Debt & Frugality

As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”

Navigating the Student Loan Dilemma: Unlocking Financial Independence with RESPs

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By Andrew Lo, President & CEO of Embark Student Corp.

(Sponsored Post)

The pursuit of higher education is a cornerstone of personal and professional growth for many young Canadians. However, this pursuit often comes at a hefty price, with student loans being a significant barrier to financial independence. The burden of student debt can haunt graduates for years, affecting their ability to save, invest, and achieve financial stability. But there’s good news: opening a Registered Educations Savings Plan (RESP) can lighten the burden of student loans and help you help your children start their adult life debt-free by encouraging regular and early savings, offering valuable government grants, and harnessing the power of compound interest.

The Student Loan Conundrum

Canada is home to a world-class education system, but the cost of pursuing post-secondary education can be daunting. Tuition fees, books, accommodation, and other expenses can quickly add up, leaving many students with no choice but to turn to the most common method of affording post-secondary:  student loans.

What some students don’t fully understand when they use student loans is that they come with interest rates that accrue after graduation. For many young Canadians, this means they start their careers with substantial debt, and few resources to help them repay their loans.

In a recent poll of Canadian students, 79% admitted that the amount of debt taken on to afford post-secondary can be debilitating. This burden of student debt can have a profound impact on a young graduate’s financial journey, with 57% of students surveyed agreeing that graduating with student debt will make it harder for them to become financially independent from their parents.

Unfortunately, the constant struggle to make loan payments often hampers their ability to save and invest in their futures. Despite this, student loans are still the most normalized way of paying for education in Canada.

There’s a better way pay for post-secondary education

One effective way to combat the student loan conundrum is to start saving for education expenses early. It can be hard to think about university and college when a child is a few years old but by beginning to save as soon as possible, families can significantly reduce their need for student loans. You’re probably thinking, “accumulating savings to cover educational costs while managing the rising cost-of-living is no easy feat.” This is where a Registered Education Savings Plan [RESP] comes into play.

RESPs are powerful tools that Canadians can take advantage of to fit the post-secondary bill. They can be opened by the parents or guardians of a child, other family members, or friends, to save over a total period of 35 years. By contributing regularly to an RESP, families can build substantial savings to cover tuition and related expenses. Starting early allows for smaller, manageable contributions over time, reducing the financial stress associated with higher education. The most valuable part of this savings tool is that it opens your savings up to a world of government grants that you can qualify for.

Unlocking “Free Money” with Grants

One of the most compelling features of RESPs is the opportunity to acquire “free money” in the form of grants. The Canadian government provides a generous grant called the Canada Education Savings Grant (CESG) as a reward for saving, allowing you to collect up to $7200.

This grant matches 20% of your contributions on the first $2,500 saved annually. Over the years, if you contribute $2500 annually to an RESP, this works out to an additional 20% being added to your first $36,000 saved without even considering investment gains. By maximizing these grant opportunities, families can alleviate the financial strain of higher education and better prepare for the future. Continue Reading…

Timeless Financial Tip #9: Beware Conflicted Financial Advice

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Lowrie Financial: Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

There’s only so much you and I can do about life’s many surprises. Some things just happen, beyond our control. Fortunately, to make the most of your hard-earned wealth, there is one huge and timeless best practice you can control: You can (and should) avoid seeking unbiased financial advice from biased sales staff.

How do you separate solid investment advice from self-interested promotions in disguise? Here’s a handy shortcut: Are the investments coming from your friendly neighborhood banker? If so, please read the fine print — twice — before buying in. Due to inherently conflicting compensation incentives, most banks’ investment offerings are optimized to feed their profit margin, at your expense.

Compensation Incentives Matter … a Lot

I’ve been covering the conflicted compensation beat for years, like in On Big Banks, Conflicting Compensation and Bad Behaviour, and my message has remained the same, for all the same reasons:

Compensation drives behaviour.

It’s human nature.  It’s true for Canadian bankers and their investment offerings. It’s also true in the U.S. and around the globe.

For example, a 2017 Consumer Federation of America report, “Financial Advisor or Investment Salesperson?” reflects on this very conflict:

“After all, people expect salespeople to look out for their own interests and maximize profits, but advisors are expected to meet a higher standard. … Investors who unknowingly rely on biased salespeople as if they were trusted advisors can suffer real financial harm as a result.”

Let’s imagine I’m a banker, on a bank’s payroll. Pick a bank, any bank. Assume I’m at any level, from teller to VP. Here’s how my compensation package is likely structured:

  1. I can expect to earn more if I promote my employer’s proprietary Widget X products over any comparable, but generic Gadget Y offerings. Sure, Widget X will cost my customers more. But by helping me and my bank thrive, aren’t we both better off?
  2. I and my team may even score special perks if we exceed our Widget X sales quotas. There may be contests, celebrations, or at least positive performance reviews.
  3. In fact, if I don’t sell enough Widget X’s (or if I sell too many Gadget Ys), my performance reviews may suffer. I could lose my job, or at least not rise in the ranks.

Under these sales-oriented conditions, guess which investment product I’m going to recommend as often as I can? As a bank employee, I may well care about my customers. But the bottom line is that they don’t determine how much or little I am paid for my efforts. When my bank’s profits rise or fall, so does my career.

“Our Way or the Highway” Investments

In theory, banks have plenty of flexibility to structure their investment lineup however they please. They could promote the same low-cost, globally diversified, evidence-based mutual funds and ETFs that independent, fee-based, evidence-based financial advisors typically deploy.

Instead, most banks tend to heavily promote their own, proprietary investment products: built, managed, and priced in-house.

In its title alone, a 2023 The Globe and Mail report speaks volumes about this approach: “Pervasive sales culture at Canadian banks designed to push customers into high-fee products.” Its authors observe:

“The commission earned from selling the bank’s products may be five times higher than on a GIC, for example. In this way, the system incentivizes the sale of funds with higher fees, even when a GIC might be a better fit for the client.”

Suitable vs. Fiduciary Advice

At best, your bank’s compensation conundrums may leave you paying more than necessary for sound investments. Worst-case (and from what I’ve seen, more likely), you’ll end up overpaying for the “privilege” of holding investments that fail to fit your short and long-term personal financial goals.

That’s because your banker may be required to offer products that are broadly “suitable” for you, but as I’ve described before, like in What is the Cost of a Financial Advisor?, they don’t have to be the best choice for you.

There’s a big difference between suitable versus fiduciary advice. Your banker’s role as an “adviser” may sound comforting. But make no mistake. Regardless of their title or compensation, they are not in a fully fiduciary relationship with you; they don’t have to always place your highest, best interests ahead of their own. Continue Reading…

A fortified U.S. Treasury ETF for Canadians

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Why Harvest ETFs chose to launch its own U.S. Treasury ETF that offers the security of U.S. Treasury Bonds and high monthly income

Image courtesy Harvest ETFs/Shutterstock

By Ambrose O’Callaghan

(Sponsor Content)

The early part of this decade saw the introduction of significant monetary interventions that rivalled the policies pursued by central banks following the Great Recession of 2007-2009. Policymakers were able to resuscitate markets in the face of a global pandemic. However, the end of the pandemic saw the beginning of a surge in inflation rates not seen in many decades.

Central banks responded to soaring inflation with the most aggressive interest rate tightening policy since the early 2000s. Policymakers are encouraged with the result of inflation coming down, but a highly leveraged consumer base has been squeezed by the upward revision in borrowing rates. Moreover, the higher interest rate environment has spurred stock market volatility. That has led to a shift investors’ focus, with investors focusing on capital preservation instead of capital appreciation.

Harvest ETFs’ investment management team believes that we are at or near the peak of the current interest rate tightening cycle. In this climate, the prudent investment strategy will factor in high interest rates while preparing for the eventual downward move that many experts and analysts are projecting for 2024.

That is why we launched the Harvest Premium Yield Treasury ETF (HPYT:TSX). This portfolio of ETFs provides exposure to longer-dated U.S. Treasury bonds that are secured by the full faith and credit of the U.S. government. HPYT employs up to 100% covered call writing to generate a higher yield and maximize monthly cash flow.

Why should you consider exposure to U.S. Treasuries?

Canadian consumers might not be celebrating the rise of interest rates. However, the switch to higher rates could be good news for Canadian savers. Continue Reading…

Why would anyone own bonds now?

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By Mark Seed, myownadvisor

Special to Financial Independence Hub 

“Many investors have been saying for years that rates can only go up from here, rates can only go one direction, rates will eventually go up. Will they?” – My Own Advisor, September 2021.

My, how things can and do change.

In today’s post, I look back at what I wrote in September 2021 to determine if I still feel that way for our portfolio.

Why would anyone own bonds now?

Why own bonds?

For years, decades, generations in fact, bonds have made sense for a diversified, balanced portfolio.

The main reason is this: bonds can reduce volatility due to their low or negative correlation with stocks. The more that investors learn about diversification, the more likely they are to add bonds to their portfolios.

That said, they don’t always make sense for everyone, all the time, always.

I’ll take a page from someone who was much smarter than I am on this subject:

Ben Graham on 100% stocks and cash

Ben Graham, on stocks, bonds and cash. Source: The Intelligent Investor.

Another key takeaway from this specific chapter of The Intelligent Investor is the 75/25 rule. This implies more conservative investors that don’t meet Ben Graham’s criteria above could consider splitting your portfolio between 75% stocks and 25% bonds. This specific split allows an investor to capture some upside by investing in mostly stocks while also protecting your investments with bonds.

Because stocks offer more potential upside, there is higher risk. Bonds offer more stability, so they come with lower returns than stocks in the long run.

As a DIY investor, this just makes so much sense since I’ve seen this playout in my/our own portfolio when it comes to our 15+ years of DIY investment returns. Our long-term returns exceed the returns I would have had with any balanced 60/40 stock/bond portfolio over the same period.

There is absolutely nothing wrong with a 60/40 balanced portfolio held over decades, of course.

From Russell Investments earlier this year:

“Fixed income has historically been considered the ballast in a portfolio, offering stability and diversification against equity market fluctuations. Over the last 40 years, a balanced portfolio of 60% Canadian equities and 40% Canadian bonds would have returned 8.5% annualized with standard deviation of 9.3%. While a portfolio consisting solely of fixed income would have had lower return with lower risk, a portfolio consisting solely of equities would have had only slightly higher return but substantially higher risk.”

Source: https://russellinvestments.com/ca/blog/the-60-40-portfolio

1/1983 – 12/2022 Canada Equities Canada Bonds Balanced Portfolio 
Annualized Return 8.8% 7.2%  8.5%
Annualized Volatility 14.4% 5.3%  9.3%

Pretty darn good from 60/40.

So, while I continue to believe the main role of bonds in your portfolio is essentially safety – not investment returns – we can see above that bonds when mixed with stocks can be enablers/stabilizers and deliver meaningful returns over long investment periods as well.

As Andrew Hallam, a Millionaire Teacher has so kindly put it over the years, including some moments on this site to me:

… when stocks fall hard, bonds act like parachutes for your portfolio. Bonds might not always rise when the equity markets drop. But broad bond market indexes don’t crash like stocks do …

Is that enough to own bonds in your portfolio?

Maybe.

Here are a few reasons to own bonds, in no particular order: Continue Reading…

Bestselling Beat the Bank celebrates its 5th anniversary

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By Larry Bates

Special to Financial Independence Hub

 

My book, Beat the ​Bank: The Canadian Guide to Simply Successful Investing, was published in September 2018. Five years later it continues to be a best seller among Canadian business/investing books.

The book, along with my website and various articles I’ve written have helped many Canadians learn to invest smarter and build (and maintain) larger retirement nest eggs.

Most Canadians continue to be directed by their banks and other advisors to invest through mutual funds. The vast majority of these mutual funds extract annual​ fees ranging from 1.5% to 2.5% from the value of the investment.

Not only are most Canadians unaware of these fees​, very few investors understand the compound damage these fees do over time. Over a lifetime of investing, these fees can reduce retirement nest eggs by 50% or more.

At the same time, the investment industry, including the same banks that sell high-cost mutual funds, offer very low cost, very efficient investment funds (ETFs) that track market indexes​. (There are many other types of ETFs as well. In my view most investors would be well served by sticking to simple index tracking ETFs).

Smarter investing means getting out of high-cost mutual funds and getting into low-cost investment products and services like index ETFs through do-it-yourself investing, using robo-advisors or finding lower cost traditional advisors.

A lot has happened in the world since​ Beat the ​Bank was published five years ago​. Covid-19 did a lot of damage and led to a great deal of unanticipated change. Inflation spiked dramatically causing central banks to raise interest rates. The full impact of higher rates is yet to be fully felt, especially by homeowners whose mortgages will be renewing in the next year or two.

The good news for investors is that bonds and GICs are finally offering decent returns although we will have to wait and see whether earning 5% interest will outpace inflation. And, despite all the uncertainty and chaos over the past five years, the total return of S&P 500 was a pleasing 70% while the total return of the S&P/TSX was 42%.

What hasn’t changed?

  • Markets continue to be uncertain​ (this never changes!)
  • The majority of “advisors” are under no legal obligation to act in their client’s best interest
  • The majority of “advisors” put millions of Canadians into high-cost mutual funds
  • Many prominent mutual funds have not reduced their fees (Why would they lower fees when investors are unaware of the impact of fees?)
  • Mutual funds continue to underperform simple index ETFs
  • Regulators have made some progress but many critical investor protection measures have yet to be implemented

​The ​Beat the ​Bank project, which was sparked​ 7 years ago by my sister’s experience with mutual funds, has been a ​gratifying experience​. I have received hundreds of messages from readers over the past five years, the great majority with positive feedback.

You can get a sense of reader response by checking out Amazon reviews. I certainly have had negative reaction from some advisors and industry people generally, but most professionals recognize the shortcomings of the industry and want to see investors achieve better outcomes with simpler, more efficient investment products and services.

DIY investing not for everyone

Do-it-yourself investing it’s not for everyone. But if you are considering switching to DIY investing, whether you check out my book​ or other independent ​sources​ (books, blogs, podcasts, etc.), I strongly encourage you to take some time to learn investment basics.

Here are just a few tips from Beat the Bank readers for those considering making the move:

“I have found that ETF equity investing is better for me than buying individual stocks.” Continue Reading…