General

Coping with the Costs of Covid-19

Posted By |
 
By Carrie Hunter
Special to the Financial Independence Hub

Our world, as we’ve known it, has changed dramatically over the last few weeks. Likely, forever.

If you have children, and like me live in Alberta, you can now add homeschooling to your c.v. You and your spouse are now living and working in this same space 24/7 practising the soon-to-be-normalized cultural rite of social isolation.

When you do step outside, gratefully breathing in fresh air, looking up as a neighbour passes and takes a step back, yet still cheerfully waving, you’re reminded again of the new normal: social distancing.

Back in your home, you open up your laptop only to be inundated with Covid-19 news headlines, across every possible platform, and overwhelmed by the inconceivable number of people being felled by the novel coronavirus.

The Zombie Apocalypse

Unsurprisingly, global financial markets, reflecting the fear, anxiety and uncertainty of investors, are in free fall — the TSX and S&P were down 34% and 32% respectively the week of March 20th — cliff-diving off record highs of just a month ago. Reporting of these numbers is closely followed with economists’ dire predictions of a recession once the Covid-19 crisis subsides. It’s surreal. I can’t shake the feeling I’m an extra in a Zombie apocalypse movie. If only.

How do we cope as the once relatively reliable world we knew, just a few short weeks ago, continues to experience seismic shifts that shake and loosen the very foundation supporting our lives?

Keep calm, Carry on

We can only control what’s within our reach. This is my mantra; only now, I repeat it several times a day. Here are  some tips to help cope with day-to-day changes:

Emergency Fund

Practically speaking, ensure you have an emergency fund. Typically, you’re looking to sock away three to six months of living expenses for the “just in case” scenario. Don’t have it now? Don’t panic. Take a good hard look at your monthly expenses and incorporate this savings target into your budget. Anticipating an income tax refund? Earmark a portion of these dollars and deposit them into a high-interest savings account. Preferably one that’s CDIC insured.

Resist the temptation to save for your rainy day with extra monthly dollars. There’s rarely spare change at the end of the month; be intentional, add this line item to your budget. Even a few dollars to kickstart the account will make a difference in the long run.

Budgets

Do you have one? If not, this is a great time to put one together. Track ALL of your expenses for a month or two. Do you see any trends? Any obvious places you can trim expenses? Make it happen.

One of my favourite hacks is around groceries and meal planning. Each week, I shop in my freezer and pantry compiling a list of recipes for the week. Not only does it take the stress out of meal planning (and save money on takeout), but it limits trips to the grocery store.

Financial Support

More than one million Canadians have now applied for Employment Insurance. You may find yourself without work; caring for a loved one battling Covid-19 or staying home with your children due to school or daycare closures. The federal government will be offering financial support for 16 weeks, beginning in April (the online portal is scheduled to launch on April 6th) and payments will be retroactive to March 15th, through its COVID-19 Economic Response Plan.

Managing your portfolio performance

I review our portfolio on a daily basis. It’s not really something I should do, and given the performance of the last month, it may be a habit I soon break.

The last month has been startling; I’ve watched our collective portfolios steeply decline, briefly ascend only to decline again. It’s unbelievably tempting to hop off the rollercoaster, almost primal, really, sell what remains and seek shelter on the sidelines. Continue Reading…

7 timeless strategies investors need to remember in this time of market turmoil

Posted By |

The world as we knew it suddenly changed. What a surprise beyond belief for all of us.

There was no announcement six months ago. There was no new or updated playbook for any of this upheaval.

A harsh pandemic is a sure way of turning lives upside down. Treacherous times are firmly entrenched as the new roadway.

Stock and bond markets march at will in both directions. Investors wonder whether they are closer to a market bottom or to a top. All sorts of fears and worries are sprouting everywhere.

This is a reminder for all to go slow: younger and older, novices and seasoned. Try your utmost to use all the investing common sense you can muster. Sitting on your hands is often a worthy move.

My strategies:

Accordingly, I have selected seven timeless strategies that every investor ought to be familiar with in detail. They form a solid foundation for guiding the family nest egg.

I’ve kept them brief and to the point for the sake of simplicity. Here is my summary of critical strategies:

1). Short term trading is best suited for your “speculative” money. Conversely, long term investing is the best fit for your “serious” money, such as funding retirement. These two portfolios are constructed differently, so don’t mix them.

2). Chasing returns has been far from a consistent winner. Instead, pay attention to acquiring broadly diversified “quality” investments. These portfolios typically fare better during bouts of market turmoil.

3). Set aside the could’ve, should’ve and would’ve schools of hindsight. Make your decisions based on available information and move forward. Looking back in your rear view only creates distractions you can’t do anything about.

4). Becoming attached to your stocks is akin to making emotional decisions. Instead, I recommend pursuing logical moves designed to embrace your best interests. Your investing success should improve.

5). Don’t make investment decision out of fears. Rather, wait until the coast begins to clear. You have absolutely no control over what happens to market fears.

6). Decide whether you seek the return “of” your money, or the return “on” your money. That strategy sheds light on the fit of your desired portfolio. It also keeps you better invested within a more comfortable asset mix.

7). Investing your money all at once is usually not a preferred strategy. Studies show that asset mix delivers the biggest impact on portfolio outcomes. Neither superior stock selection, nor timing of purchases are close seconds.

My premise:

My premise is that investing strategy need not be complicated. I recommend that the main ingredient is always plenty of patience combined with common sense. Focus on logical and sensible approaches that contribute to your discipline. Continue Reading…

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

Posted By |

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

Posted By |

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…

Two Way Traffic – a podcast series on cross-border financial issues

Posted By |
Two Way Traffic is hosted by Elena Hanson (L) and Darren Coleman (R).

By Elena Hanson and Darren Coleman

Special to the Financial Independence Hub

Canadians with assets in the United States and/or family members who are American citizens can face a whole range of complexities when it comes to their financial matters. This can include everything from tax – on both sides of the border – to a myriad of issues concerning an estate, gifting, investments, what have you.

This is what inspired us to develop a unique podcast series called Two Way Traffic. In a nutshell, it’s a give-and-take discussion by two experts who share a great deal of experience: an accountant specializing in cross-border tax, and a wealth-management advisor licensed in both Canada and the United States.

Two Way Traffic, produced by the Acme Podcasting Company, kicked off in January and involves five episodes. Every month we release another one with a different topic.

Through our combined experience, we’ve seen it all, but inevitably a situation arises that presents new challenges. Take the example of a Canadian widow with an account managed by a U.S. trust company. One department of that trust company wanted her to transfer the account because she was in Canada, while another department with the same company said she couldn’t transfer! She then hired a lawyer to effectively have one department argue with the other department: and all at her own cost. The problem could have been avoided altogether if her spouse had sought advice from cross-border experts before he had put this structure in place.

Example: A Canadian IT pro with a California customer

Or take the example of a Canadian IT professional who is incorporated in Canada. This person  works for a California-based customer; some of the work is done out of his home in Canada and some of it is done in the U.S. But here is the problem. The person gets paid in stock options and makes a popular U.S. 83(b) election to pay tax on stock options at grant when the value is low in the hopes of significant appreciation in the future. However, this results in a complete mismatch of Canadian and U.S. taxes at both the personal and corporate levels. As with the other example, if this person had reached out to a tax accountant with cross-border expertise, such a mistake would have been avoided.

Two Way Traffic is just that. It’s not just trucks carrying freight that go across the border every day. It’s also people and – the most complicated commodity of all – money/assets. Our podcast series includes five episodes, each one designed to guide listeners through the complications, implications and advantages of having money and family on both sides of the border.

A million Americans live in Canada

This is a particularly pertinent subject right now. With over one million Americans living in Canada, a booming job market for professionals in both countries, and a new free-trade agreement just signed, the cross-border movement of skilled workers has never been higher. Also, many Canadians have family or property in the U.S. who may not have yet considered the effects of U.S. taxes on their financial plans. This podcast will bring to light those areas of your Canada/U.S. finances where you might be missing something crucial.

For example, the new US-Mexico-Canada trade agreement will impact a lot of people and a lot of companies. With cross-border movement, things can get very murky, and murky is the last thing you want when it comes to determining country of residence, taxes, employment benefits, pensions, and so on.

You have to think about tax residency, which is a very different animal in Canada than it is in the United States. Tax reporting can be complicated if a U.S. person has Canadian corporate ownership. For example, there are different anti-deferral tax provisions that require a U.S. citizen who is a shareholder of a Canadian corporation to recognize corporate income when it is earned and not distributed. Things in Canada are done differently; you are taxed personally when the corporate income is distributed. Bottom line? This can be a major headache for incorporated U.S. citizens who have corporate entities in Canada, or for that matter, anywhere outside the U.S.

Tax reporting can also be complicated if a U.S. person holds such popular Canadian savings vehicles as RESPs and TFSAs. There is also a significant difference between a U.S. person who expatriates by giving up their U.S. nationality, and a Canadian who chooses to become a non-resident of Canada. Continue Reading…