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Benefits of a Core-Satellite Investment approach

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By Erin Allen, CIM, VP Online ETF Distribution, BMO ETFs

(Sponsor Content)

Asset allocation is one of the most critical investment decisions an investor can make. Studies, such as the influential Brinson, Hood and Beebower paper, “Determinants of Portfolio Performance,1” suggest that the long-term strategic asset allocation of a portfolio accounts for over 90% of the variation of its return.

According to the study, the portfolio’s strategic – or target – asset allocation will have a greater impact on its performance than security selection or any short-term active or tactical asset allocation shifts.

The first step when constructing a portfolio is to determine the appropriate asset allocation, based on your risk profile and investment objectives, and then select investments across each asset class.

There are several approaches to constructing an investment portfolio. One such strategy is to adopt a core-satellite approach. Core-satellite investing involves using a core portfolio to anchor the portfolio’s strategic asset allocation, and adding satellite investments to enhance returns and/or mitigate risk.

Fundamentals of a core-satellite portfolio

A typical investment portfolio is comprised of traditional asset classes that represent the broad market, and generally include investment-grade fixed income securities and large-cap Canadian, U.S. and international equities, for example BMO S&P TSX Capped Composite Index ETF (ZCN), BMO S&P 500 Index ETF (ZSP), and BMO MSCI EAFE Index ETF (ZEA). These asset classes make up the portfolio’s “core” investments. Specific securities within each asset class will depend on the investor’s return objectives and risk tolerance.

In order to further diversify the portfolio, non-traditional asset classes – referred to as “satellite” strategies – are used to enhance returns and manage risk. Satellite strategies often have greater return potential than core asset classes, but may be considered higher risk (with greater volatility) when held on their own. However, they often have a lower correlation – a measure of the degree to which two investments move in relation to each other – to traditional assets classes. Satellite strategies can include asset classes or themes that can be used as either short-term, tactical investments, or held for longer periods of time. Combining investments with a low correlation can improve the risk/return characteristics of a portfolio.

Examples of satellite strategies are shown in Table 1 [below]. By using one or more of these satellite strategies in tandem with a core portfolio, investors can further diversify their portfolio across additional asset classes, regions, sectors, market capitalizations, currencies and/or investment styles. For example, real assets such as commodities, infrastructure and real estate have a tangible value that can rise during periods of inflation.

Infrastructure and real estate can also offer a steady and predictable cash flow.  Global fixed income securities provide Canadian investors with exposure to bonds in countries with different currencies and interest rate cycles, which can help reduce interest rate risk; while hedge funds, such as market neutral or multi-strategy funds, can actually lower volatility and improve a portfolio’s risk-adjusted performance.

Table 1: Courtesy BMO ETFs

Constructing a core-satellite portfolio

A core-satellite portfolio can be implemented by using:

  • Active strategies that seek to add value through security selection;
  • Passive strategies that seek to track the performance of an index representing a particular investment market;
  • A combination of active and passive strategies.

There is a fundamental investment theory that states markets are efficient and the price of any individual security already reflects all available relevant information, which makes it more difficult for active managers to outperform. Investors who share this view would generally purchase passive investments. Conversely, others believe markets are not efficient and do not always behave rationally, providing active managers with the opportunity to select undervalued securities and avoid overvalued securities – and increasing their potential to add value above the market and/or provide better risk controls and downside protection. While some studies show that the “average” active manager does not add value, well-selected managers have demonstrated the ability to add value and/or reduce risk over the long term.

One approach to constructing a core-satellite portfolio is to use passive investments for efficient markets and active investments for less efficient markets. Many traditional asset classes, such as the U.S. equity market, are considered to be very efficient, making it difficult for active managers to outperform. Non-traditional asset classes, such as Emerging Markets equities or high yield bonds, are often considered less efficient. Many of these asset classes may be more difficult to access, can be less liquid, and are not covered as broadly by research analysts, which can enable active managers greater potential to add value.

The most critical step

Determining the appropriate asset allocation (mix of stocks, bonds and other asset classes) is the most important step when building your portfolio. Whether you use a passive strategy, an active strategy, or a combination of both, the addition of one, or more, satellite strategies to a core portfolio can potentially enhance returns, reduce risk and provide a better return/risk profile for your portfolio.

Simple to use All-in-One Core Portfolio ETFs

BMO ETFs offers a range of all-in-one Asset Allocation ETFs you can select as your core investment portfolio, based on your risk tolerance and time horizon. These ETFs are a one-ticket solution where the asset allocation is determined by professional managers, and where the asset allocation is automatically rebalanced for you on a regular basis to ensure you are on track to meeting your goals. They are low cost, and there is no double dipping on the fees (all-in MER of 0.20%* includes the cost of the underlying ETFs).  Examples include our BMO Balanced ETF (ZBAL), or BMO Growth ETF (ZGRO) and BMO All-Equity ETF (ZEQT).  Click Here to learn more.

Erin Allen has been a part of the BMO ETFs team driving growth since the beginning, joining BMO Global Asset Management in 2010 and working her way through a variety of roles gaining experience in both sales and product development. For the past 5+ years, Ms. Allen has been working closely with capital markets desks, index providers, and portfolio managers to bring new ETFs to market. More recently, she is committed to helping empower investors to feel confident in their investment choices through ETF education. Ms. Allen hosts the weekly ETF Market Insights broadcast, delivering ETF education to DIY investors in a clear and concise manner. She has an honors degree from Laurier University and a CIM designation.

* Management Expense Ratios (MERs) are the audited MERs as of the fund’s fiscal year end or an estimate if the fund is less than one year old since the audited MER of the ETF has not gone through a financial reporting period.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

Commissions, management fees and expenses (if applicable) may be associated with investments in mutual funds and exchange traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Please read the fund facts, ETF Facts or prospectus of the relevant mutual fund or ETF before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in BMO Mutual Funds or BMO ETFs, please see the specific risks set out in the prospectus of the relevant mutual fund or ETF .  BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

S&P®, S&P/TSX Capped Composite®, S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “TSX” is a trademark of TSX Inc. These trademarks have been licensed for use by S&P Dow Jones Indices LLC and sublicensed to BMO Asset Management Inc. in connection with the above mentioned BMO ETFs. These BMO ETFs are not sponsored, endorsed, sold or promoted by S&P Dow Jones LLC, S&P, TSX, or their respective affiliates and S&P Dow Jones Indices LLC, S&P, TSX and their affiliates make no representation regarding the advisability of trading or investing in such BMO ETF(s).The BMO ETFs or securities referred to herein are not sponsored, endorsed or promoted by MSCI Inc. (“MSCI”), and MSCI bears no liability with respect to any such BMO ETFs or securities or any index on which such BMO ETFs or securities are based. The prospectus of the BMO ETFs contains a more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related BMO ETFs.

BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and  portfolio manager and separate legal entity from Bank of Montreal.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.

Despite inflation, Canadians still prioritizing retirement and contributing to RRSPs and TFSAs

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While the vast majority (87%) of Canadians are worried about rising costs from Inflation, Questrade Leger’s 2023 RRSP Omni report finds that 73% of RRSP owners plan to contribute again this year, and 79% of TFSA holders plan to recontribute. That’s despite the fact 69% fret that inflation will impact their RRSP’s value and 64% worry about the impact on their TFSA’s value.

“The number of Canadians who are saving for retirement remains consistent with previous years,” the report says. “Among those who are saving for retirement, about three-in-five (58%) say they are very worried compared to Canadians who are not saving for retirement. Women are also more likely to be very worried about the costs associated with rising inflation.”

Seven in ten respondents who have RRSPs told the panel they are concerned about the rising costs associated with inflation and a possible recession: 25% indicate that they are very concerned. “A similar trend is observed among those who hold TFSAs for retirement purposes, with almost two-thirds (64%) indicating that they are concerned.”

 

Worries about inflation and recession “raise questions about the ability of Canadians to control their financial future, especially when it comes to retirement,” the report says. These concerns are most acute for those with an annual income of less than $100,000: “These Canadians are also more likely to agree that they will have to draw upon their savings or investments to cover their expenses in the coming year.”

Less than half are confident about their financial future

Less than half feel they are confident when it comes to their financial future: “Only those making over $60K have confidence in their own financial future despite the current state of the economy.”

The survey seems to imply that Canadians value TFSAs a bit more than RRSPs, based on willingness to max out contribution room of each vehicle. Of course, annual TFSA room only this year moved up to $6500 per person per year, less than a quarter of the maximum RRSP room of $30,780 in 2023, for those with maximum earned income.

Only 29% of RRSP holders plan to maximize their RRSP contribution room in 2023, compared to almost half (46%) who plan to max out their TFSAs. The most enthusiastic TFSA contributors are males and those aged 55 or older.

Given economy, most worry about rising cost of food and everyday items  

Day-to-day living expenses continue to be a concern in the face of rising inflation: 79% worry about rising food prices and 77% rising everyday items. The third major concern (for 45%) is inflation’s impact on savings/investments and fourth (at 30%) is rising mortgage costs. Depending on annual incomes, worry over inflation can centre either on investments or on debt:  those in the middle to upper income brackets ($60K or more) “are much more likely to find the impact on savings / investments and increasing mortgage concerns more worrisome than compared to those who make less than $60K.”

Ability to save impacted by inflation

Three in four (74%) agree that inflation has impacted their ability to save, at least somewhat. And half (47%) have had to draw upon their savings or investments to cover expenses due to rising costs, especially those under 55 and those who are not currently saving for retirement. Many Canadians also agree they will have to draw upon their savings/investments to cover expenses in the coming year (43%). Continue Reading…

TFSA contribution is Job One in 2023 and other inflation-related tax changes to consider

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A belated Happy New Year to readers. Today I wanted to start with a reminder that your first Financial New Year’s Resolution should always be to top up your TFSA contribution to your TFSA (Tax-free savings account), which because of inflation has been bumped to $6,500 for 2023. I’ll also link to two useful columns by a financial blogger and prominent media tax expert.

A must read is Jamie Golombek’s article in Saturday’s Financial Post (Dec. 31/2022), titled 11 tax changes and new rules that will affect your finances in 2023. Golombek is of course the managing director, Tax & Estate planning for CIBC Private Wealth.

He doesn’t lead with the TFSA but does note that the cumulative TFSA limit is now $88,000 for someone who has never contributed to a TFSA. On Twitter there is a community of Canadian financial bloggers who often reveal their personal TFSA portfolios, which tend to be mostly high-yielding Canadian dividend-paying stocks. In some cases, their TFSA portfolios are spinning out as much as $1,000 a month in tax-free income.

On a personal note, my own TFSA was doing nicely until 2022, when it got dragged down a bit by US tech stocks and a token amount of cryptocurrency. Seeing as I turn 70 this year, I’ll be a lot more cautious going forward. I’ll let the existing stock positions run and hopefully recover but my new contribution yesterday was entirely in a 5-year GIC, even though I could find none paying more than 4.31% at RBC Direct, where our TFSAs are housed. (I’d been under the illusion they would by now be paying 5%. I believe it’s still possible to get 5% at independents like Oaken and EQ Bank.)

At my stage of life, TFSA space is too valuable to squander on speculative stocks, IPOs, SPACs or crypto currencies. Yes, if you knew for sure such flyers would yield a quick double or triple, it would be a nice play to “sell half on the double,” but it’s better to place such speculations in non-registered accounts, where you can at least offset capital gains with tax-loss selling. So for me and I’d suggest others in the Retirement Risk Zone, it’s interest income and Canadian dividend income in a TFSA and nothing else.

Inflation and Tax Brackets

Back to Golombek and inflation. Golombek notes that in November 2022, the Canada Revenue Agency said the the inflation rate for indexing 2023 tax brackets and amounts would be 6.3%:

“The new federal brackets are: zero to $53,359 (15 per cent); more than $53,359 to $106,717 (20.5 per cent); more than $106,717 to $165,430 (26 per cent); more than $165,430 to $235,675 (29 per cent); and anything above that is taxed at 33 per cent.”

Basic Personal Amount

The Basic Personal Amount (BPA) — which is the ‘tax-free’ zone that can be earned free of any federal tax — rises to $15,000 in 2023, as legislated in late 2019. Note Golombek’s caveat that higher-income earners may not get the full, increased BPA but will still get the “old” BPA, indexed to inflation, of $13,521 for 2023.

RRSP limit: The RRSP dollar limit for 2023 is $30,790, up from $29,210 in 2022.

OAS: Golombek notes that the Old Age Security threshold for 2023 is $86,912, beyond which it begins to get clawed back.

First Home Savings Accounts (FHSA). Golombek says legislation to create the new tax-free FHSA was recently passed, and it could be launched as soon as April 1, 2023. This new registered plan lets first-time homebuyers save $40,000 towards th purchase of a first home in Canada: contributions are tax deductible, like an RRSP. And it can be used in conjunction with the older Home Buyers’ Plan.

3 investing headlines to ignore this year

Meanwhile in the blogosphere, I enjoyed Robb Engen’s piece at Boomer & Echo, which ran on January 1st: 3 Investing Headlines To Ignore This Year. Continue Reading…

10 Tips to help save Money on Healthcare Expenses

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From taking advantage of tax deductions to keeping a healthy sleep schedule, here are the 10 answers to the question, “What are some tips to help save money on personal healthcare expenses?”

  • Take Advantage of Tax Deductions
  • Keep a Healthy Diet
  • Opt For Services In Your Network 
  • Save With Pre-Tax Accounts
  • Ask Questions and Advocate for Yourself
  • Get Robust Health Insurance
  • Compare Quotes to Get the Best Deals
  • Buy Generic Drugs
  • Use Free Screenings
  • Just Sleep It Off

Take Advantage of Tax Deductions

Make sure you are taking advantage of the tax deductions you are eligible for when paying for your healthcare. These include deducting the costs of your health insurance premiums, medical expenses, and dependent care expenses. You can also deduct the costs of travel for medical care and the cost of child care for medical appointments. 

While the healthcare costs are high, you can save money by simply keeping track of the expenses you are already paying and ensuring you itemize your deductions to get the most out of them. –– Matthew Ramirez, CEO, Rephrasely

Keep a Healthy Diet 

Invest in quality nutrition now to save money on health care later. Many people give in to the convenience and comfort of fast food, but it really shouldn’t be a regular part of anyone’s life. Eating whole, colorful foods is the best way to keep your body healthy, and yes: it can be quite expensive to eat healthily.

While organic produce, free-range eggs and meats with no added hormones may bump up your grocery bill, it’s far less expensive than managing a chronic condition like diabetes or cardiovascular disease. My best advice is to take care of your body now so you can save money on health care expenses later. — Jae Pak, MD, Jae Pak MD Medical

Opt for Services in your Network 

Finding strategies to pay for medical expenses without going bankrupt is a daily effort for persons with chronic diseases and long-term treatment demands. Fortunately, the news is not all negative. 

The clever consumer may find big discounts in many typical healthcare circumstances if they know where to search. It is tempting to visit the first care facility with an open appointment when you’re feeling under the weather. However, the costs of various provider alternatives vary. 

Do you need to go to an emergency room? You may see physicians who are in-network or out-of-network depending on your health insurance. Because in-network providers have an agreement with your health plan, you pay less to see them. This translates into reduced prices. — Isaac Robertson, Fitness Trainer & Co-Founder, Total Shape

Save with Pre-Tax Accounts 

Using Health Savings Accounts (HSAs) or Flexible Savings Accounts (FSAs) is a great way to save money on healthcare expenses. You can put money into an HSA or FSA each year and use it to pay for qualified medical expenses, including doctor visits, prescription, and over-the-counter drugs, home medical supplies, and even mental health services. 

These accounts can cover a variety of personal daily products related to first aid, feminine care, family planning, skincare (such as acne treatment and sunscreen), respiratory health, and pain relief. 

The money you put into an HSA or FSA is not taxed, and any money you spend on qualified medical expenses is not taxed either. You can use the money in your HSA or FSA to pay for medical expenses, even if a health plan does not cover you. — Michaela Ramirez, MD, Founder, O My Gulay

Ask Questions and Advocate for Yourself

Sometimes being in a healthcare setting can be overwhelming, especially if you aren’t feeling your best. However, it’s important not to get railroaded into agreeing to things that don’t serve you in the long run. 

For example, a medical professional may suggest a test, treatment, or procedure which you’re uncertain you can afford. Don’t be afraid to ask questions. Why is this necessary? Is there a cheaper alternative? 

Make sure you’re informed about all your options before agreeing to anything. There can be pressure to make snap decisions, but this is your health, nobody else’s. 

“Can I just take a moment to consider this?” is a great phrase to use in order to gain some breathing space. If a medication is recommended, it’s always worth asking whether there is a generic equivalent. These are often cheaper than brand-name products and just as effective. A curious, considered, and calm approach should help you make the best choices. — Alex Mastin, CEO & Founder, Home Grounds

Get Robust Health Insurance

One of the best ways to save money on personal healthcare expenses is to have a robust health insurance plan. Many people think health insurance plans with low premiums are workable. But that’s not true. 

Health insurance plans with low premiums come with other liabilities. They have higher deductibles, and you may get a higher co-pay. Also, low-premium plans don’t cover many things. These plans don’t include particular procedures or tests. 

As a result, your medical expenses can get out of control. Sometimes health plans offer discounts and valuable services. They deliver services that give a boost to your health. You can get all the details from the health insurance company or your health insurance card. — Sean Harris, Managing Editor, FamilyDestinationsGuide

Compare Quotes to get the Best Deals

One great tip that has increased my savings on personal healthcare expenses is to compare the costs of service providers. 

When I was shopping around for a primary care physician, I called various medical offices and asked about their appointment fees. Even though each office listed different pricing, one stood out because it was lower than the other options. 

By taking the time to shop around, I could save money in the long run. Compare-and-save strategies can be used not only with doctors but also with many other areas of healthcare, such as medications and lab tests.  Continue Reading…

Are your Online Shopping habits compromising your Financial Security?

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Image: Unsplash

By Beau Peters

Special to the Financial Independence Hub

Incredible advancements in technology have made it so we don’t ever need to leave the house to buy the stuff we like. You can buy anything from food to video games from the comfort of your home and have it delivered the next day. However, while convenient, the rise of online shopping has also made it easier than ever to overspend and put our information in the hands of hackers and cybercriminals. It is important to know your limits and shop responsibility.

Today, we will talk a bit about the dangers of shopping online and what you can do to protect your data and your pocketbook.

Awareness of the Risks

If you watch the news, then you have likely heard reporters talk about the criminals that use online spaces to steal the money of consumers. The reality is that if you do anything online, then hackers can get to it. According to Help Net Security, 62% of consumers believe that online shopping fraud is a real threat, yet, most people continue to use e-commerce sites for their needs. The reason is likely because they don’t really understand how bad stolen data can be.

The fact is that if a hacker is able to get ahold of your credit card or debit card numbers, they can steal and retain that information and use it to take out fraudulent loans on your behalf. Even the personal data that you put online, like email addresses and birthdays, can be sold to other hackers for profit.

There are several threats to be aware of, including unencrypted websites. When you shop on any site, you must look at the web address and ensure that it says HTTPS before the website name. The “S” in this case stands for secure, and it means that the website automatically encrypts your payment information so it cannot be read by hackers even if it is stolen.

You must also be cautious when you are shopping on your phone, especially when you are out in public. Hackers can set up fake Wi-Fi networks that can look like the real deal, but when you connect, you are really connecting directly to the hacker. From there, they can steal your data and log into your bank accounts. This is why it is so important to be vigilant about online security wherever you go.

Before you buy anything at a website that you have never shopped at before, take a look around the site for red flags. For instance, if the website does not have a returns policy that you can easily find and review, then it may mean that it is a scam. Also, be aware of spelling mistakes. It is human nature to make a spelling error here and there, but if the website is littered with errors, then it may mean that it was put up in a hurry and the site is not legitimate.

Be Smart about Payment Info and Documentation

It is essential that you are aware of how you use and store your payment information as you do your online shopping. Many companies give you the option to store your payment information on their website for the sake of convenience. But you should know that if that store is not secure, then your financial security could be in jeopardy. So, if you must keep your card information saved at that company, then ensure that they are encrypted, and if you are unsure, then shop elsewhere.

If you do decide to keep your payment information on a website, you must make it a habit to routinely check your debit and credit card statements. If that website is hacked and your card information is stolen, then hackers can continue to use your payment info to make fraudulent purchases. By checking your statements, you can spot false charges right away and file a dispute with the bank.

Also, consider how you store and access those statements. If you view them online at your banking or credit card website, then ensure that you protect your data by adding a complicated password complete with letters, numbers, and special characters. Make your password hard to guess and change it regularly.

Some people choose to download their statements and save them to their computers for future review. If you do the same, then you still need to be cautious because hackers can also get into your device and read the information you have on those statements. Once the documents are on your computer, consider redacting your personal information off of those PDF files, so it cannot be read by others. Doing so will black out your name, address, account number, and other sensitive information so you can keep your files without fear of theft.

Be Smart about your Money

The other potential downside to online shopping is that the instant access makes it too easy to give into temptation and buy more than you need. It can only take a few seconds to find that you have spent the money that you need to pay the bills. That is why it is always a smart idea to create a budget so you can ensure that you stay within your limits.

It is important to consider your wants and needs when budgeting. You may want to buy that new sweater or television set, but are there expenses that you absolutely need to pay before you can splurge? Sit down and write down all of your monthly expenses, including childcare, food costs, utilities, and rent. Compare those necessary costs with the money you have coming in each month. If there is anything left over, then you can dedicate some of that to your online shopping desires.

Part of financial security is not letting your debt get so out of hand that you dig yourself into a deeper hole. If you have debt on credit cards, then it is important that you focus on eliminating it before you spend more unnecessary money. You can do that by adding your credit card payments into your budget, paying more than the minimum each month, and if you have more than one card, then pay off those with the highest interest first. Then, once you pay off your debt, reward yourself with something nice.

As you can see, it is important that you are smart about how you shop online. By shopping with a plan, you can avoid scams and improve your financial situation so you can have a brighter future.

Beau Peters is a creative professional with a lifetime of experience in service and care. As a manager, he’s learned a slew of tricks of the trade that he enjoys sharing with others who have the same passion and dedication that he brings to his work. When he is not writing, he enjoys reading and trying new things.