that since people would regularly buy alcohol, therefore the company would always be highly profitable, and the dividends would be safe.

I was simply too naive.

What did I learn from this mistake? I learned to always do research about the company regardless of whether I know the company very well or not. Never assume that I know something and never let my ego take over. At a minimum, learn about the company by going over investor presentations that most companies have under their investor relations. It is also important to go over quarterly and annual reports or consult websites such as Morningstar, Yahoo Finance, Marketbeat, Digrin, Seeking Alpha, Simply Wall St, etc.

In case you’re wondering, Liquor Store eventually was de-listed. It is now part of Alcanna (CLIQ.TO).

Mistake #2: Being greedy, not following my own rules

When I graduated in 2006 and entered the workforce, my company’s stock was trading around $15 per share. After my three-month probation period, I enrolled myself in the share purchase program and purchased company stocks with a portion of my pay-cheque every two weeks (the company matched 15% of my contribution).

The stock price went up to $22 in 2007 but I decided to keep my shares instead of selling them.

Then the financial crisis happened and the company stock went down the drain. My company stopped the share purchase program and I owned a few hundred shares at a cost basis in the low teens.

Early in 2009, the company stock went all the way down to just below $4 a share. It sat around that price for a few months. Being young and with some money saved up, I decided to purchase 300 shares at $3.93. I then purchased a few hundred shares more as the stock price climbed its way up to around $10.

Altogether, I owned less than 2,000 of my company shares. Knowing that the company was not profitable at the time and that I could be easily replaced in a blink of an eye, I decided that it was not a good idea to put all my money in one basket, so I invested my money elsewhere (i.e. high fee mutual funds).

My company turned itself around in 2012 and the stock price started climbing. At one point, I told myself that I’d sell everything when the stock hit $20.

Throughout 2013, the stock price kept climbing, reaching a high of $25. The company was firing on all cylinders – we had won many multi-million deals with key customers and we were gaining market shares. I sold a few hundred shares to take in some profit. But I was not satisfied. I believed that the stock price would keep climbing.

I was being greedy and wanted to make more money.

So I kept most of my shares.

The stock price continued to climb. First, it was $30 per share. I told myself I’d wait for a little bit longer and sell when the price hit $35.

The stock price hit $35. Once again, I told myself I’d wait for $40.

Then the stock price hit $40 and I told myself I’d wait for $45 before selling everything.

The stock price went higher and higher. It was exhilarating. Everyone in the company was excited and happy about the stock price.

In early 2015, the stock price hit a high of just below $55. I thought about selling all my shares at the time but decided to reset my selling target to $60.

I was crunching numbers and imagining how much money I’d profit if I sold all my shares at $60.

But the stock price never got anywhere close to $60. In about three months’ time, the share price quickly tumbled from a high of around $55 to just below $20.

I was kicking myself for not selling my shares at higher prices. A year later the stock price eventually climbed back up. Seeing that I missed the boat the first time and didn’t want to miss my chance again, I sold a few hundred shares at a time as the stock price climbed its way up to $35.

What lesson did I learn? First of all, I was being too greedy and wanted to sell things at a high point. But I couldn’t have predicted where the top was so I completely missed it. Although it’s fine to increase my selling target incrementally, what I should have done was to sell some shares along the way and take in profits while the stock price was going up, instead of just holding onto all the shares and keeping increasing my selling target price.

Investing has a lot to do with being patient, setting and executing strategies as flawlessly as possible, and not letting your ego get in the way. In this instance, I totally got my ego in the way. I needed to learn to have an exit plan and execute this exit plan according to it, rather than continuously deviating from it.

Mistake #3: Not thinking long term

I purchased a number of Google shares in October 2012, a few days after Google announced a terrible quarterly result and the stock price went for a slide. At around $340 a share, I thought the per-share price was high but when I looked at the PE ratio and how much cash Google had, I thought I purchased Google shares at a discount (remember, you can’t just look at the stock price alone and claim it’s expensive).

Goog purchase

I’ve always wanted to own Google shares, ever since I started using Google for internet searches in the late 1990s. I was amazed at how good and efficient Google was compared to other search engines like Yahoo, Altavista, and Excite (remember them?). As a teenager, I was convinced that Google would be extremely profitable. In the early 2000s, on several occasions, I told my dad to invest in Google if the company was to go public. Continue Reading…