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).

Artificial Intelligence: A new twist on an old idea

Posted By |

By Noah Solomon

Special to the Financial Independence Hub

Although the use of artificial intelligence (AI) has become increasingly popular over the past several years, the idea that algorithms make better decisions than humans has been around for over 60 years.

In 1954, psychologist Paul Meehl published Clinical vs. Statistical Prediction: A Theoretical Review of the Evidence. Following extensive research, Meehl claimed that mechanical, data-driven algorithms were better at predicting human behavior than trained clinical psychologis

Meehl’s controversial findings, which challenged the assumption of human rationality in modern economic theory, have since been corroborated by several scholars including Daniel Kahneman, who was awarded the 2002 Nobel Memorial Prize in Economic Sciences for his work on the psychology of judgment and decision-making. In his most recent book, Thinking Fast and Slow, Kahneman illustrates that in situations involving uncertainty and unpredictability, simple algorithms match or outplay humans and their “complex” decision making criteria essentially every time.

Terrifying but True 

In The Undoing Project, author Michael Lewis describes a study conducted by the Oregon Research Institute on radiologists’ x-ray diagnoses.

The experiment started with the creation of a simple algorithm for determining the likelihood of an ulcer being malignant. The algorithm was based on an equal weighting of seven criteria that the doctors in the study had identified as being important for diagnostic purposes. The researchers then took a sample of 96 x-rays of different stomach ulcers and asked the doctors to judge the probability of cancer in each x-ray on a scale ranging from “definitely malignant” to “definitely benign.” Without telling the doctors, researchers showed them each ulcer twice.

The doctors’ diagnoses were all over the map. The experts didn’t agree with each other. More surprisingly, when presented with duplicates of the same ulcer, the doctors contradicted themselves and rendered more than one diagnosis. On the other hand, the model-driven diagnoses were far more accurate. The simple algorithm had not only outperformed the group of doctors as a whole, but actually managed to outperform even the most accurate doctor. If patients wanted to know whether they had cancer, they were better off using the algorithm than they were asking a radiologist to study an x-ray.

It’s about what A.I. doesn’t have

AI is often lauded for its ability to do what humans cannot. Algorithms can rapidly perform complex analysis on massive quantities of data to find patterns and identify predictive signals. Notwithstanding this clear advantage, it is the specifically “human” characteristics that AI doesn’t have that perhaps constitute its largest advantage over human decision-making. Continue Reading…

Put that $6,000 of TFSA contribution for 2020 to work as soon as possible

Posted By |

 

The federal government kept the annual TFSA contribution limit at $6,000 for 2020 – the same annual TFSA limit that we had in 2019. It’s good news for Canadian savers and investors, who as of January 1, 2020, have a cumulative lifetime TFSA contribution limit of $69,500.

The Tax Free Savings Account (TFSA) was introduced in 2009 by the federal conservative government. The TFSA limit started at $5,000 that year: an amount that “will be indexed to inflation and rounded to the nearest $500.”

TFSA Contribution Limit Since 2009

The table below shows the year-by-year historical TFSA contribution limits since 2009.

Year TFSA Contribution Limit
2020 $6,000
2019 $6,000
2018 $5,500
2017 $5,500
2016 $5,500
2015 $10,000
2014 $5,500
2013 $5,500
2012 $5,000
2011 $5,000
2010 $5,000
2009 $5,000
Total $69,500

Note that the maximum lifetime TFSA limit of $69,500 applies only to those who were 18 or older on January 1, 2009. If you were born after 1991 then your lifetime TFSA contribution limit begins the year you turned 18.

You can find your TFSA contribution room information online at CRA My Account, or by calling Tax Information Phone Service (TIPS) at 1-800-267-6999.

TFSA Overview

The Tax Free Savings Account is a flexible vehicle for Canadians to save for a variety of goals. You can contribute every year as long as you’re 18 or older and have a valid social insurance number.

That means young savers can use their TFSA contribution room to establish an emergency fund or save for a down payment on a home. Long-term investors can use their TFSA to invest in ETFs, stocks, or mutual funds and save for the future. Retirees can continue to save inside their TFSA for future consumption or withdraw from their TFSA tax-free without impacting their Old Age Security or GIS.

Unlike an RRSP, any amount contributed to your TFSA is not tax deductible and so it does not reduce your net income for tax purposes.

  • You can contribute room is capped at your TFSA limit. Excess contributions will be taxed at 1 per cent per month
  • Any withdrawals will be added back to your TFSA contribution room at the start of the next calendar year
  • You can replace the amount of your withdrawal in the same year only if you have available TFSA contribution room
  • Any income earned in the account, such as interest, dividends, or capital gains is tax-free upon withdrawal

How to Open a TFSA

Any Canadian 18 or older can open a TFSA. You are allowed to have more than one TFSA account open at any given time, but the total amount you contribute to all of your TFSA accounts cannot exceed your available TFSA contribution room.

To open a TFSA you can contact any bank, credit union, insurance company, trust company or robo-advisor and provide that issuer with your social insurance number and date of birth.

The most common type of TFSA offered is a deposit account such as a high interest savings account or a GIC.

You can also open a self-directed TFSA account where you can build and manage your own savings and investments.

Qualified TFSA Investments

That’s right: you’re not just limited to savings accounts and GICs. Generally, you can put the same investments in your TFSA as you can inside your RRSP. These types of allowable investments include:

  • Cash
  • GICs
  • Mutual funds
  • Stocks
  • Exchange-Traded Funds (ETFs)
  • Bonds

You can contribute foreign currency such as USD to your TFSA. Note that your issuer will convert the funds to Canadian dollars. The total amount of your contribution, in Canadian dollars, cannot exceed your TFSA contribution room.

If you receive dividend income from a foreign country inside your TFSA, the dividend income could be subject to foreign withholding tax.

Gains inside your TFSA

Some investors may be tempted to put risky assets inside their TFSA account to try and earn tax-free capital gains. There are two advantages to this strategy:

  1. Earn tax-free capital gains
  2. Potentially increase your available TFSA contribution room Continue Reading…

MoneySense: Mutual funds still have a place, especially those without Embedded Compensation

Posted By |
MoneySense.ca: Photo created by snowing – www.freepik.com

MoneySense magazine has begun to publish a package of three mutual fund articles they commissioned me to write. You can find the first article by clicking on the highlighted headline: DSC mutual funds and the future of investment advice. It ran on January 16th.

The first article looks specifically at the gradual decline of the once-ubiquitous DSC sales structure, or Deferred Sales Charge. It recaps recent regularatory developments surrounding DSC, and addresses the related issue of embedded compensation for financial advisors, or so-called Trailer Commissions. These are gradually being eliminated in various Western nations (notably the UK and Australia/NZ) and they are also being phased out in all Canadian provinces, with the conspicuous exception of Ontario.

The lesser-known “Direct-to-Consumer” mutual fund families

When it’s published, the second article will look at two particular “camps” of mutual fund providers: the big-name Embedded Compensation firms you may have heard from (because they can afford to advertise) and a lesser known camp of Direct-to-Consumer managers whose names may be less familiar because they don’t generally have embedded compensation and whose fees are lower and typically mean they don’t have as much money to throw around on big marketing and advertising budgets. The article focusses on four firms in particular you may not have heard of, except through family referrals and word of mouth: Beutel Goodman, Leith Wheeler, Mawer, Steadyhand.

Space precludes mentioning that in the good old days of mutual fund mania (the 90s) there were several other direct-to-consumer firms that either were acquired or are now a shadow of their former selves: the list includes Altamira, Saxon, Sceptre and a few others. We also look at two deep value firms that are still around but get so much publicity about their performance that they can hardly be dubbed as “firms you’ve never heard of.” They are Irwin Michael’s ABC Funds and Francis Chou’s Chou & Associates. Continue Reading…

8 ways to build Home Equity

Posted By |
Nanaimo, BC

By Lynn Donn

Special to the Financial Independence Hub

If you’ve been watching the real estate market in British Columbia, you may have noticed that quite a few Nanaimo homes for sale have a large amount of equity. Equity is the difference between the market value of your home and the mortgage balance owed. Another way of thinking about equity is that it’s the profit you make when the time comes to sell.

Building equity is the largest single benefit of owning a home in Nanaimo or anywhere else. Your home equity increases in one of two ways:

  • Value of your home increases
  • Amount of debt on your home decreases
Add value to your home

Here are eight great ways to build equity in your home by increasing value and decreasing debt:

You have instant equity in your home when home values appreciate. Three things that make home values rise are:

1.) Real estate market in Nanaimo is moving upward: Appreciation is something that happens without you having to do anything. Home prices are more likely to go up in established, attractive neighborhoods and in growing areas around town.

2.) Improvements and updating: Not all home improvements have the same return on investment. So, before spending money on updating, be sure to choose the ones that will add the most value to your home. Smart home improvements include kitchen and bathroom updating, improving curb appeal with low-maintenance landscaping, and adding square footage to your home.

3.) Upkeep & routine maintenance: Although routine maintenance can be tedious, it’s better to keep everything in your kept up than to face a major repair bill like a leaking roof or broken down furnace. Nanaimo homes for sale that have been maintained poorly are also at the biggest risk of losing equity, even when the real estate market is appreciating.

Decrease debt on your home

Decreasing the debt on your home while adding value can build equity surprisingly fast. Techniques to reduce mortgage debt include: Continue Reading…

Currency investing may seem appealing but you’ll lose in the long run

Posted By |

It’s A Rare Investor Who Makes Enough Profit From Long-Term Currency Investing Activities To Compensate For The Risk Involved

As a general rule, we advise against long-term currency investing speculation for many of the same reasons we advise against options trading and bond trading. It’s a rare investor who makes enough profit from these activities to compensate for the risk involved.

Our view is that if you like a currency’s outlook, you should buy stocks that will profit from a rise in that currency. Our longstanding advice is to invest mainly in well-established companies. Avoid exposure to currency trading, penny stocks, new issues, options, futures or any high-risk investments. That way, while you may experience modest losses when markets drop, you should show overall positive results over time.

Keep hedged ETFs as a long-term currency investing strategy out of your portfolio

If you want to buy U.S. stocks and hedge against currency movements, you could buy a hedged ETF.

Hedged ETFs, like, say, the iShares Core S&P 500 ETF (symbol XUS on Toronto) are funds sold in Canada that hold U.S. stocks. However, they are hedged against any movement of the U.S. dollar against the Canadian dollar. That means that the ETF’s Canadian-dollar value rises and falls solely with the movements of the stocks in the portfolio.

For example, if a stock rises 10% on, say, New York, but also rises a further 5% for Canadian investors due to an increase in the U.S. dollar, a holder of a hedged ETF would only see a 10% rise in the value of that holding in their hedged ETF. At the same time, the reverse is also true: If a stock rises 10% on New York, but falls 5% for Canadian investors due to a decrease in the U.S. dollar, a holder of a hedged ETF would still only see a 10% rise in the value of that holding as part of their hedged ETF.

Note, though, that hedged funds include extra fees to pay for the hedging contracts needed to factor out currency movements. Of course, those costs can rise or fall regardless of currency swings.

Hedging against changes in the U.S. dollar only works in your favour when the value of the U.S. dollar drops in relation to the Canadian currency. If the U.S. dollar rises while your investment is hedged, it reduces any gain you’d otherwise enjoy, or expands a loss. Continue Reading…