Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Wealth and Happiness, Part 1: The importance of managing and using your money wisely

Posted By Financial Independence Hub | November 4, 2021

By Warren MacKenzie, for Canadian Moneysaver

Special to the Financial Independence Hub

Retirees should remember that money only has value to the extent that it can be used to increase happiness. Unfortunately, some retirees who already have sufficient wealth may miss an opportunity because they mistakenly believe that greater wealth leads to greater happiness. In this three part series we discuss the relationship between money and happiness.

In his book, The Art of Happiness, the Dalai Lama says, “The purpose of life is Happiness” Aristotle has said, “Happiness is the meaning and the purpose of life, the whole aim and end of human existence.”

Wealthy individuals have absolutely no reason to feel guilty for using their wealth to maximize
their happiness. Whether rich or poor, going to a job we hate, or to the fridge for a snack, the reason we do something is always the same: we do what we do because we believe we’ll be happier by doing it. In this regard, rich and poor people are alike.

… one big difference between a poor person and a rich person is that the poor person believes that his or her problems will disappear with more money. Wealthy people know that this is untrue.

The Importance of both Managing and using your money wisely

The main focus of the financial services industry is to increase the size of investment portfolios. However, in many cases investors would be happier if, in addition to having a larger investment portfolio, they also had a better understanding of the relationship between wealth and happiness so they get to enjoy the pleasure that comes from using their money wisely.

Don’t mistake joyful events for a Happy Life

We all want a happy life so it’s important to understand the difference between a joyful event and true happiness. Examples of joyful events include buying your first new car, weddings, purchase of one’s first home, or a spectacular vacation. But we’re lucky if we experience a few joyful occasions each year. For a happy life we also have to be able to experience happiness as we participate in the routine activities that take up most of our days.

Regardless of our level of wealth, we all spend most of our days doing routine activities such as watching the news, checking emails, or speaking to family and friends. For a happy life we need to find happiness during these routine activities. The secret is to live in the present moment, to focus intently on our activities, and by so doing we may find happiness as we do the things we need to do each day.

Unconditional happiness is when you’re so absorbed in what you’re doing that you temporarily forget about who you are or how the time is passing by. You’re not thinking about yourself and instead you’re 100% focused on what you’re doing. You may be working or watching your favorite TV program, or you’re focused on a friend or spouse. And since you’re not thinking about yourself you have no wants or unfulfilled desires, financial or otherwise, which are the only source of unhappiness.

Unconditional happiness is also known as ‘living in the moment’ or being ‘in the zone’ or a ‘flow state’. As an example, imagine you’re watching your favorite TV comedy show and it’s the funniest show you’ve ever seen. You’re laughing almost hysterically and you’re thinking of nothing except the TV show and you’re unaware of the time passing. Now you’re living in the moment! Now you’re experiencing unconditional happiness.

In the next moment, your mind kicks into gear and you start thinking, and wishing your friend was here to enjoy the show. Now the spell is broken and you’ve lost the moment of unconditional happiness. You have an idea of yourself as a friend and you wish your best friend was there to share this experience. Now you’re no longer living in the moment, instead you’re conscious of yourself and your unfulfilled desire for your friend to be with you.

We all have the same opportunity for moments of unconditional happiness and our experience is the same regardless of the size of our income or investment portfolio.

Conditional happiness is when we’re happy because of something that you’ve acquired, or some experience you’ve enjoyed. These external events might include receiving an unexpected income tax refund, enjoying a new home, when our investment portfolio increases in value, or as our candidate wins the election.

When it comes to conditional happiness, wealthy individuals have the potential to acquire more material goods and experience more travel and adventures. Therefore, in this area, they have an advantage over less wealthy people.

It’s also interesting to note that happiness research shows that, in terms of conditional happiness, there is greater long term enjoyment when we spend money on experiences such as a cruise or climbing a mountain than spending the same amount on new toys or material goods.

Recognizing opportunities for Happiness by knowing when it’s as good as it gets

Regardless of one’s wealth, similar activities usually give about the same amount of pleasure. For example, if you enjoy a cup of coffee in the morning, you should know that no amount of wealth will increase the enjoyment of your morning coffee. Continue Reading…

XEQT Review: An iShares All-Equity ETF Analysis

Posted By Financial Independence Hub | November 2, 2021

By Bob Lai, Tawcan

Special to the Financial Independence Hub

A while ago, I wrote a VEQT review where I performed a thorough and deep analysis of the Vanguard All-Equity ETF. While I really like VEQT, we ended up buying XEQT for our kids’ RESPs due to a few key reasons. The beauty of a one-fund solution ETF such as the iShares All-Equity ETF (XEQT) means there’s no need to re-balance regularly. This makes it a very straightforward and simple investment approach. More importantly, the all-in-one ETFs provide instant asset class diversification and geographical diversification, all for a very low management fee.

Vanguard and iShares are two of the most well established and most trusted ETF companies in the world. Both companies offer similar all-equity ETFs – VEQT and XEQT, respectively. Lately, when I’m coaching clients new to investing, I’d typically recommend XEQT to them because of the lower MER fee compared to VEQT.

Although XEQT is great for beginner investors, this all-equity ETF is just as good for experienced investors. This ETF definitely has a place in most investors’ portfolios.

Having written a VEQT review, I figured I needed to write a similar review for XEQT so readers can compare the two side-by-side.

iShares All-Equity ETF – XEQT

The iShares All-Equity ETF Portfolio, XEQT, holds 100% in equity. This means that the ETF holds no bonds. iShares have several all-in-one ETFs and XEQT falls in the more volatile, riskier spectrum of all the all-in-one ETFs because XEQT holds 100% in stocks.

XEQT seeks to provide long-term capital growth by investing primarily in one or more exchange-traded funds managed by BlackRock Canada, or an affiliate that provides exposure to equity securities. Just like its counterpart all-in-one ETFs, iShare All-Equity ETF trades on the Toronto Stock Exchange under the ticker name “XEQT” and is traded in Canadian dollars.

XEQT is a relatively new ETF. It was created in Aug 2019. Some key facts of XEQT:

Inception Date: Aug 7, 2019
Eligibility: RRSP, RRIF, RESP, TFSA, DPSP, RDSP, taxable
Dividend Schedule: Quarterly
Management Fee: 0.18%
MER: 0.20%
Listing Currency: CAD
Exchange: Toronto Stock Exchange
Net Asset: $595.48M
Number of holdings: 4
The number of stocks: 9,444

XEQT Fees

XEQT has a management expense ratio (MER) of 0.20%, which is 0.05% lower than VEQT. While 0.05% may not seem a lot, if your portfolio value is $250,000, it means $125 in fees each year. While it’s not an enormous amount of money when your portfolio is that big, it adds up eventually.

One thing to note is that the all-in-one and all-equity ETFs that Vanguard, iShares, and other ETF companies all have very low management fees. These management fees are typically much, much lower than the MER on the typical mutual funds available to Canadians. The low MER is one of the key reasons why index ETFs are excellent investment options for Canadians.

If you use a discount broker like Questrade, you can buy ETFs commission free. This would reduce your overall transaction cost significantly. If you use Wealthsimple, you can also buy ETFs commission free.

Check out my Questrade vs. Wealthsimple Trade review to see which discount broker is best for you.

XEQT Underlying Holdings

Like other iShares all-in-one ETFs, XEQT holds four iShares ETFs which means that XEQT holds 9,033 stocks. The underlying holdings are:

iShares Core S&P Total US Stock (ITOT) – 48.02%
iShares MSCI EAFE IMI Index (XEF) – 24.39%
iShares S&P/TSX Capped Composite (XIC) – 22.71%
iShares Core MSCI Emerging Markets (IMEG) – 4.64%

The rest of the portfolio holds USD and CAD cash and/or derivatives.

XEQT Top 10 Market Allocation

Here is XEQT’s top 10 market allocation.

US: 47.13%
Canada: 23.79%
Japan: 5.37%
UK: 3.08%
Switzerland: 2.25%
France: 2.23%
Germany: 1.92%
Australia: 1.84%
China: 1.74%
Netherlands: 1.27%

Retirement Planning for Baby Boomers: Getting ready to Retire comfortably

Posted By Financial Independence Hub | October 29, 2021

Lowrie Financial/Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Are you a baby boomer with retirement planning on your mind? If you’re among the surge of citizens born in a large urban center like Toronto and across North America during the 20ish years after World War II, you may be noticing a different sort of booming sound lately. Can you hear it? It’s the drum beat of your retirement, fast approaching … or arrived.

Search the Internet for “Retirement Planning Toronto” and you’re likely to see a lot of fear out there, along with plenty of headline-grabbing stats on how ill-prepared many boomers are to retire. Before you let consumer-wide stats consume you, remember: Numbers don’t necessarily lie, but they can deceive.

As a personal financial advisor, I help families successfully prepare for retirement and other life transitions by emphasizing the planning part of retirement planning. Following are some of the most frequent topics of conversation I’ve found key to achieving your short- and long-term financial goals in retirement.

Family Retirement Planning: What Will It Really Cost?

If you’re like most folks getting serious about retirement planning, it may feel like a huge, angry gorilla is standing between you and your ideal lifestyle over the next 20–30+ years. One way to take on a hairy obstacle is to state the obvious about it, and consider your options from there:

Steve’s Retirement Planning Observations

Before you retire: In a perfect world, you’ve been earning an amazing income, spending well within your means, and maxing out your registered investment accounts your entire life. But let’s get real. Most of us have earned some income, avoided most debt, and accumulated some assets along the way.

After you retire: You no longer have a salary to draw on. Even if you continue to tinker part-time, any earned income is likely to be greatly reduced (and should probably be positioned to avoid unpleasant OAS clawbacks).

Time travel: No matter what you’ve accomplished so far, there’s no going back to seize any past, passed-up opportunities.

Peace of Mind Planning

So, what can we do about your personal retirement realities? Robust retirement planning helps you quantify what you’re facing and qualify how we’re going to address it. In this sense, retirement planning may be better described as peace of mind planning. At least half the battle is getting your mind wrapped around the nature of the beast, so you can make informed decisions about how to tame it.

A financial needs analysis quantifies what your retirement might look like:

Income expectations: How much can you expect to receive from which outside sources? Possibilities include government or corporate pensions and benefits, proceeds from selling your business, a spouse’s continued salary, part-time employment, etc.

Spending goals: How much do you expect to spend in retirement? Estimate numbers for early retirement, when you may still be more active and independent, as well as for once you may be slowing down and requiring more care. Organize your expenses by needs and then wants.

The gap: Usually, you’ll discover a gap between your income and spending expectations. As long as it’s a manageable amount, you’ll bridge it by taking a “salary” from your taxable and registered investment accounts. After all, that’s what they’re there for. The goal is to draw a tax-efficient income stream from your total portfolio, while leaving the rest to grow as planned for funding future needs. (Hint: A personal financial advisor can add a lot of value here.)

Balancing Spending/Earning Trade-Offs

Has your initial financial needs analysis revealed ample accumulated wealth to bridge any savings/spending gap? Congratulations, you’re retirement-ready! You may even be able to add more “wants” to your spending plans.

But what if the financial needs analysis has demonstrated that your gap is too wide to leap? We can usually help families identify a combination of trade-offs they can mix and match to shore up their retirement funding. While belt-tightening is never fun — and, alas, there is no magic money wand to wave around — these no-nonsense steps can pack a lot more power than you might think:

Working more: You may be able to transition out of the workforce more gradually than planned, seek a higher-paying position, or consider a second source of income such as consulting or participating in the gig economy.

Spending less: Can you vacation closer to home, dine out less lavishly, or downsize to more modest quarters? Maybe you wouldn’t mind selling that cottage you rarely visit, ditching that second car, or canceling a languishing membership or two. If you’ve not yet got a household budget, create one; take a month or so to watch your spending: all of it. This will help you identify excess expenses you may not even miss once they’re gone.

Digging out of debt: If you’ve been spending beyond your means, you may have accumulated high-interest debt over the years, or you may be considering doing so to bridge that widening gap. Unfortunately, this form of “bad” debt only aggravates the issue. If you’re carrying heavy debt, work with a reputable personal financial advisor or debt counselor to lighten the load.

Saving/investing more: Even as you approach or enter retirement, the more money you can direct into your investment accounts, the more leverage you’ll have over time. Depending on your time horizon, you may also be able to restructure your investment portfolio to take on more market risk in pursuit of higher expected long-term returns. Or you might consider converting a portion of your wealth into the equivalent of a personalized pension plan to reliably fund your retirement lifestyle. (An important trade-off here is you’re likely leaving less legacy for your heirs. Perhaps you could offset this by considering long-term care coverage, to minimize the chance you’ll be a financial burden as you age.)

What About Real Estate?

With today’s red-hot real estate market (especially in Toronto and other major hubs in Canada), most retirement planning ends up including a conversation about housing. So, let’s talk about that before we wrap. Continue Reading…

Short and Steady wins the race: The case for Short-term bonds

Posted By Financial Independence Hub | October 28, 2021

By Adrienne Young, CFA

Portfolio Manager, Director of Credit Research, Franklin Bissett Investment Management

(Sponsor Content)

The phrase “hunt for yield” is by now a well-worn cliché among fixed income investors. Persistently low yields have led many investors to take on additional risk, and some have considered abandoning fixed income altogether.

We think this is a mistake. Even amid fluctuating yields, inflation jitters and pandemic-driven economic upheaval, fixed income can help maintain stability and preserve capital: if you know where to look.

Why Short-term now

For increasing numbers of investors, the short end of the yield curve is the place to be in the current environment. Short-term rates reflect central bank policy actions. Since the pandemic first took hold early in 2020, central banks have taken extraordinary measures to keep liquidity pumping into the marketplace, all without raising rates. Both the Bank of Canada and the U.S. Federal Reserve have so far left their overnight lending rates unchanged and have indicated their intent to continue along this path well into next year, and possibly longer. This predictability has stabilized, or anchored, short-term rates. In contrast, longer maturities have been prone to volatility as the stop-and-go nature of the pandemic has influenced economic reopening, inflation expectations and financial markets.

Franklin Bissett Short Duration Bond Fund is active in short-term maturities, with an average duration of 2-3 years. About 30% of the portfolio is held in federal and provincial bonds; most of the remaining 70% is invested in investment-grade corporate bonds.

Beyond stability, investments need to make money for investors. In this fund, duration and corporate credit are important sources for generating returns. Historically, the fund has provided investors with better returns than the FTSE Canada Short Term Bond Index¹ or money market funds, and with comparatively little volatility.

In It for the Duration

Duration is a measure of a bond’s sensitivity to interest rate movements. Imagine the yield curve as a diving board, with the front end of the curve, where short-term rates reside, anchored to the platform. Like a diver’s body weight, pandemic-driven economic forces have placed increasing pressure further out along the curve. The greatest movement ― expressed as volatility ― has been at the long end, especially in 30-year government bonds. Currently, the fund has no exposure to these bonds.

Cushioned by Corporates

Corporate debt provides a cushion against interest rate volatility, and a portfolio that includes carefully selected corporate securities as well as government debt can therefore be a bit more protective. In addition, the spread between corporate and government bonds can provide excess returns.

We believe it is not unreasonable to anticipate stronger Canadian economic and corporate fundamentals in 2021 and 2022, as well as continued demand for bonds from yield-hungry international investors. These conditions support a continuation of the current trend of a slow grind tighter in spreads, with higher-risk (BBB-rated) credits outperforming safer (A and AA-rated) credits.

Credit Quality is Fundamental

In keeping with Franklin Bissett’s active management style, in-house fundamental credit analysis is a key element of our investment process for the fund. Unless we are amply compensated for both credit and liquidity risk (particularly in the growing BBB space), at this stage of the economic cycle we prefer higher-quality credit. We look for strong balance sheets, good management teams, excellent liquidity, clear business strategy and larger, more liquid issues. Continue Reading…

JP Morgan, RBC on post-Covid Retirement trends

Posted By Jonathan Chevreau | October 27, 2021

A couple of recent surveys from J.P. Morgan Asset Management and RBC shed a fair bit of light into recent Retirement trends in North America in the wake of the ongoing Covid-19 pandemic. Summarized in the October 2021 issue of Gordon Wiebe’s The Capital Partner newsletter, here are the highlights:

First up was J.P. Morgan on August 19 in a study focused on de-risking for investors approaching retirement and about to draw down on Retirement accounts.

The study was quite comprehensive, drawing on a data base of 23 million 401(k) and IRA accounts and 31,000 Americans. 401(k)s and IRAs are similar to Canada’s RRSPs and RRIFs.

De-risking is quite common, with 75% of retirees reducing equity exposure after “rolling over” their assets from a 401(k) to an IRA. These retirees also relied in the mandatory minimum withdrawal amounts.

Of those studied, 30% received either pension or annuity income, and the median value of Retirement accounts was US$110,000. The median investable assets were roughly US$300,000 to US$350,000, with the difference coming from holdings in non-registered accounts.

Not surprisingly, the most common retirement age was between 65 and 70 and the most common age for commencing the receipt of Social Security benefits was 66. (Coincidentally, the same age Yours Truly started receiving CPP in Canada.)

The report warns that retirees who wait until the rollover date to “de-risk” or rebalance portfolios needlessly expose themselves to market volatility and potential losses: they should consider rebalancing well before the obligatory withdrawal at age 71.

The newsletter observes that 61-year-olds represent the peak year of baby boomers in Canada and cautions that if they all retire and de-risk en masse, “Canadian equity markets will likely undergo increased downward pressure and volatility. Retirees should consider re-balancing or ‘annualizing’ while markets are fully valued and prior to an increase in capital gains or interest rates.”

The report includes several interesting graphs, which you can find by clicking to the link above. The graph below is one example, which shows average spending (dotted pink line) versus average retirement income (solid green line.) RMD stands for Required Minimum Distributions for IRAs, which is the equivalent of Canada’s minimum annual RRIF withdrawals after age 71.

EXHIBIT 4: AVERAGE RETIREMENT INCOME AND SPENDING BY AGES Source: “In Data There Is Truth: Understanding How Households Actually Support Spending in Retirement,” Employee Benefit Research Institute & J.P. Morgan Asset Management.

RBC poll on pandemic impacts on Retirement and timing

Meanwhile in late August, RBC released a poll titled Retirement: Myths & Realities. The survey sampled Canadians 50 or over and found that the Covid-19 pandemic has caused some Canadians to “hit the pause button on their retirement date.” 18% say they expect to retire later than expected, especially Albertans, where 33% expect to delay it.

They are also more worried about outliving their money, with 21% of those with at least C$100,000 in investible assets expecting to outlive their savings by 10 years. That’s the most in a decade: the percentage was just 16% in 2010.

Sadly, 50% do not yet have a financial plan and only 20% have created a final plan with an advisor or financial planner.

Those near retirement are also resetting their retirement goals. Those with at least $100,000 in investable assets now estimate they will need to save $1 million on average, or $50,000 more than in 2019. 75% are falling short of their goal by almost $300,000 on average.

Those with less than $100,000 have lowered their retirement savings goal to $533,153 from $574,354 in 2019, and the savings gap is a hefty $472,994.

To bridge the shortfall, 37% of those with more than $100K plan stay in their current home and live more frugally, compared to 36% of those with under $100K. 31% and 36% respectively plan to return to paid work, 31% and 23% plan to downsize or move, and 3 and 5% respectively intend to ask a family member for financial assistance.