Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

Where are you parking your cash these days? GICs vs. High-interest savings accounts

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Cash is king during times of economic trouble. Working families need emergency savings to pay the bills in case of job loss or a reduction in wages. Retirees or near retirees need a cash cushion to avoid selling stocks at a loss. But should you park your cash in a high interest savings account or a GIC?

For a short time, not too long ago, we lived in the golden age of high interest savings. The competition was lively, as online banks and credit unions pushed interest rates well above 2 per cent (LBC Digital briefly paid 3.3 per cent).

Rising interest rates on savings deposits made GICs look less attractive. GICs paid the same rates or lower, yet savers had to lock-in their deposits for 1-5 years. Where did the liquidity premium go?

High Interest Savings Account rates

The situation quickly changed when the coronavirus pandemic forced central banks to take emergency action and cut interest rates. The Bank of Canada lowered its key interest rates by 50 basis points on two occasions. The ripple effect caused high interest savings account rates to plummet.

LBC Digital had already lowered its rate to 2.8 per cent – now it sits at a still respectable 2.25 per cent. Wealthsimple Cash had arguably the worst-timed launch when it came out with a 2.4 per cent interest rate for its chequing/savings account hybrid. That rate was quickly dropped to 1.9 per cent, and then lowered again to 1.4 per cent.

EQ Bank lowered the interest rate on its Savings Plus account to 2 per cent, while motusbank dropped its rate to 1.75 per cent. What a difference a month makes!

Here are the top high interest savings account rates today (March 25, 2020):

Bank Interest rate
LBC Digital 2.25%
Motive Financial 2.20%
Implicity Financial 2.10%
Outlook Financial 2.10%
EQ Bank 2.00%
Oaken Financial 2.00%

 

As always, savers need to look beyond the big banks to maximize the interest earned on their deposits. If inflation averages 2 per cent, then you need to earn at least 2 per cent on your savings to maintain purchasing power. Even still, at best you’re treading water.

Despite the recent drop in rates, a high interest savings account is still the best place to park your emergency savings. You never know when you’ll need to access cash for an unexpected bill, or to pay for your living expenses during a period of unemployment.

A high interest savings account is also a must-have for retirees and near-retirees to stash one year’s worth of spending – the first bucket in the three-bucket approach to retirement income planning.

What this current rate crisis has highlighted is the fact that high interest savings account rates are not guaranteed. Those who eschewed GICs to chase higher yielding savings accounts now find their savings account paying 0.50 – 1.00 per cent less than it was a month ago. Not ideal.

GIC rates

One of my clients recently alerted me to an email sent by Oaken Financial advertising an increase in GIC rates. Its one-year GIC now pays 2.5 per cent, which is a full 25 basis points more than the top-paying high interest savings account. Oaken’s five-year GIC now pays 2.95 per cent interest. It looks like the liquidity premium is back.

You’ll easily find one-year GIC rates paying at or above the best high interest savings account rate.

Bank Interest rate
Oaken Financial 2.50%
Canadian Tire Bank 2.50%
EQ Bank 2.40%
Wealth One Bank of Canada 2.40%
Peoples Trust 2.30%

 

Longer-term rates vary widely so be sure to shop around for promotions. Here are the top five-year GIC rates as of this writing:

Bank Interest rate
Oaken Financial 2.95%
Wealth One Bank of Canada 2.60%
Canadian Tire Bank 2.55%
EQ Bank 2.55%
Peoples Trust 2.55%

 

Readers should know that GICs are typically non-redeemable, so you should be absolutely certain that you won’t need the money when you lock it in for 1-5 years.

That means GICs are ill-suited for an emergency fund, but ideal for a goal with a specific time period.

Using High Interest Savings Accounts and GICs for Retirement Income

For retirees and near-retirees, GICs are best-suited for “bucket two” in your three-bucket approach to retirement income. Bucket two is where you build a GIC ladder with three to five years of annual retirement spending. Continue Reading…

Aman Raina’s 5-year Robo advisor review — and how Robos are holding up in the bear market

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By Aman Raina, SageInvestors.ca

Special to the Financial Independence Hub

NOTE: This review was initially undertaken using data compiled as of January 30, 2020, which marked the 5-year anniversary during which the portfolio was active but prior to the severe market turbulence that occurred in February and March 2020.  As it became apparent that the market pullback was becoming an epic meltdown, additional data was compiled and included into the review.

Five years ago I embarked on a personal experiment. I was having a hard time getting any insights on the effectiveness of a new investment services that was shaking the ground at the time in 2015.

Known or labeled as Robo Advisors, these new wealth management companies offered services to invest on behalf of others using an online platform and a combination of algorithms and computer coding to buy and sell specific investments and manage portfolios. Five years ago these firms were just stepping into the investing consciousness, but since then they have mushroomed and even traditional investment companies are now offering some flavor of online investment management services.

It all seemed quite appealing; however, there was one thing that many marketing materials, blogs, and mainstream media were avoiding … do these types of services make money for investors? Is this the type of service that would successfully bring more people, who naturally feel intimidated and frustrated by the whole investing concept into the investing domain?

Since no robo advisor company back then was interested in disclosing their performance (they still avoid it) other than citing research that their low cost/passive oriented strategy is superior, I decided five years ago to try an experiment to get some more insights that did not involve boilerplate marketing speak. I set up an account with one of the “large” Robo Adviser firms and invested $5000 of my own money into it.

My goal was to go through the process and blog about my experience using the service, how the ROBO went about making decisions and how it managed my portfolio, and more importantly, the results. I’ve always said that we need a good five years to really get a handle on how effective these services are compared to traditional wealth management services. Well, I just crossed the five-year mark of my ROBO journey, so let’s check back in and take a look at how it’s been doing. I’ve also said that I would reserve my opinions about this service until we reached that five-year threshold. Well here we are and I’m ready to unload my takes.

 

2019 was an epic year for stocks. US major stock indexes were up just over 30 per cent on the year. Fantastic returns. Hopefully my ROBO got a good piece of that action.

Performance

Overall, my ROBO portfolio posted a solid year. The portfolio was up 11.6 per cent year over year, a nice rebound from the previous year where it lost 2.1 per cent. Over the 5 years, the portfolio generated positive returns in three of the 5 years, and posted double-digit returns in those three years. The portfolio increased by $707, of which $162 came from dividend income while the remaining $545 came from capital gains. Over the year period, the ROBO portfolio increased from my initial $5000 to $6817, a cumulative return of 36 per cent. Of the $1817 increase, 1/3 was from dividends while the remainders was from capital gains. The portfolio continued to benefit from higher concentration of US and Canadian equities, which again hit it out of the park the past year.

ROBO Annual Return Chart.jpg
ROBO Cap Gain vs Dividend Chart.jpg

Below is the breakdown of the portfolio. Five years ago when I set up the account I answered a series of questions about my financial literacy and risk tolerance. ROBO took my responses and crafted a portfolio that it felt was compatible with my profile. Continue Reading…

My FP Down to Business podcast on the Crash of 2020 and how to deal with it

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The Financial Post has just published a podcast about the market impact of coronavirus, via a conversation between me and FP transportation reporter Emily Jackson, host of the weekly podcast Down to Business. You can find the full 19-minute interview by clicking the highlighted text: How Coronavirus market chaos compares to 2008. 

While I have been posting almost daily commentaries on the crisis right here on the Hub from various experts, thus far I have refrained from comment myself, but the podcast pretty much covers my views. One thing that came out of the interview was that there may be big generational differences in how this market crash is viewed.

For baby boomers who are retired or thought they were close to it (read “me!”) this crash has been a traumatic experience, especially for those who didn’t pay much attention to risk management and appropriate asset allocation. At our age (I’ll be 67 in a few weeks), we presumably have finished accumulating our nest egg and our time horizon to recoup any losses is shrunken: young people are in quite a different situation: they have less money to lose and have several decades to get it back.

Worried retirees should be at least 50% in fixed income by now

Fortunately, we have been quite conservative: my own advisor has long counselled being somewhere between 50 and 60% fixed income and — having been reminded of the downside risk of the market yet again — I have been selling a few winners where we can find them with the goal of getting our total cash and fixed income to about two thirds of our total portfolio.

We took some profits as the 11-year bull market raged, although of course hardly enough to dodge the storm entirely.  As with most investors, Covid-19 was a “Black swan” that seemingly came out of the blue. I guess I was lulled into believing that the US president would keep the markets aloft at least until he was re-elected, by leaning on the Federal Reserve chairman and various other levers he possesses. Fooled us again, Donald!

Some readers and at least one advisor I correspond with probably think 67% fixed income is too conservative, but that’s right in line with the conservative rule of thumb that fixed income should equal your age. That leaves about a third in (mostly) non-registered stocks, although we also hold US dividend paying stocks in our RRSPs, along with fixed income (bond ETFs and laddered strips of GICs). Our selling inside our RRSP has been more along the lines of selling half of big winners and “playing with the house’s money,” a phrase our daughter has happily adopted too.

Emily Jackson, host of Down to Business; BusinessFinancialPost.com

On the other hand, as I remarked to Emily, it’s much less of a disaster for younger people: in fact, I’d argue it’s almost good news, financially speaking (not of course from a health perspective). Finally, younger investors have an opportunity to buy stocks and equity ETFs at reasonable prices, and at the same time as interest rates fall, they are getting a break — or soon will — on variable-rate mortgages.

Certainly if I were 20 years younger I’d be itching to buy at current prices, although even then I’d keep some powder dry just in case the bargains become even more tempting.

How bad could this get? In yesterday’s FP, David Rosenberg frankly raised the spectre of a depression and total losses in the Canadian market of 50% or more. See It’s time for investors to start saying the D-word — this economic damage could be double 2008.

Too late to ‘revaluate’ your risk tolerance?

A blog the Hub republished on the weekend from Michael James on Money suggested that now is not the time to reassess your risk tolerance. See It’s too late to ‘revaluate’ your risk tolerance. That blog generated a fair bit of discussion on Twitter. Again, this could fall along generational lines. If you believe markets are only half way down and you want some cash to deploy to scoop up bargains at the bottom, then you can sell down some non-registered winners and losers, ideally in equal proportions to make it net tax neutral. Massive up days like Tuesday are an opportunity to do that. Continue Reading…

Advice matters: Here’s why

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By Bernard Letendre

Special to the Financial Independence Hub

The investments landscape has witnessed seismic changes in North America and around the globe in recent years. Although the vast majority of customers are either satisfied or extremely satisfied with the services they receive from their advisor — based on The Investment Funds Institute of Canada and Pollara Strategic Insights 2019 Canadian investor survey –one narrative that has been gathering a lot of attention focuses narrowly on fees and goes as far as questioning the value of advice. Like all generalizations, this narrative oversimplifies things and can create misleading perceptions.

If you’re a seasoned investor, you know that picking individual securities to create a desired return isn’t a simple task. Investing to achieve a meaningful goal is even harder: it involves developing a good plan and focusing on outcomes rather than fees and performance alone. And that’s hard work.

That’s why I believe in the value of advice. Studies like the one conducted by CIRANO and the University of Montreal have shown that financial advice results in better outcomes: pure and simple. In fact, findings revealed that investors who worked with an advisor over a 15-year period accumulated 3.9 times more assets than those who invested on their own during the same period. Another interesting finding revealed that the difference in outcomes wasn’t mostly due to investment performance (Alpha) but to other factors such as discipline and increased savings rate associated with the advice received by investors: grouped under the concept of Gamma by the study’s authors.

One explanation for those better outcomes could be that in creating a financial plan, an advisor will ask their clients important questions that DIY investors may not think about: or wish to ask themselves. Secondly, once a plan is put in place, an advisor can play a unique role in holding clients accountable towards their own goals, which may result in better financial outcomes compared to people who rely on self-discipline to keep themselves in check.

When it comes to navigating the big moments in life, like passing down a business to the next generation, recognizing early signs of mental health issues that come with age, or handling the death of a spouse, the complexity of such precarious situations often requires a human touch. Investors need someone with the expertise, emotional intelligence and compassion who goes above and beyond to help them every step of the way. Advisors do that.

Advisors focus on more than just Asset Allocation

As is clear by now, advisors focus on more than just asset allocation to help clients achieve their goals. They’re able to support them with a more holistic approach, which could include advice around tax planning, estate planning, insurance planning and more. This is why investors who benefit from the support of an advisor often achieve better outcomes than if they were to try and do it themselves. Continue Reading…

Retired Money: The trouble with playing with FIRE

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My latest MoneySense Retired Money column looks at the trouble with playing with FIRE. Click on the highlighted headline to retrieve the full column: Is Early Retirement a realistic goal for most people?

FIRE is of course an acronym for Financial Independence Retire Early. It turns out that Canadian financial bloggers are a tad more cynical about the term than their American counterparts, some of whom make a very good living evangelizing FIRE through blogs, books and public speaking.

The Hub has periodically republished some of these FIRE critiques from regular contributors Mark Seed, Michael James, Dale Roberts, Robb Engen and a few others, including one prominent American blogger, Fritz Gilbert (of Retirement Manifesto).

No one objects to the FI part of the acronym: Financial Independence. We’re just not so enthusiastic about the RE part: Retire Early. For many FIRE evangelists, “Retire” is hardly an accurate description of what they are doing. If by Retire, they mean the classic full-stop retirement that involves endless rounds of golf and daytime television, then practically no successful FIRE blogger is actually doing this in their 30s, even if through frugal saving and shrewd investing they have generated enough dividend income to actually do nothing if they so chose.

What the FIRE crowd really is doing is shifting from salaried employment or wage slavery to self-employment and entrepreneurship. Most of them launch a FIRE blog that accepts advertising, and publish or self-publish books meant to generate revenue, and/or launch speaking careers with paid gigs that tell everyone else how they “retired” so early in life.

How about FIE or FIWOOT or Findependence?

Some of us don’t consider such a lifestyle to be truly retired in the classic sense of the word. Continue Reading…