All posts by Jonathan Chevreau

Motley Fool: Best vehicles for an Emergency Fund

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What are the best investment vehicles for holding a safe and highly liquid Emergency Fund? That’s the focus of the third in my latest series of blogs for Motley Fool Canada introducing the basic principles of establishing Financial Independence.

You can find the latest instalment by clicking on the highlighted headline here: One Essential Tip for Achieving Financial Freedom.

In the first two installments of this new series of articles, we looked at two key steps toward Financial Independence: jettisoning debt and, once that is accomplished, applying the resulting surplus to savings and ultimately long-term investments.

As the latest blog argues, you could even argue that an emergency cash cushion should take precedence over both debt elimination and saving/investing.

What should you be looking at in an Emergency Fund? First, you need liquidity: the ability to access the cash at a moment’s notice. Second, you want safety of capital, which really means cash equivalents or fixed income, not equities normally held with a time horizon of more than five years. Third, assuming some sort of fixed income that’s not locked up like a 5-year GIC, you want at least a reasonable rate of interest to be paid on it.

Normally, you shouldn’t regard RRSP investments as an emergency cushion, since you’ll have to pay tax to access the funds. Most people will try to keep relatively high cash balances in their chequing accounts that can serve as a cushion, although typically these accounts pay next to nothing in interest income. One possibility is short-term or redeemable GICs that may pay somewhere between 1 and 2% per annum. Another good place to “park” such funds is a High Interest Savings Account (HISA).

As the name suggests, HISAs pay high amounts of interest, usually more than 2%. According to this source, several pay more than that: as of mid 2019, EQ Bank was paying 2.3%, Motus Bank up to 2.5%, Tangerine was offering a promotional rate of 2.75%, and Motive Financial was paying 2.8%, Wealth One Bank of Canada was paying 2.3% and WealthSimple 2%. Pretty nice returns for liquid cash cushions! Continue Reading…

Retired Money: What to do about falling GIC rates

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PWL Capital’s Ben Felix

My latest MoneySense Retired Money column has just been published. It looks at the reversal the past year in interest rates, which impacts seniors who had started to look forward to at least half-decent GIC rates near 3%. You can find the full piece by clicking on the highlighted headline: Are GICs right for retirees looking for Fixed Income? 

Short of embracing high-yielding dividend paying stocks, the more palatable alternative for conservative retirees might be fixed-income ETFs. The article focuses on a recent video by CFA Charterholder Benjamin Felix, an Ottawa-based portfolio manager for PWL Capital. Felix argues that at a minimum such investors should have a mix of both fixed-income ETFs and GIC ladders.

The latter let you sleep at night because they are invariably “in the green” in investment accounts. But while in the short term fixed-income ETFs can be in the red — just like equity ETFs — Felix makes a compelling argument for the higher potential returns of bond ETFs.

Felix believes that what really matters for investors is total return: “Holding a lower-rate GIC after a rate increase still results in an economic loss.” Bond returns consist of principal, interest payments and reinvested interest, so focusing only on return of principal misses the point. Individual bonds are not ideal for individual investors, as they require extensive research, are relatively expensive and tricky to trade.

Short-term GICs miss out on the term premium

But short-term GICs miss out on the term premium, which is substantial over time. Going back to 1985, Felix says short-term bonds returned 6.51% annualized versus 7.97% for the aggregate bond universe (which includes some short-term bonds).  This shows how much mid- and long-term bonds bring up the overall return. To be clear, this period captures one of the greatest bond markets in history but Felix says it is still reasonable to expect a relationship between riskier longer-term bonds and higher expected bond returns. Risk and return should be related.

GICs are also illiquid, so even if an investor chooses to include GICs in a portfolio, they will generally also include bond ETFs, which – like stock ETFs – can be sold any trading day. Nor do GICs provide exposure to global bonds.

Of course, a nice alternative are those asset allocation ETFs we have often discussed on this site. See for example this excellent overview by CutthecrapInvesting’s Dale Roberts: Which All-in-One, One-Ticket Portfolio is right for you? 

The Felix video can be found at his Common Sense Investing YouTube series here.

 

Franklin Templeton adds pair of actively managed Fixed Income ETFs

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Franklin Templeton staff at opening bell of TSX Monday to launch two more actively managed bond ETFs

Franklin Templeton Canada has announced the launch of two new actively managed fixed income ETFs that will invest directly in two Franklin Bissett mutual funds. Franklin Templeton’s employees rang the Toronto Stock Exchange’s opening bell on Monday morning (July 8) to celebrate the listings of the new funds.

“Investors are looking for actively managed fixed income to provide stability in their portfolios,” said Duane Green, president and CEO, Franklin Templeton Canada in a press release. “Now they can access the compelling, risk-adjusted returns of our Franklin Bissett fixed income mutual funds in either an ETF or mutual fund structure depending on what works best for their portfolio.”

Franklin Liberty Core Plus Bond ETF (FLCP) invests in series O of Franklin Bissett Core Plus Bond Fund, with a management and administration fees totalling 55 bps. It seeks to provide high current income and some long-term capital appreciation through exposure to primarily Canadian fixed income securities, including federal and provincial government and corporate bonds, debentures and short-term notes. The fund is co-managed by Tom O’Gorman, SVP and director of fixed income, Franklin Bissett, and Darcy Briggs, SVP and portfolio manager, Franklin Bissett. They have 29 and 25 years of industry experience, and eight and 14 years with the firm, respectively.

Franklin Liberty Short Duration Bond ETF (FLSD) invests in series O of Franklin Bissett Short Duration Bond Fund.The management and administration fees total 40 bps. The fund seeks to provide income and preservation of capital through exposure to primarily Canadian fixed-income securities, including federal and provincial government and corporate bonds, debentures and short-term notes. The fund is co-managed by Darcy Briggs and Adrienne Young, VP and director of credit research, Franklin Bissett.

You can find more information on the new bond ETFs at Franklin Templeton’s website, here.

Motley Fool: How to move from Saving to Investing

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What’s the difference between Saving and Investing and how do you move smoothly from the one to the other?  Motley Fool Canada has just published the second in a new series of articles by me about the basic steps towards Financial Independence, or what I call “Findependence.” You can find the first one, which ran early in June, here; and the new one by clicking on the highlighted text here: 2 critical steps toward Financial Independence.

The first article discussed how the journey to Findependence hasn’t even begun while you’re still in debt. To paraphrase one of the characters in my book Findependence Day, you can’t even begin to climb the tower of Wealth until you get out of the basement of debt.

It’s nice to be free of debt, whether high-interest credit card debt, student loans or even a mortgage. It’s a big step moving from negative net worth to being merely broke, where your assets and liabilities cancel themselves out. Being free of all debt is certainly a nice place to be if you’ve been anxious over being hounded by creditors. But it’s not financial independence either, which is the stage of life when all sources of income more than meet your monthly financial needs.

As the followup article summarizes, you want to move from Debt elimination to the intermediate step of Saving, and then from Saving to true investing. Saving is being a loaner — you lend money to a bank or other institution and receive a small amount of interest back as well as your principal upon maturity. But to be an investor you want to be an owner: a business owner, through stocks or equities, or more broadly through a diversified basket of equity ETFs.

The end of the piece references a piece by Investopedia about the difference between investing and saving. You can find their explanation here. It says saving is for emergencies and purchases, by which they mean immediate needs. Investing is about a longer-term horizon (defined as seven or more years) and entails more risk than saving. That’s why they refer to the “risk free” return of investing in cash, treasury bills and the like.

Investing is about Money begetting Money

The beauty about saving is that, once the process is begun, it sets the stage for when  money begins to beget still more money, a process that will ultimately happen even while you’re sleeping. So does investing: the difference is that saving is a kind of junior partner to investing: it works a bit for you, but nothing so hard as true investing for the long term. Saving begets small amounts of money; ultimately, investing begets huge amounts of money: eventually enough to live on whether or not you choose to work another day in your life. Continue Reading…

Boomer & Echo guest blog: What I’ve learned so far in Semi-Retirement

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Regular Hub guest blogger Robb Engen returned the favour earlier this week by inviting me to write a blog for his site Boomer & Echo. You can find that version by clicking on the highlighted headline: What I’ve learned so far in Retirement.

For convenience, it also appears below, including original links, with a Hub headline and a few subheadings that better reflect the central point that I personally don’t consider myself fully retired yet. This version has a few extra points added, plus two links to FIRE pieces that didn’t appear in the original B&E version. And as a bonus, it includes near the end an update on some of our recent travels, which hopefully reinforce some of the broader themes described in this blog.

Which begins as follows:

Through most of the five years the Financial Independence Hub has existed, Boomer & Echo’s Robb Engen has been kind enough to allow the “Hub” to republish some of his blogs that first appeared on his own site.

He recently suggested we turn the tables and invited me to write a guest blog for Boomer & Echo recounting some of the lessons I’ve learned in my decades as a financial writer and what I’ve learned so far in Retirement. Here it is.

For starters, my age alone qualifies me as a Boomer: I recently turned 66, but do not consider myself retired: at most, I consider myself semi-retired. As Robb would know, running a website is no trivial undertaking and I aim for new content 5 days a week, 52 weeks a year. That and writing for a handful of media outlets keeps me fairly occupied, although the privilege of doing this from home means I gain a couple of hours that would formerly have been expended on commuting.

Indeed my last full-time salaried staff job that involved commuting and bosses ended five years ago, when I stepped down from the editorship of MoneySensemagazine. That two-year stint followed 19 years at the National Post/Financial Post, most of which time I was the paper’s personal finance columnist.

Those familiar with my books or blogs would not expect me to describe myself as Retired, since my shtick has long been Financial Independence, or my contraction for it: Findependence. That’s as in Findependence Day, a financial novel I wrote in 2008 (Canadian edition) and 2013 (US edition.)

As I have often written, I do not regard the terms Retirement and Findependence as synonyms. You can be Findependent but not Retired, as I am; but it’s hard to be Retired if you’re not Findependent.

In the old days, the traditional “full-stop” retirement was considered to happen at age 65, which even today is when you can first start receiving Old Age Security benefits. (And yes, I do now collect OAS, for reasons I’ve explained elsewhere). But “Findependence Day” can be years or even decades earlier: you may still choose to work for money but on your terms: the magic day is when you’re completely free of debt and have enough saved (and properly invested) that even if you never earned another dime you could meet all your major living expenses, assuming some variant of the 4% Rule.

Even if I considered myself as having “retired” at age 61, that’s relatively old by the standards of the so-called FIRE movement, which of course stands for Financial Independence Retire Early. True FIRE people aspire to “retire” in their 30s or 40s, sometimes even in their 20s, typically by saving like demons for a decade or so: in the most extreme cases they may save      something like 50% of their income.

I’m more like Robb, where he described in his blog why he wasn’t yet paying down his mortgage because he first wanted to maximize RRSP and TFSA savings. Mind you, my books do argue that “the foundation of financial independence is a paid-for home” but I’m old school and we bought our first home (of only two) back in the 1980s, when Toronto real estate was pricey but hardly at the lofty levels of today. Of course, interest rates were much higher then: close to 12% in our case, so we were motivated to pay off the mortgage as quickly as possible.

I don’t see myself as an early retiree or a “FIRE” blogger

There have been some interesting critiques of FIRE, nicely summarized by Fritz Gilbert in a guest blog for the Hub: Is the Fire community full of hypocrites? Fritz is an American Pluto award winning blogger for RetirementManifesto.com, who I’ve come to know through our joint membership in the Younger Next Year 2019 Facebook group, which I helped found and have helped moderate (along with the site’s prime mover Vicki Peuckert Cook) since late 2017. Fritz “retired” himself at age 55 about this time last year. But as we would both argue, he’s hardly retired in the classical sense of the term. Continue Reading…