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.

Fixed Income: The Outlook & Opportunities

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Image by BMO ETFs

By Winnie Jiang, Vice President, Portfolio Manager, BMO ETFs

(Sponsor Content)

Little about the current economic cycle has conformed to historical norms. With divergence in employment data and leading economic indicators, recent data released sent mixed signals that left investors perplexed about the near-term economic outlook.

On one hand, the job market remains overwhelmingly strong, with ISM (Institute for Supply Management) Services bouncing back from extreme lows in December and retail sales also rebounding. The re-opening of the Chinese economy will likely provide a breather on global supply chain issues while boosting demand. Consumer credit remains well retained as default rates stay low with no warning signs of near-term upticks.

On the other hand, yield curve inversions, a precedent of most recessions, continue to worsen. 3-month U.S. Treasury yields are pushed above 10-year yields by the widest margin since the early 1980s. ISM Manufacturing PMI (purchasing managers’ index) and housing data also point to a gloomy outlook. Corporate sentiment and capital expenditure showed little signs of recovery, and housing permits have rolled back to pre-pandemic levels after surging strongly during Covid.

Source: Bloomberg, January 31st, 2023

The Outlook

While robust job markets and consumer data keep inflation well above the Fed’s long-term target, recent CPI (Consumer Price Index) announcements indicate things are steadily, albeit slowly, moving towards the right direction. The inversion of the yield curve caps the magnitude of further rate increases that could be absorbed by the economy before it slips into a recession.

Continue Reading…

2023 Federal Budget: Deficit swells; AMT rises for wealthy but no jump in Capital Gains tax for middle class

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The 2023 federal budget dropped on or about 4 pm Tuesday (March 28.) You can click here and here for budget documents and the latest from the Department of Finance. Below are links to some of the early media coverage, much of which is in Wednesday’s papers.

The theme of the budget is Making Life More Affordable, a somewhat comic choice given that government’s inflationary policies and high-spending, high-taxing behaviour is a big part of what makes life so expensive, especially for one-income couples. [See Steve Nease cartoon below on his take on the impact on the middle class.]

Here’s the Department of Finance’s backgrounder on it.

Pre-budget one of the biggest concerns expressed by investors was whether the capital gains tax or the inclusion rate might be hiked. That did not appear to transpire in the budget, at least for the middle class. See however Christopher Nardi’s article in the National Post highlighted below: he suggests those affected by the Alternative Minimum Tax (AMT) may indeed pay more in capital gains tax.

And here’s CIBC Wealth’s tax guru Jamie Golombek, writing on both topics in the Financial Post: Alternative minimum tax changes will make it harder for high-income earners to avoid paying taxes.

Also hoped for was measures to delay or reduce annual forced taxable withdrawals from Registered Retirement Income Funds (RRIFs). I saw no mention of this in early coverage listed below.

CBC’s summary

On TV, the CBC highlighted that the deficit will grow by $69 billion between 2022 and 2028, no longer projecting a balanced budget in this fiscal framework. On the CBC website it provided the following highlights:

  • $43B in net new spending over six years.
  • 3 main priorities: health care/dental, affordability and clean economy.
  • Doubling of GST rebate extended for lower income Canadians, up to $467 for a family.
  • $13B over five years to implement dental care plan for families earning less than $90K.
  • $20B over six years for tax credits to promote investment in green technologies.
  • $4B over five years for an Indigenous housing strategy.
  • $359 million over five years for programs addressing the opioid crisis.
  • $158 million over three years for a suicide prevention hotline, launching Nov. 30.
  • Creation of new agency to combat foreign interference.
  • Deficit for 2022-23 expected to be $43B, higher than projected in the fall.
  • Higher than expected deficits projected for next 5 years.
  • Federal debt hits $1.18 trillion. Debt-to-GDP ratio will rise slightly over next 2 years.
Cartoon by Steve Nease

CTV’s summary

Here are the highlights in CTV’s view:

Budget 2023 prioritizes pocketbook help and clean economy, deficit projected at $40.1B.

  •  $2.5 billion for a GST tax credit billed as a ‘grocery rebate’
  •  $46.2 billion for federal-provincial-territorial health deals
  •  $13 billion for expanding the federal dental plan
  •  2 per cent cap on incoming excise duty increase on alcohol
  •  Advancing passenger protections but upping a traveller charge
  •  $4.5 billion for 30 per cent tax credit on clean tech manufacturing
  •  $15.4 billion in savings from public service spending cutbacks

Much of the budget was previously announced or telegraphed

The National Post weighed in with this: Chrystia Freeland abandons budget balance plan, adding $50 billion in debt. It noted “much of what is in the budget has been previously announced — or at the very least telegraphed. Ottawa will spend an extra $22 billion on health care over the next five years, as per provincial deals announced last month. It’s also adding about $7 billion for expanded dental care. Low-income Canadians will receive an extra GST credit, at a cost of $2.5 billion.

A Joe Biden Budget

Also at the Post, William Watson said Freeland delivers a Joe Biden budget.  

“From blue-collar bluster to giant green subsidies, Made-in-Canada packaging and make-the-rich-pay rhetoric, Canada’s federal budget borrows from the U.S.”

Green tax credits, more dental care as expected pre-budget

Also expected, according to this FP story published before the budget was released, was “significant” tax credits for the green economy, more measures on dental care and other ways to make life more “affordable,” including amendments to the Criminal Code to reduce predatory lending. It was expected the criminal interest rate be lowered to 35%, as it is in Quebec. The predatory lending measure is indeed included, as you can see in the link to the backgrounder above.

Also leaked earlier in the day was a report in the Globe & Mail that there will be a clean-tech manufacturing tax credit to encourage domestic mining of critical minerals.

Alternative Minimum Tax (AMT) rises

Here is an early overview from the Globe & Mail after 4 pm: Federal budget 2023: Trudeau government bets on green economy, expands dental care.  The G&M reported Ottawa plans to raise “nearly $3-billion through changes to the Alternative Minimum Tax, which is a second way of calculating tax obligations to ensure a high wealth individual can’t make excessive use of tax deductions … 99 per cent of the AMT would be paid by those who earn more than $300,000 a year and about 80 per cent would be paid by those who earn more than $1-million.”

Christopher Nardi in the National Post wrote the following summary, with the subheading “Bye bye federal budget surplus, hello light recession.”

Note this sentence from Nardi:

‘With this first overhaul since 1986, the AMT will now apply largely to Canadians in the top income tax bracket (over $173,000) and will see their capital gains inclusion rate jump to 100 per cent and a host of eligible tax deductions, like moving or employment expenses, dropped to 50 per cent.”

Continue Reading…

The Ins and Outs of Ethical Investing

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Image Pexels/Mikhail Nilov

By Anita Bruinsma, CFA

Clarity Personal Finance

Most people know that investing in the stock market is a good way to earn higher returns on their investments. Money in savings accounts and GICs doesn’t grow fast enough to keep up with inflation over time. To avoid eroding the value of savings, the stock market is the place to be.

You might agree that you need higher returns, but you might not want to support certain companies or industries for ethical reasons. When you buy a traditional mutual fund or exchange-traded fund (ETF), you will own dozens, hundreds or even thousands of companies. Not all of them will line up with your values.

The stock market is an efficient mechanism for companies to get access to the funding they need to grow – to develop new products, to offer more services, and to produce more goods. Like it or not, we are all part of this ecosystem. It’s impossible to escape. But what if you could earn higher returns while avoiding the worst of the worst companies, the ones you really don’t like?

Enter SRI and ESG investing.

What is SRI, ESG and impact investing?

SRI and ESG investing are terms used to describe ethical investing. Sometimes the terms are used interchangeably, but there are differences.

Socially-responsible investing, or SRI, is a way for investors to own companies that better align with their values, usually by eliminating certain sectors of the economy like oil, tobacco and weapons. Environmental, Social and Governance (ESG) investing is a little different – it applies a screen to companies to evaluate their practices as it relates to environmental, social and governance issues. The main difference is that with SRI you are avoiding certain industries, but with ESG you are investing in the “better or less bad” companies. There is a third term: impact investing. This takes things a step further and focusses on companies that are actively doing ethically-appealing activities, like funding community projects, enhancing solar energy technology, or financing local food producers.

For example, an SRI ETF might invest in the U.S. market index but eliminate companies in oil production and weapons manufacturing. An ESG fund might invest in the U.S. market index but exclude the bottom 25% of companies, as ranked by their ESG practices. An impact fund might invest only in solar energy companies.

Three things you need to know

There are some important things to understand about ethical investing before you jump in.

  1. You’re not always getting what you think you’re getting.

Would you be surprised to learn that your ESG fund owns Amazon, a seller of massive amounts of consumer goods that provides same-day, gas-guzzling delivery? Or Halliburton, one of the world’s largest fracking companies? Or Agnico-Eagle, a mining company? The reason they are in the ESG fund is that they are actively doing things to be less bad, or even do some good. They get points for writing a report outlining their environmental practices, like buying electric vehicles, using more green energy in their operations, and doing environment clean-up. Their operations might not be great for the world (although we all use oil and gas, metal, and probably Amazon), but they are offsetting some of the damage by doing good things. Continue Reading…

How 12 Business Leaders invest to Grow their Income

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From getting over the fear of starting to looking into REITs, here are 12 answers to the question, “Can you share your most recommended tips for how you can invest your money to grow your wealth and increase your income, specifically for financial independence through investing?” 

  • Get Started Right Now 
  • Maximize Tax-advantaged Investments
  • Avoid Trying to Time the Market
  • Remember Diversification is More Important Than You Think
  • Put Your Tax Refunds to work
  • Create a High-Yield Savings Account
  • Think of the Market as a Game
  • Prioritize Risk Management Over Chasing High Returns
  • Be Patient and Plan
  • Raise Your Savings Rate by 5% Each Year
  • Repay High-interest Debt
  • Try REIT Index Funds 

Get Started Right Now 

Investing is one of those things that seems like an insurmountable barrier to entry for many people. How can I invest when I don’t have thousands of dollars just kicking around is a common attitude I’ve come across, and in my opinion, it is one of the biggest mistakes toward actually growing your wealth and becoming financially independent. 

The thing is that you actually have to get started: even if it’s a few dollars at a time invested in penny stocks, you’ve got to make a start. Even if the amounts are negligible, you’re gaining invaluable experience in financial markets and financial literacy that will pay massive dividends down the line. — Dragos Badea, CEO, Yarooms

Maximize Tax-advantaged Investments

Both IRAs and 401(k)s have tax advantages [and the equivalent RRSPs and group RRSPs in Canada: editor]. You can choose to deduct your contributions from your taxes or contribute after taxes and avoid taxes when you withdraw during retirement. 

IRAs and 401(k)s are easy to set up. A 401(k) is offered through employers, so if your workplace offers one and matches a percentage of your contributions, take advantage of that matching benefit.

Anyone can start an IRA. You can open an account online today with Fidelity or another firm. Many people assume it’s hard to set up, but it’s not. You can do it in half an hour. 

With both options, you can set up automatic withdrawals from your paycheck. That option helps you succeed in saving because you don’t have to think about it. — Michelle Robbins, Licensed Insurance Agent, Clearsurance.com

Avoid trying to Time the Market

Almost 80% of active fund managers fall behind the major index funds. 

So if these financial professionals can’t beat the market, what chance do ordinary people like you and me have? 

This is why my best investing tip is consistently putting money into an index fund like the S&P 500 without trying to time the market. 

By putting a portion of your salary into an index fund every month for decades, your investments compound, allowing you to build unimaginable amounts of wealth. 

For example, if you put just $300 a month into an index fund growing 8% annually, you’ll have over one million dollars after 40 years. — Scott Lieberman, Owner, Touchdown Money

Remember Diversification is more Important than you Think

Portfolio diversification is a powerful tool that can help protect your investments against large losses due to market downturns. By selecting assets with low correlation, you are essentially increasing the safety of your portfolio while pursuing rewards. This strategy has become indispensable for individual investors and financial advisors alike: after all, who wouldn’t want some extra security for their hard-earned money?

If you split them between two different companies, such as Invest A and B — one providing package deliveries and another offering video conferencing services — you’ll have far less reason for worry in times of economic hardship or other disruptive events! Look at how gas shortages can fuel success with Investment B: when stock prices dip on account of limited resources, people switch to digital communication tools from home, which ultimately benefits Investment B’s performance. — Derek Sall, Founder and Financial Expert, Life and My Finances

Put your Tax Refunds to work

Using your tax refunds to invest is a wise investing tactic to consider that you may have never thought about: for many, the short-term sacrifice is worth the long-term benefits, especially as you settle into life after work. 

This is a great way to supplement your current income or even a retirement account, or jump-start a new investment account. Tax refunds can also be used for other pivotal financial reasons, including paying off debt, funding an IRA, building a health savings account, and creating an emergency stash. — Dakota McDaniels, Chief Product Officer, Pluto

Open a High-Yield Savings Account

While savings accounts aren’t exciting ways to grow your wealth, online banks are currently paying 3-4% interest. While 3-4% might not seem like much, it only takes a few minutes to set up an account, meaning you can earn interest risk-free while also keeping your money easily accessible. — Larissa Pickens, Co-Founder, Worksion

Think of the Market as a Game

For investing, I always tell people to think of the stock market as a big game of poker.

Invest in real estate: “I like to think of real estate as the gift that keeps on giving. With rental properties, you’re not just earning income from tenants, but also building equity over time.”

Start your own business: “Entrepreneurship is not for the faint of heart, but neither is settling for a mediocre 9-5 job. Starting your own business is like taking a leap of faith and trusting that you’ve got what it takes to make it happen. Just remember to pack a parachute.”

Invest in yourself: “Investing in yourself is like planting a money tree, except instead of watering it with H2O, you’re watering it with knowledge and experience. So, go ahead and take that online course, attend that industry conference, or volunteer for that new project. Your future self will thank you.” — Russ Turner, Director, GallantCEO 

Prioritize Risk Management over Chasing High Returns

Although even small returns can accumulate into significant wealth through compounding, a single failed investment can cause a substantial loss. 

To mitigate risk, I employ the dollar-cost averaging (DCA) strategy when investing in the S&P 500. The S&P 500 is already a diversified index, reducing the risk associated with individual stock investing. Furthermore, the DCA strategy further minimizes risk by investing fixed amounts of money at regular intervals, regardless of the market’s ups and downs.  Continue Reading…