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.”

3 easy ways to build an Investment Portfolio on the cheap

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I ditched my financial advisor about a decade ago and started investing on my own. I was fed up with paying high fees for underperforming mutual funds. Dividend-paying stocks were growing in popularity so I decided to take the plunge and build my own portfolio of blue-chip companies.

Several years later I realized my folly; it’s hard to pick winning stocks. It’s even more difficult to consistently pick winners and avoid losers over the long term. Overwhelmingly, the academic research showed that passive investing using mutual funds or exchange-traded funds (ETFs) has a much better chance of outperforming active investing that focuses on stock picking and market timing.

I bought into the research, sold my dividend stocks, and set up my new investment portfolio using two low-cost, broadly diversified ETFs.

Today investors have many more choices available to build an investment portfolio on the cheap. I’ll show you three ways to lower your investment costs, diversify your portfolio, and reduce the time you spend worrying about investing.

1). Use a robo-advisor

A traditional financial advisor or wealth manager might cost an investor between 1.5 to 2.5 per cent in management fees each year. Then along came robo-advisors to disrupt the portfolio management model and drive down costs to less than 1 per cent.

A robo-advisor helps you build a portfolio based on your risk tolerance, experience, and time horizon. Once your model portfolio is built all you have to do is make regular contributions and the robo-advisor will allocate your cash into the appropriate investments.

The robo-advisor takes care of rebalancing your money whenever the portfolio drifts away from its original allocation (due to market movements or from your own contributions).

Competition is heating up in the robo-advisor space with the likes of Wealthsimple, Nest Wealth, Justwealth, ModernAdvisor, Questwealth, and WealthBar all vying for your investment dollars. BMO SmartFolio has been around for a while and more recently RBC launched its own robo-platform with RBC InvestEase.

2.) Invest in index funds

An index fund tracks a stock or bond market and aims to deliver market returns minus a very small fee. All of the big banks offer index funds, typically at half the cost (or lower) than their traditional equity or bond mutual funds.

One popular set of index funds is TD’s e-Series funds. These funds can only be purchased online but they offer tremendous savings over their actively managed mutual fund cousins. Investors can find e-funds for Canadian equities, Canadian bonds, as well as U.S. equities and International equities all for fees of about 0.50 per cent or less.

Another solid set of index funds comes from Tangerine’s Investment Funds. These are one-fund solutions that come in five flavours; with the traditional 60 per cent equities, 40 per cent bonds balanced portfolio being its most popular. The expense ratio on Tangerine’s funds comes in at 1.07 per cent: higher than TD’s e-Series funds, but still a bargain compared to the industry average. Continue Reading…

Motley Fool: Best vehicles for an Emergency Fund

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What are the best investment vehicles for holding a safe and highly liquid Emergency Fund? That’s the focus of the third in my latest series of blogs for Motley Fool Canada introducing the basic principles of establishing Financial Independence.

You can find the latest instalment by clicking on the highlighted headline here: One Essential Tip for Achieving Financial Freedom.

In the first two installments of this new series of articles, we looked at two key steps toward Financial Independence: jettisoning debt and, once that is accomplished, applying the resulting surplus to savings and ultimately long-term investments.

As the latest blog argues, you could even argue that an emergency cash cushion should take precedence over both debt elimination and saving/investing.

What should you be looking at in an Emergency Fund? First, you need liquidity: the ability to access the cash at a moment’s notice. Second, you want safety of capital, which really means cash equivalents or fixed income, not equities normally held with a time horizon of more than five years. Third, assuming some sort of fixed income that’s not locked up like a 5-year GIC, you want at least a reasonable rate of interest to be paid on it.

Normally, you shouldn’t regard RRSP investments as an emergency cushion, since you’ll have to pay tax to access the funds. Most people will try to keep relatively high cash balances in their chequing accounts that can serve as a cushion, although typically these accounts pay next to nothing in interest income. One possibility is short-term or redeemable GICs that may pay somewhere between 1 and 2% per annum. Another good place to “park” such funds is a High Interest Savings Account (HISA).

As the name suggests, HISAs pay high amounts of interest, usually more than 2%. According to this source, several pay more than that: as of mid 2019, EQ Bank was paying 2.3%, Motus Bank up to 2.5%, Tangerine was offering a promotional rate of 2.75%, and Motive Financial was paying 2.8%, Wealth One Bank of Canada was paying 2.3% and WealthSimple 2%. Pretty nice returns for liquid cash cushions! Continue Reading…

Retired Money: What to do about falling GIC rates

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PWL Capital’s Ben Felix

My latest MoneySense Retired Money column has just been published. It looks at the reversal the past year in interest rates, which impacts seniors who had started to look forward to at least half-decent GIC rates near 3%. You can find the full piece by clicking on the highlighted headline: Are GICs right for retirees looking for Fixed Income? 

Short of embracing high-yielding dividend paying stocks, the more palatable alternative for conservative retirees might be fixed-income ETFs. The article focuses on a recent video by CFA Charterholder Benjamin Felix, an Ottawa-based portfolio manager for PWL Capital. Felix argues that at a minimum such investors should have a mix of both fixed-income ETFs and GIC ladders.

The latter let you sleep at night because they are invariably “in the green” in investment accounts. But while in the short term fixed-income ETFs can be in the red — just like equity ETFs — Felix makes a compelling argument for the higher potential returns of bond ETFs.

Felix believes that what really matters for investors is total return: “Holding a lower-rate GIC after a rate increase still results in an economic loss.” Bond returns consist of principal, interest payments and reinvested interest, so focusing only on return of principal misses the point. Individual bonds are not ideal for individual investors, as they require extensive research, are relatively expensive and tricky to trade.

Short-term GICs miss out on the term premium

But short-term GICs miss out on the term premium, which is substantial over time. Going back to 1985, Felix says short-term bonds returned 6.51% annualized versus 7.97% for the aggregate bond universe (which includes some short-term bonds).  This shows how much mid- and long-term bonds bring up the overall return. To be clear, this period captures one of the greatest bond markets in history but Felix says it is still reasonable to expect a relationship between riskier longer-term bonds and higher expected bond returns. Risk and return should be related.

GICs are also illiquid, so even if an investor chooses to include GICs in a portfolio, they will generally also include bond ETFs, which – like stock ETFs – can be sold any trading day. Nor do GICs provide exposure to global bonds.

Of course, a nice alternative are those asset allocation ETFs we have often discussed on this site. See for example this excellent overview by CutthecrapInvesting’s Dale Roberts: Which All-in-One, One-Ticket Portfolio is right for you? 

The Felix video can be found at his Common Sense Investing YouTube series here.

 

7 tips for speeding up the day you burn your mortgage

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By Barry White

Special to the Financial Independence Hub

Mortgage payments can be a huge drain on your budget, particularly if it accounts for a significant part of your income. Apart from the interest you will be paying on the principal, mortgage repayments can be a hindrance to your other long-term financial goals. Not only can paying off a home mortgage early help you save thousands of dollars but it will also help you to gain your financial freedom earlier. If you have made up your mind and eager to pay off your mortgage early, here are seven helpful tips you can implement.

1.) Pay extra on your repayment each month

Making extra payments each month is the easiest way to help lower your debt on the property. Whenever you make your monthly mortgage repayment, most lenders allow borrowers to make an extra payment and mark it as “principal only.”  This implies that the extra payment pays down only the principal instead of both the mortgage principal and the loan interest.

Assuming you have a monthly loan repayment amount of $1,346, you can decide to round it up to $1,400. The extra $54 is dedicated as a repayment on the principal. This simple act of extra payment can save you lots of interest charges as well as helping you clear your loan ahead of schedule (since the principal payments will add up faster than you’d think). Therefore, plan to add as much as possible to these payments to help with the principal plus lower the amount of total payments owed. Looking for ways to find extra cash to put on your mortgage? You can use bonuses or apply raises from your job.

2.) Pay more than Monthly, bi-weekly

A bi-weekly mortgage is when you make a payment that equals exactly half of the total monthly repayment every two weeks. This consequently shortens the time to pay off. For instance, if your normal mortgage repayment per month is $1,000, you would instead pay $500 every two weeks. This has almost a similar impact on your budget as one monthly payment. But with the 52 weeks in one year, a bi-weekly payment schedule will bring about a grand total of 13 full monthly payments each year instead of the usual 12. You’ll conveniently be making an extra payment yearly without scrounging around for the extra money.

3.) Make one big extra payment each year

Another great way to repay your mortgage early is to deliberately make an extra payment in a month every year. This helps you settle your mortgage faster, and chances are you wouldn’t miss it.  You can schedule the payment for a month when you hardly have any larger expenses, like during holidays. Of course, this technique requires extra discipline from you since you will need to save that payment. To be on the safe side, you can automatically transfer a little amount every month into a dedicated account for an extra mortgage payment.

4.) Divert “free” money towards your mortgage

Did you receive a tax refund or Christmas bonus from work? Divert that extra money that cannot be accounted for in your budget to your mortgage pay-off fund. Continue Reading…

Could the First-time Home Buyer Incentive be used in Canada’s largest markets?

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

When the federal government announced in March that it would be wading into the shared equity mortgage market in efforts to improve home buyer affordability, it stirred up some controversy.

The program, called the First-Time Home Buyer Incentive (FTHBI), was teased in the budget as a ground-breaking approach to helping buyers get into the market by providing interest-free down payment loans of 5% for resale homes, and up to 10% on brand-new builds.

In exchange for the upfront funds, which are designed to reduce the overall size of the mortgage and monthly payments, the Canada Mortgage and Housing Corporation (CMHC) will take an equity percentage the homes’ value, which must be paid off when either the mortgage matures, or the home is sold.

This paid-back amount fluctuates along with appreciation and depreciation in the market. For example, let’s say the CMHC provides a 5% loan of $25,000 for a home purchase of $500,000. The homeowner sells the home several years later, and its value has increased to $550,000. The homeowner would then need to pay the CMHC back $27,500 to reflect 5% of the increased value of the home.

Critics say FTHBI too restrictive to be effective

Mortgage analysts have called the effectiveness of this equity sharing program into question, as the total amount owed to the government could be significantly more than what was loaned in the first place, especially in a market that experiences rapid price growth.

However, the most contested features of the FTHBI are its mortgage and purchase price restrictions, which critics say render the program useless in markets like Toronto and Vancouver where home buyers arguably need the most help. Continue Reading…