Victory Lap

Once you achieve Financial Independence, you may choose to leave salaried employment but with decades of vibrant life ahead, it’s too soon to do nothing. The new stage of life between traditional employment and Full Retirement we call Victory Lap, or Victory Lap Retirement (also the title of a new book to be published in August 2016. You can pre-order now at VictoryLapRetirement.com). You may choose to start a business, go back to school or launch an Encore Act or Legacy Career. Perhaps you become a free agent, consultant, freelance writer or to change careers and re-enter the corporate world or government.

Short and Steady wins the race: The case for Short-term bonds

Franklin Templeton/Getty Images

By Adrienne Young, CFA

Portfolio Manager, Director of Credit Research, Franklin Bissett Investment Management

(Sponsor Content)

The phrase “hunt for yield” is by now a well-worn cliché among fixed income investors. Persistently low yields have led many investors to take on additional risk, and some have considered abandoning fixed income altogether.

We think this is a mistake. Even amid fluctuating yields, inflation jitters and pandemic-driven economic upheaval, fixed income can help maintain stability and preserve capital: if you know where to look.

Why Short-term now

For increasing numbers of investors, the short end of the yield curve is the place to be in the current environment. Short-term rates reflect central bank policy actions. Since the pandemic first took hold early in 2020, central banks have taken extraordinary measures to keep liquidity pumping into the marketplace, all without raising rates. Both the Bank of Canada and the U.S. Federal Reserve have so far left their overnight lending rates unchanged and have indicated their intent to continue along this path well into next year, and possibly longer. This predictability has stabilized, or anchored, short-term rates. In contrast, longer maturities have been prone to volatility as the stop-and-go nature of the pandemic has influenced economic reopening, inflation expectations and financial markets.

Franklin Bissett Short Duration Bond Fund is active in short-term maturities, with an average duration of 2-3 years. About 30% of the portfolio is held in federal and provincial bonds; most of the remaining 70% is invested in investment-grade corporate bonds.

Beyond stability, investments need to make money for investors. In this fund, duration and corporate credit are important sources for generating returns. Historically, the fund has provided investors with better returns than the FTSE Canada Short Term Bond Index1  or money market funds, and with comparatively little volatility.

In It for the Duration

Duration is a measure of a bond’s sensitivity to interest rate movements. Imagine the yield curve as a diving board, with the front end of the curve, where short-term rates reside, anchored to the platform. Like a diver’s body weight, pandemic-driven economic forces have placed increasing pressure further out along the curve. The greatest movement ― expressed as volatility ― has been at the long end, especially in 30-year government bonds. Currently, the fund has no exposure to these bonds.

Cushioned by Corporates

Corporate debt provides a cushion against interest rate volatility, and a portfolio that includes carefully selected corporate securities as well as government debt can therefore be a bit more protective. In addition, the spread between corporate and government bonds can provide excess returns.

We believe it is not unreasonable to anticipate stronger Canadian economic and corporate fundamentals in 2021 and 2022, as well as continued demand for bonds from yield-hungry international investors. These conditions support a continuation of the current trend of a slow grind tighter in spreads, with higher-risk (BBB-rated) credits outperforming safer (A and AA-rated) credits.

Credit Quality is Fundamental

In keeping with Franklin Bissett’s active management style, in-house fundamental credit analysis is a key element of our investment process for the fund. Unless we are amply compensated for both credit and liquidity risk (particularly in the growing BBB space), at this stage of the economic cycle we prefer higher-quality credit. We look for strong balance sheets, good management teams, excellent liquidity, clear business strategy and larger, more liquid issues. Continue Reading…

7 ways Investors are capitalizing on Low Interest Rates

 

What is one way you are capitalizing on low-interest rates?

To help you take advantage of low interest rates, we asked seven finance experts and business leaders this question for their best insights. From refinancing existing debts to looking into preferred securities, there are several suggestions that may help you benefit from the low interest rates in the current market. 

Here are seven tips for capitalizing on low-interest rates:   

  • Work with a Finance Broker
  • Get into Commercial Real Estate
  • Refinance Existing Debts
  • Consider FHA Loans
  • Maximize your Return on Investment
  • Set up a Line of Credit
  • Look into Preferred Securities 

Work with a Finance Broker

As a commercial finance broker, we work with our clients to make sure they can take advantage of low interest rates based on a thorough financial analysis of their company. By analyzing your credit and financial health, we act as an advisor to clients for the best financing options available. We also build leases and loans that are competitively priced and intelligently structured for an optimal plan that works for the client and incorporates the best rates possible.  — Carey Wilbur, Charter Capital

Get into Commercial Real Estate 

If you’ve been wondering whether or not to buy commercial real estate, I think it is time to take advantage of the “perfect storm” of low borrowing rates. You’ll save a lot of money on interest payments long term. Now is the perfect moment to acquire real estate for assets as an income-generating resource. So whether you need a warehouse, brick-and-mortar store outlet, or even commercial property to place on the rental market, this might be one of the best times to get in the market. Renting your commercial property will provide you with consistent income, and you might also benefit from tax advantages on depreciation and capital gains, to name a few. — Allan J. Switalski, AVANA Capital

Refinance Existing Debts 

I suggest you consider refinancing your small business loan, mortgage, or student debt, which entails paying off your existing loan by taking out a new one. The new loan will have a reduced interest rate. Ideally, opt for a fixed-rate loan to lock in the lower rate. To qualify, you’ll need strong credit, but if you do, you’ll save a lot of money on interest fees. — Sundip Patel, LendThrive

Consider FHA Loans

FHA Loans are a great low-interest lending option that is offered by the Federal Housing Administration. These loans are intended to increase homeownership access to those who may not have the ideal credit score required by other financing options. This can be a great option for prospective real estate investors. — Than Merrill, FortuneBuilders

Maximize your Return on Investment

When interest rates are low, borrowing is much more convenient. Continue Reading…

Helping entrepreneurs thrive as pandemic-driven small business trends stay for the long haul

Image RBC/iStock

By Don Ludlow, Vice President, Small Business, Strategy & Partnerships and Business Financial Services, RBC

(Sponsor content)

While the COVID-19 pandemic brought significant challenges and uncertainty to small businesses across Canada, it also became a catalyst for many new business practices.

In many ways, it also accelerated the need for small business owners to adapt to other trends and consumer expectations that were steadily on the rise over the last several years.

To help us better understand these trends, RBC recently conducted research to gauge the types of experiences and expectations Canadians have when interacting with small businesses in the coming year as we continue to navigate the ongoing pandemic and journey toward economic recovery.

The survey revealed three important trends that will continue to impact small businesses in the year ahead:

  1. First, we’ll see a growing demand for digital payment and engagement options, whether customers are connecting with small businesses in person or online.

While eCommerce and digital solutions were already on the rise pre-pandemic, they became pandemic necessities as businesses adapted to health and safety measures.

Now, more Canadians are expecting this to be the new way of doing business, with two-thirds (64%) of Canadians saying that partnering with digital platforms to make products and services more accessible will be important post-pandemic, especially among millennials (72%).

Meanwhile, four in five Canadians polled say that they would like to continue to shop online at small businesses, even after the economy is fully reopened, and 72% say that increased social media presence helped them become more aware of what small and local businesses had to offer.

  1. Small businesses that focus on prioritizing employee wellness and overall customer health & safety will be greatly valued by Canadians.

The majority of Canadian respondents in our poll said providing more wellness and mental health benefits and resources to employees will be important going forward (87%).

They also expect heightened hygiene standards to continue post-pandemic (99%) and would like businesses to continue offering flexible curbside pickup and delivery services (78%).

As a result, offering employee benefits, resources and safety protocols that meet these expectations will be critical differentiators for small businesses looking to attract and retain talent and customers.  

  1. We’ll continue to see a rise in socially and locally conscious consumers – especially among millennials and Gen Z.

Supporting small, local, and diversity-focused businesses is here to stay post-pandemic. According to our research, the majority of Canadians (77%) polled plan to spend more at small, local retail stores, restaurants and businesses to support their recovery than they did before the pandemic.

Many respondents also said they are actively seeking out and supporting 2SLGBTQ+* (52%) and BIPOC **(61%)-owned businesses, products and services. These numbers are greater among Millennials and Gen Z, indicating the next generation of consumers will increasingly purchase through a diversity-focused lens.

Being aware of these trends, and adapting business strategies and operational practices to address evolving consumer expectations will be important to the success of small business owners in the next year.

In light of these insights, we have three tips for entrepreneurs to consider as part of their 2022 playbook for success. Continue Reading…

Retired Money: What is the Rule of 30?

ECW Press

My latest MoneySense Retired Money column reviews actuary Fred Vettese’s new retirement book: The Rule of 30 (ECW Press).

You can find the full column by clicking on the highlighted headline here: What’s the Rule of 30? And what does it have to do with Income and Retirement?

Never heard of the Rule of 30? Neither had I, nor Fred himself until he invented it.

In a nutshell, it’s a rule of thumb financial planners can use to guestimate how much young couples starting off on their financial journeys need to save for Retirement. Rather than flatly state something like save 10 or 12 or 15% of your gross (pre tax) income each and every year, the Rule of 30 sees retirement saving as occurring in tandem to Daycare and Mortgage Repayment.

From the get go Vettese suggests young couples allocate 30% of their gross or after-tax income to the three expenses of Retirement saving, Daycare and Mortgage paydown. However, in the early years they may save less in order to handle Daycare and the mortgage. Since daycare expenses usually fall away after a few years (depending on how many children a couple has), once it has gone you can ramp up the mortgage paydown and/or retirement savings. And if – ideally five years before retirement – the home mortgage is paid off, then couples can kick their retirement saving into overdrive by allocating a full 30% or more solely to building their nest egg.

Wealthy Barber style fictional format

In a departure from his previous books — Retirement Income for Life and The Essential Retirement Guide among them — The Rule of 30 uses the tried-and-true quasi-fictional “story” pioneered by David Chilton’s The Wealthy Barber. That road has been ploughed by many subsequent financial authors, including Yours Truly in Findependence Day. 

As Vettese told me in an interview mentioned in the column, he didn’t plan it that way initially. “I did a first chapter using that format and then realized it’s a lot easier to write this way and it’s not as dry: it’s somewhat easier to read and to write. When you get a problem, a character chimes in.”

The main characters are a couple, X and Y, and — conveniently — the neighbour next door who happens to be an actuary with time on his hands.

No doubt it would have worked either way, but Vettese’s dialogs are readable enough and he even works in a minor subplot involving the actuary and his estranged daughter.

One of the people acknowledged by Vettese at the back of the book is fellow actuary and retiree Malcolm Hamilton. In an email, Hamilton said “I have always believed that middle class Canadians who marry, buy a house and have children cannot reasonably expect to save much for retirement until after the age of 45,” Hamilton told me via email, “There just isn’t enough income to cover mortgage payments, the cost of raising children and Canada’s heavy tax burden (with child care expenses and mortgage payments generally non deductible for those with incomes that suggest they need to save.”

All in all, a useful rule of thumb for young couples setting out on family formation, home ownership and ultimately Retirement. Note that Vettese says that once you are within five years of your hoped-for Retirement age, you should strive to be mortgage free. And around 55, you should move from the Rule of 30 to using a Retirement calculator like the free one Vettese developed for Morneau Shepell: PERC, or the Personal Enhanced Retirement Calculator.

PS: I am now Investing Editor at Large for MoneySense

Alert readers who got to the bottom of the column and read the author blurb will see a slight change in my status at MoneySense. In addition to writing the monthly Retired Money column I am now also the Investing Editor at Large for the site, a fact that’s also divulged in my Twitter profile.  I will continue to publish Hub blogs every business day: so much for Retirement!

 

 

 

A look at BMO Asset Allocation ETFs

This article has been sponsored by BMO Canada. All opinions are my own.

I’m on record to say that the vast majority of self-directed investors should simply use a single asset allocation ETF to build their investment portfolios.

What’s not to like about asset allocation ETFs? Investors get a low cost, risk appropriate, globally diversified portfolio in one easy to use product. It’s a fresh take on an old idea – the global balanced mutual fund – updated for the 2020’s using low-cost ETFs.

Investors don’t even have to worry about rebalancing their portfolio when they add or withdraw money, or when markets move up and down. Asset allocation ETFs automatically rebalance themselves regularly to maintain their original target asset mix.

This article looks at BMO’s line-up of asset allocation ETFs, which include a conservative (ZCON: 40/60), balanced (ZBAL: 60/40), growth (ZGRO: 80/20), and balanced ESG (ZESG: 60/40) option.

For a YouTube video about these ETFs, click here.

These BMO asset allocation ETFs are available for self-directed investors to purchase through their online brokerage account. Notably, these ETFs can be traded commission-free through BMO InvestorLine and Wealthsimple Trade.

What’s inside BMO’s Asset Allocation ETFs?

Launched in February 2019, BMO’s core asset allocation ETFs are made up of seven underlying ETFs representing various asset classes and geographic regions.

On the equity side we have:

  • ZCN – BMO S&P/TSX Capped Composite Index ETF
  • ZSP – BMO S&P 500 Index ETF
  • ZEA – BMO MSCI EAFE Index ETF
  • ZEM – BMO MSCI Emerging Markets Index ETF

While on the fixed income side we have:

  • ZAG – BMO Aggregate Bond Index ETF
  • ZGB – BMO Government Bond Index ETF
  • ZMU – BMO Mid-Term US IG Corp Bond Hedged to CAD Index ETF

Altogether these seven ETFs represent nearly 5,000 individual stock and bond holdings from around the world.

In terms of geographic equity allocation, the BMO asset allocation ETFs hold 25% in Canadian stocks, 25% in international stocks, 40% to 41.25% in US stocks, and 8.75% to 10% in emerging market stocks.

BMO reviews their portfolios quarterly and will rebalance any fund that is more or less than 2.5% off from its target weight. In reality, these funds are rebalanced regularly with new cashflows from new investors.

BMO’s Balanced ESG ETF (ZESG) is made up of six underlying ETFs, including:

  • ESGY – BMO MSCI USA ESG Leaders Index ETF
  • ZGB – BMO Government Bond Index ETF
  • ESGA – BMO MSCI Canada ESG Leaders Index ETF
  • ESGE – BMO MSCI EAFE ESG Leaders Index ETF
  • ESGB – BMO ESG Corporate Bond Index ETF
  • ESGF – BMO ESG US Corporate Bond Hedged To CAD Index ETF

The management expense ratio for each of the BMO asset allocation ETFs is 0.20%. There is no duplication of fees or additional charges for the underlying ETFs. Continue Reading…