Emotions play a very big part in how we live our lives and have an impact on the decisions we make every day: including how and when we each choose to invest for our future.
As financial markets move up and down, investors’ emotions follow suit. Emotions and behavioural biases play a role in people’s investment decisions, and often, emotionally-driven investing can leave them with poor returns in the long run. Add a volatile market to the mix and it can make it even harder to reach important investment goals.
Financial advisors know that staying invested during market downturns makes sense. While this recommendation is typically passed on to clients, panic sets in and some clients insist on selling to avoid a loss, despite sound logic and statistics. We all need to be taking a closer look at people’s behaviours and biases and finding ways to counteract them, for the benefit of our investors.
A new Behavioural Economics program for Canadian advisors
With that in mind, Manulife Investment Management wants to help change the investment game for our clients. Through a new partnership with BEworks, a behavioural consulting firm and research institute,we launched a Canadian Behavioural Economics (BE) program to help advisors understand and manage human emotions in volatile markets. The program will be rolled out to advisors over the course of this year with more to come in 2020.
With the help of Dr. David R. Lewis at BEworks, our advisors have access to:
• Scientific-led research and actionable tools to help them and their clients understand the biases in investment decision making Continue Reading…
Finance professor Moshe Milevsky welcomes industry’s implementation of academic longevity insurance theories
My latest MoneySense Retired Money column looks at two longevity-related financial products that the industry may develop after the road to them was paved in the March 2019 federal budget. You can access the full column by clicking on the highlighted headline: A new kind of annuity designed to help Canadian retirees live well, for longer.
Once they are created by the industry, hopefully in the next year, these new products will introduce an element of what finance professor Moshe Milevsky has described as “tontine thinking.” In the most extreme example, a tontine — often depicted in fictional work like the film The Wrong Box — features a pool of money that ultimately goes to the person who outlives everyone else. In other words, everyone chips in some money and the person who outlives the rest gets most of the pot. As you can imagine at its most extreme, this can lead to some nefarious scenarios and skulduggery, which is why you occasionally see tontines dramatized in film, as in The Wrong Box, and also TV, as in at least one episode of the Agatha Christie TV adaption of Miss Marple.
Fortunately, the Budget doesn’t propose something quite as dramatic as classic tontines but get used to the following two acronyms if and when the insurance and pension industries start to develop them: ALDA is an acronym for Advanced Life Deferred Annuity. As of 2020, ALDAs could become an investment option for those currently with money invested in registered plans like RRSPs or RRIFs, Defined Contribution (DC) Registered Pension Plans and Pooled Registered Pension Plans (PRPPs).
The other type of annuity proposed are Variable Payment Life Annuities (VPLAs), for DC RPPs and PRPPs, which would pool investment risk in groups of at least 10 people. Not quite tontines in the classic academic sense but with the pooling of risk VPLAs certainly have an element of “tontine thinking.”
The budget says a VLPA “will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VLPA annuitants.” That means – unlike traditional Defined Benefit pensions – payments could fluctuate year over year.
There is precedent for pooled-risk DC pensions: The University of British Columbia’s faculty pension plan has run such an option for its DC plan members since 1967.
The budget said Ottawa will consult on potential changes to federal pension benefits legislation to accommodate VPLAs for federally regulated PRPPs and DC RPPs, and may need to amend provincial legislation. But it’s ALDAs that initially captured the attention of retirement experts, in part because of its ability to push off taxable minimum RRIF payments.
Up to $150,000 of registered funds can go into an ALDA
An ALDA lets you put up to 25% of qualified registered funds into the purchase of an annuity. The lifetime maximum is $150,000, indexed to inflation after 2020. Beyond that limit you are subject to a penalty tax of 1% per month on the excess portion. Continue Reading…
Saving can be one of the most time-consuming methods of acquiring personal wealth, but if you choose the right account for the right goal, you can make the most out of this lengthy process.
The best way to make your money work over time is by choosing the best savings account based on what you’re saving for.
Picking the best savings account in Canada can maximize your interest return and (in some cases) minimize the amount of taxes you’ll end up having to pay.
While this might seem obvious, it’s a crucial step in the financial planning process. By finding the best savings accounts based on what you’re saving for, you’ll be able to achieve your financial goals much more quickly.
The other side of the coin shows that not choosing the right account can cause roadblocks down the line and sometimes cost you money in early withdrawal fees and taxes.
For example, if your aim is saving on a down payment for your first house, but you have all of your money wrapped up in, let’s say, GICs, you won’t be able to withdraw funds early without a penalty.
But that’s not to say that savings accounts are only propped up for massive investments like homes or your retirement.
Saving up for a car, your wedding, or even a trip can have significant benefits on your interest return, but only if you pick the best savings accounts for your financial goals.
Base choice of Savings Account on what you’re saving for
If you’re unsure what it is you need to save for, consider these two questions before making any firm decisions:
What is my financial situation like right now?
Will I need to access the money I’m investing soon?
Here are a few suggestions why a TFSA, RRSP, and HISA are best suited for your short-term and long-term goals, whatever they may be.
Tax-Free Savings Account (TFSA)
A Tax-Free Savings Account (TFSA) isn’t exactly a savings account. Think of TFSAs as tax shelters. You can put cash, mutual funds, stocks, bonds, or GICs in a TFSA and shelter them from taxes, as long as you remain under your yearly TFSA contribution limit [currently $6,000.]
The contribution limit on your TFSAs depends on how much you contribute each year and the yearly contribution limit allotted by the Canadian Revenue Agency (CRA).
If you exceed your yearly TFSA contribution limit by $2,000, you will not be able to deduct the exceeded amount. Contributions that exceed the $2,000 threshold are subject to a 1% fee for every month the amount remains in your RRSPs.
A Registered Retirement Savings Plan (RRSP) might seem like a savings account exclusively for retirement planning. However, it’s also one of the best savings accounts for saving for your first home.
An RRSP is somewhat similar to a TFSA. Both shelter your contributions from tax: so long as you remain below your yearly contribution limit. Unlike a TFSA, however, an RRSP does not allow you to withdraw money tax-free. Continue Reading…
It’s no secret that in order to purchase a house in Toronto or Vancouver, you’ll need to have considerable financial assets; however, a new study from Zoocasa reveals just how elite income earners need to be in order to afford the benchmark single-family home in these cities.
According to the data, which is based on benchmark home prices sourced from the Canadian Real Estate Association as well as income tax filings from Statistics Canada, a Torontonian buyer must be within the top 10% of earners to afford a house priced at $873,100, while only Vancouverites within the top 2.5% could do so for a home priced at $1,441,000.
The numbers also show that prices for entry-level housing, such as condos, remain out of reach for many; buyers must be within the top 25% of income earners to afford the benchmark unit, which costs $656,900 in Vancouver and $522,300 in Toronto, respectively.
Affordability is greater in Southern Ontario, Prairies
However, the study also highlights the comparative affordability in other cities; several of the secondary markets in Ontario, as well as in the Prairie provinces, are much more accessible in terms of housing prices.
For example, those interested in markets within proximity of the GTA, such as Waterloo real estate, need only be within the top 50% to purchase a condo priced at $320,857, though houses are still only in reach for those within the top 25%, at a benchmark of $523,720.
London is also a reasonable alternative for first-time buyers; those looking to purchase a house priced at $426,236 must be within the top 25%, though condos for sale in London are accessible to the top 50%, at $307,359.
You’re probably familiar with mutual funds. Most people have encountered them at some point: either through their banks and financial advisors, or their friends complaining about the fees.
ETFs are a newer investment, which people tend to associate with lower fees and broad diversification.
“So, what is the difference between a mutual fund and an ETF?”
Mutual funds are bundles of stocks and bonds that are managed for you by a bank or investment firm. Traditionally, they’re taking a hands-on approach to try to beat the market.
With actively managed mutual funds, you have managers who are trading a lot to take advantage of opportunities. However, this active trading comes at a cost, which usually translates into higher fees.
Most ETFs, or Exchange-Traded Funds, tend to take a different approach. They were primarily set up to track an index of investments (eg. The S&P 500 is an index of 500 publicly-listed US stocks and an ETF could track it. But you could have track indexes of tech stocks, energy investments, real estate investments, etc).
With most ETFs, portfolio managers are trying to reproduce the holdings and performance of an index. They give investors diversified exposure to an index at a low cost.
With those kinds of funds, managers don’t need to rebalance as often. That could mean lower costs for them. In turn, they can charge lower fees for the client.
“Which one is a better financial fit for me?”
Based on the above description, you might be wondering, “Why should I take a hands-off approach and match indexes, when I can take a hands-on approach and try to beat them?” Continue Reading…
Posted By 
Posted By 
