Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

Defined Benefit pension plans continue to perform, despite ongoing market volatility

Image Mercer/Getty Images

By F. Hubert Tremblay, Partner, Mercer Canada

Special to Financial Independence Hub

 The last few years have thrown a number of hurdles on the markets. A pandemic and the recovery phase have been accompanied by recent additional uncertainty from the collapse of Silicon Valley Bank and fears of a global banking crash. Canadians looking at their retirement savings realize how volatility can affect their accounts and might have to save more to meet their retirement objectives or delay retirement.

Despite this volatility, the financial positions of defined benefit (DB) pension plans continued to improve over the last quarter, as indicated by the Mercer Pension Health Pulse (MPHP).

The MPHP, which tracks the median solvency ratio of the DB pension plans in Mercer’s pension database, rose in Q1, finishing the quarter at 116 per cent, a jump of 3 per cent from the beginning of 2023. This is on top of a remarkable jump of 10 per cent during 2022.

While the global banking crisis continues to wreak havoc on markets, a strong January and February helped ensure that Canadian DB plans remained unaffected, and most continued to improve. In fact, many plans’ funded positions finished the quarter in better positions than they have been in 20 years. However, looking ahead, there are several factors that may create more volatility and uncertainty for DB plans:

 The global economy at play

The global economy entered 2023 juggling multiple risks. Around the world, central banks were focused on tackling inflation by increasing their policy interest rates and other qualitative tightening activities. On the heels of the failure or takeover of high-profile banks in both the U.S. and Europe, policymakers must now weigh the consequences of continuing these tightening measures with the need to stabilize the banking sector overall.

The war in Ukraine – with no signs of resolution in the near future – could also mean continued global tensions and a reduction in global trade, all of which will negatively impact the global economy.

In North America, there is increased political polarization in the U.S., with the debt ceiling needing to be raised but neither side compromising to reach an agreement. The consequences of the American government debt default would be disastrous for global financial markets.

 The Canada equation

North of the border in Canada, in addition to the inflation scenario, Ottawa’s decision to cease issuing real return bonds (RRBs) and proceed with Bill C-228 caused a stir among pension stakeholders. Continue Reading…

RetireEarlyLifestyle.com interview on Financial Independence & the “Findependent” lifestyle

By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to Financial Independence Hub

We at Retire Early Lifestyle like to bring you individual FIRE stories and interviews of interesting people. There is no one single way to retire, and it is our hope that in reading these interviews with those who are on the path to Financial Independence it will inspire you to do the same!

Meet Jon [Jonathan] and Ruth Chevreau

Jonathan (Jon) and Ruth Chevreau

RetireEarlyLifestyle: Could you tell us a little about yourselves? Are you financially independent now?

Jon Chevreau: I’d describe Ruth and me as financially independent, yes, although it’s hard to claim we retired early like yourselves.

I just turned 70 and am still writing and editing, as well as running my own website on Financial Independence. Ruth is a year younger and retired from full-time work when she turned 65. My last full-time employment was at age 61, so by my definition when I became freelance/self-employed that was the start of our Findependence.

But we COULD have left the salaried routine earlier if we had wished to do so: we paid off our mortgage decades ago and our financial assets in combination with small employer pensions and the usual Government pensions are more than enough to fund a modest lifestyle.

REL: What type of work did you do, and what your life was like before FIRE?

JC: I’ve always been a journalist and editor, as well as an author and blogger.

Initially I worked in staff newspaper jobs covering technology in the early 80s ‘for the Globe & Mail (one of Canada’s two national newspapers), then almost two decades covering personal finance and investing for the National Post (Canada’s other national newspaper). I was also editor-in-chief for MoneySense Magazine for a few years after the Post and continue to write and edit for them in addition to running Financial Independence Hub, which I launched in 2014 when I left my full-time job at MoneySense.

REL: Because Billy has a background in finance and securities, he’s very familiar with US investments. Tell us about Canadian-backed assets.

JC: Canada is similar to Australia in its investment profile.

We’re dominated by energy and materials stocks and by six big banks. We have virtually no health care stocks and our consumer staple stocks are really just publicly traded grocery store chains like Loblaw;  our tech sector is small. Every once in a while Canada spawns a technology winner: Nortel, which went bust after China’s Huawei “borrowed” some of its technology; Research in Motion, whose Blackberry was a big-time success until the Apple iPhone ursurped it; and currently Shopify is our big tech winner.

Jon & Ruth sitting on a sand dune in Morocco

But mostly the Toronto Stock Exchange is dominated by banks like Royal Bank, BMO, Bank of Montreal, and TD Canada Trust (all with some US presence) and energy giants like Enbridge and TransCanada Pipelines. An American investor can get away with almost exclusive home country bias since the US is roughly half the global market cap and many of the big players are international anyway.

Canada is maybe 3% of the world’s total market cap, so we are forced to look to the US and global markets to be properly diversified. Once upon a time we were limited to just 20% foreign content in our pensions and retirement plans but that got scrapped so now we can overload on the S&P500 if we wish.

REL: Are discount brokers available to you in Canada like Fidelity, Charles Schwab and Vanguard?

JC: Oh yes, mainly through the big banks, so there’s TD Waterhouse, RBC Direct Investing (both of which we use) and the other banks have similar operations. There are also several independent online brokers like Questrade. Fidelity and Vanguard have Canadian divisions but mostly to sell their mutual funds and ETFs.

REL: Are capital gains taxed more favorably than income in Canada?

JC: Yes. Only half of capital gains are taxed, so that means about half as much tax as is usually paid on interest income or employment income. Also, unlike the US, the capital gains tax in Canada does not rise or fall depending how long you held before taking a profit. Dividends paid by Canadian companies get a lower tax rate than foreign dividends, which are taxed like interest and so best held in tax-sheltered retirement vehicles like the RRSP (Registered Retirement Savings Plan, similar to America’s IRA).

Ruth hiking in Spain

REL: Could you explain Canada’s Old Age Pension, how that works, at what age one can begin receiving it, and how one qualifies for it?

JC: Canada’s equivalent to Social Security is actually three programs we dub CPP/OAS/GIS.

The main one is the Canada Pension Plan, to which all employees must contribute. Like Social Security you can take CPP early (even at age 60) but it pays much more if you wait till 70.

There is also Old Age Security or OAS, which people normally take at the traditional Retirement Age of 65. You can’t get it earlier than that but like CPP, can defer it to 70 and get paid more. It’s funded by the government’s general tax revenues but it’s means-tested, so if you have taxable income above $80,000 or so (the threshold rises a bit each year), you start to have OAS taxed away and you lose it all around $120,000. This is for each person, so retired couples normally try to keep their taxable income below $80,000 each, so $160,000 between them.

Finally, there is the Guaranteed Income Supplement (GIS) to the OAS: which is means-tested and aims to top up income for seniors who have no real pensions or retirement savings. Personally, we don’t plan on receiving GIS: most middle-income seniors worry more about preserving OAS benefits: CPP is taxed but benefits are not clawed back.

REL: Could you tell us a little about how your portfolio is structured?

JC: I always used to wonder [in articles] why anyone would need more than a single global balanced mutual fund or these days a comparable Asset Allocation ETF from firms like Vanguard, BlackRock or BMO ETFs.

I believe in diversification by asset class, geography, investment style, and market cap. To some extent I keep in mind the All-Weather Portfolio championed by Ray Dalio, or before that, Harry Browne’s Permanent Portfolio. The latter was 25% in bonds for deflation, 25% stocks for prosperity, 25% gold for inflation and 25% in cash for really bad times. Dalio is a bit like that but would add commodities and maybe real estate. I don’t believe you can consistently predict markets and asset classes so I believe in being exposed to all of these over the long haul, with perhaps shorter-term tactical tweaks if trends become obvious (like interest rates bottoming a year ago.)

REL: How big a part of your retirement plan does the Canadian-based healthcare play? Would you consider permanently relocating to another country? If so, which countries have you considered?

JC: Canadians are a bit spoiled with universal health care. US Democrats would probably call it socialized medicine.

Jon in Malaga, Spain

It’s not entirely free as Ontario levies an annual Health Premium [i.e. tax] depending on income, but it’s lower than private insurance would be. We don’t worry about sticking with a single employer just to keep their health care insurance, although of course some will buy private Blue Cross and that kind of thing beyond what employers provide.

We travel a lot: Florida for a while, more recently Morocco, Mexico and other Spanish-speaking places including Spain itself. But I doubt we’d permanently leave Canada.

Just today we were walking around our home turf by the lake in Toronto. It’s called Long Branch, which was originally a Summer Resort when founded in 1884: affluent families in downtown Toronto would take the street car to their summer “cottage” in Long Branch. It’s now just another bedroom community but only a 15-minute GO train ride from downtown Toronto.

Canada overall is a blessed place: we’re protected by two oceans and it’s nice having a friendly neighbor and military power to the south. The rest of the world probably considers us boring, which suits us fine: we’ll keep us a best-kept secret! At one point we considered Mexico as a way to avoid Canada’s long winter and relatively high taxes but the high apparent levels of crime in recent years scared us off. My parents were British and French so we like to visit the UK and France, as well as Spain. But we are happy to keep Toronto a home base and to visit places for months at a time through AirBnB.

REL: In your retirement life, what will you do about access to health care? Are you open to Medical Tourism?

JC: Again, Canada’s health care system is almost free for citizens and reasonably accessible. In fact, it’s so attractive that it may prevent some of us from permanently pulling up stakes. I can see Dental Tourism as more likely, as only recently have the NDP started to badger the Trudeau Liberals to provide universal free dental care for young people and low-income seniors.

Sadly, neither category is us!

REL: Are you a traveler or more of a stay-at-home, community kind of guy? Are you and your wife on the same page regarding retirement and travel?

JC: I think we are. Ruth retired from her full-time job in the transportation industry three years ago but still does a bit of consulting and a lot of church work, volunteering, tutoring and the like.

Lake Ontario, a 30-second walk from Jon and Ruth’s home

As I said to you before this interview, I still put in a “gruelling 3-hour day” Monday to Thursdays, with Friday mornings if necessary. Like yourselves, I can run the web site from anywhere with good Internet access. Most recently we spent 4 weeks in Malaga, Spain and I kept things going from there. But in our next stage we will try to avoid more of the long Canadian winter and spend 2 or 3 months at a time abroad in January/February/March. Continue Reading…

Cash Alternatives: Bond ETFs and other Vehicles

Image Deposit Photos

By Alizay Fatema, CFA 

(Sponsor Content)

Central banks across the globe are likely to continue with their attempts to tame inflation by hiking interest rates, crushing the hope that markets will return to normality any time soon.

With the unemployment rate at a historically low level, inflation remains a top concern for the Bank of Canada (BoC) and the Federal Reserve (Fed), who are also dealing with looming risk of a recession and uncertainty regarding the impacts of the recent bank turbulence. The BoC and the Fed appear to be ahead of global peers in their attempt to slowdown inflation – raising the question around whether we have seen the peak in rates in North America.

The rapid tightening cycles by policy makers are reinforcing the appeal of owning high-
quality ultra-short bond, and money market ETFs. A series of recent rate hikes by the Bank of Canada and the Federal Reserve gave a boost to yields for these products, making the saying “cash is king” true to a certain extent, as investors who are worried about higher inflation and slowing growth prefer investing in these cash alternatives to ride out the market volatility. In today’s market, you can earn an attractive yield while taking less risk – earning while you wait for volatility to subside.

Yield curve[1], are we in love with the shape of you?

Normally, the yield curve is upward sloping, meaning longer-term bonds yield more than shorter-term bonds as investors often demand higher yields for locking their money up for a longer period. However, at present, the shape of the yield curve is inverted, which means shorter-term securities are yielding more than longer-term ones. This inversion is largely owing to the Central Bank’s quest to reduce inflation by hiking the interest rates.

Due to historically low interest rates in the last few years, investors were compelled to take more duration[2] risk by adding exposure to longer-term bonds and higher credit risk[3] by investing in lower credit quality segments such as high-yield or emerging markets bonds. However, due to the current yield curve inversion, the tables have turned now, offering a unique opportunity for fixed-income investors looking to earn higher yields.

Source: Bloomberg USYC3M10 Index (Sell 3 Month US T-bill & Buy 10 Year US Bond Yield Spread) Sep 1992 to April 2023

Why stash cash in money market & ultra-short-term bond ETFs?

The front-end of the yield curve (0-1yr) offers an attractive asymmetry and opportunity to capture yield between 4-5% + with limited duration and credit risk. This allows investors to earn the highest yields we’ve seen in more than a decade on fixed income and build a more stable high-quality fixed-income portfolio by adding exposure to ultra-short investment grade bonds and money market securities. Based on the current interest-rate volatility, hugging the front-end of the curve seems a more prudent and consistent way to preserve capital in a fixed-income allocation. BMO ETFs offers solutions such as BMO Money Market Fund ETF Series (ZMMK), BMO Ultra Short-Term Bond ETF (ZST) and BMO Ultra Short-Term US Bond ETF (ZUS), which are a great way to get exposure to the front end of the curve.

These money market & ultra short-term bond ETFs invest in high credit-quality instruments that provide a great degree of safety and capital preservation. Firstly, by investing in securities that mature in less than one year, the duration risk is minimal, which results in lower interest rate sensitivity in your portfolio. Secondly, these ETFs offer high liquidity[4] due to the nature of their underlying securities, which means they can be bought and sold easily with minimal market impact. Continue Reading…

New tax-free Questrade FHSA helps Canadians save, invest & realize their dream of homeownership

Image courtesy Questrade/iStock

By Rob Shields, Questrade 

Special to Financial Independence Hub

On April 1, 2023, Questrade became the first in Canada to offer the new First Home Savings Account (FHSA). For us, this was a major accomplishment in our continued mission to help Canadians on their journey to financial independence. Our goal has always been to challenge the status quo, transforming financial, investing and mortgage services for the good of Canadians. Knowing the Government of Canada was introducing the new FHSA on April 1, the team at Questrade began planning months ago. Our goal was to offer Canadians this account on day one, so they can start saving, investing and growing their money for their first home. Mission accomplished.

Save for a home faster

Saving for a home is a big challenge for many Canadians. With housing prices as they are — especially in major cities — maximizing your down payment is critical. By opening an FHSA account at Questrade, Canadians can invest up to $8,000 annually, deduct their investment contributions from their taxable income and give it the opportunity to grow in the market. They can contribute up to $40,000 in this account, with no limits to how much it can grow, making it a powerful savings tool. Ultimately, they can withdraw it tax-free to use it for a home purchase: with no requirement to repay. The only requirements to open an FHSA are: being a verified resident of Canada, being at least 18 years of age, and being a first-time home buyer.

Imagine a scenario where you open an FHSA account with a goal to buy a house in 10 years. If you maximize your annual contribution limit of $8,000 per year for the first 5 years, you’ll reach the lifetime contribution limit of $40,000 in 5 years. If you invest your account with a Questwealth Aggressive Growth Portfolio, which had an average return of 7.18% per year, your account could grow to $69,993 after 10 years*. That’s $69,993 you can withdraw tax-free to put towards your home, with $29,993 coming just from investment gains. Continue Reading…

How to build a portfolio of Fine Wines: for Fun & Profit

It’s been two years since former Vanguard Canada CEO Atul Tiwari launched Cult Wines Americas. Late in April, Tiwari celebrated the milestone with a small media gathering at Fine Wine Reserve, a premium wine storage facility in Toronto.

Atul Tiwari

For a refresher, see this Hub blog written by Tiwari late in 2021: A New Asset Class for Affluent Investors. It explains that the Cult Wine Investment story began in London, England in 2007, and in 2021 expanded into North America with offices in Toronto and New York.  See also these articles written by two Globe & Mail writers who were at this month’s event along with myself: How profitable is investing in fine wine? and Former Vanguard Canada CEO to head wine investing venture in the U.S

The idea behind Cult Wine Investment is to let you invest in leading global wines (mostly French) for ultimate profit, and to safely store it off-site while still having title to and access to the actual product, should you wish to consume a portion. As Tiwari told the G&M’s John Daly last year, “Cult Wines is not securities regulated, because you actually own the wine.” Below are some pointers on building a collection. Cult currently allows Canadian investors with as little as $12,500 (or US$10,000 for U.S. investors) to access a customized wine portfolio, with management fees ranging from 2.25%t to 2.95%, depending on portfolio size.

Marc Russell: www.finewinereserve.com

In addition to sampling the mostly-French wines, we had a quick tour of the Toronto storage facility, courtesy of Marc Russell, Founder and CEO of The Fine Wine Reserve Inc. (shown on the right).

The chart above shows a portfolio of Cult Fine Wines [CWI is the orange bars] has performed against its benchmark, the EP40 index (Green bars) as of March 31, 2023. EP40  is a fixed basket of 40 Bordeaux En Primeur wines.

“Fine wine as an asset class has performed as it should over the last two years,” Tiwari told me, “In a volatile market setting, Cult Wines has returned on average 16% in 2021 and 12.77% in 2022, in addition to providing the portfolio diversification  benefits of low correlations to equities, low volatility and acting as an inflation hedge.”

As we learned at the briefing, investing in fine wines for profit primarily means investing in French wines, mostly from the French districts of Bordeaux, Burgundy and Champagne. Those three districts account for roughly 80% of Cult Wine portfolios. At the briefing, the tasting focus was on the first two: after all,  Tiwari is a member of the Confrérie des Chevaliers du Tastevin, a global society of Burgundy aficionados.

A handout says Bordeaux wines are “the bedrock of fine wine” portfolios, adding that after a period of recent underperformance, “Bordeaux wines now offer more attractive relative values when compared to other French regions.” In addition, “the end of zero-COVID policies in China fuelled a surge in fine wine trading in early 2023.”

How to store fine wines

While most folk merely buy wines from the LCBO or nearby Vineyard and consume it within days, it turns out that storing multiple cases of wines for profit is considerably more complex. This was evident at the four of the Fine Wine Reserve, where temperature control, humidity and other variables are all far more complex than you might imagine. And yes, if you do hire them to store your wines, you are able to visit and even withdraw a few bottles or cases for actual use, should you desire to enjoy your investment as well as profit from it down the road.

Here are a few interesting talking points provided at the tour:

• Everyone overestimates the importance of cool temperatures when storing and aging fine wines, and underestimates the importance of temperature stability and high humidity.

• This explains why wines age best in the cool damp natural cellars located far below ground, as in Europe.

(Here I dare to add a personal note, since I once visited a white wine vineyard in France’s Loire Valley that bears the illustrious name Chevreau.)

• Wines are like kids. If you neglect them when young, they grow up unbalanced. Don’t put off proper storage. Stored improperly, wines will be irreversibly damaged within a year. And 1 hour in a hot car! Continue Reading…