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).

A timeless investment lesson learned from coronavirus

Posted By Financial Independence Hub | February 18, 2020

LowrieFinancial.ca/unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

The term “novel coronavirus” is almost as new as the year itself. And yet, how quickly it has grabbed global headlines. As depicted in this 2018 timeline of media-inflamed fears, there’s nothing like a global epidemic to occupy the media’s attention. On the plus side, dramatic coverage can spur dramatic cures. But whenever this sort of viral news spreads, so too does financial uncertainty. Investors are left wondering whether they should try to dodge markets that have been exposed.

Our advice is simple: Don’t let the breaking news directly impact your investment stamina. If you’re already following an evidence-based investment strategy …

You’ve already got a globally diversified investment portfolio.
It’s already structured to capture a measure of the market’s expected long-term returns.
You’ve already accepted (at least in theory!) that tolerating a measure of this sort of risk is essential if you’d like to actually earn those expected long-term returns.
You’ve already identified how much market risk you must expect to endure to achieve your personal financial goals; you have allocated your investments accordingly.

In other words, leaving your existing portfolio exposed to the risks wrought by a widespread epidemic is part of the plan. All you need do is follow it, because …

1. ) Markets endure

Not to downplay the socioeconomic suffering coronavirus has created, but we’ve endured similar events. Each time, markets have moved on.

To illustrate, consider a globally diversified all-equity portfolio, divided equally among Canada, U.S., and non-North American holdings. The SARS epidemic may most closely resemble current events (at least so far). What if you simply bought and held this portfolio since around the time SARS hit the headlines in February 2003? Your investment would have gone up 8.9% per year. Or in dollar terms, it would have quadrupled!

Here are other examples of the same:

Epidemic	Inception Date	Annual Return (since inception)	Growth of $1 (since inception)
SARS	Feb 2003	8.9%	$4.27
Bird Flu	Jan 2005	7.0%	$2.78
Swine Flu	Jan 2009	10.6%	$3.04
Ebola	Sept 2014	6.0%	$1.37
Zika	Jan 2016	8.4%	$1.39

“Journalists who reported flights that didn’t crash or crops that didn’t fail would quickly lose their jobs. Stories about gradual improvements rarely make the front page even when they occur on a dramatic scale and impact millions of people.” — Hans Rosling (Author of Factfulness)

2.) The risk is already priced in

The latest news on coronavirus is unfolding far too fast for any one investor to react to it … but not nearly fast enough to keep up with highly efficient markets. As each new piece of news is released, markets nearly instantly reflect it in new prices. So, if you decide to sell your holdings in response to bad news, you’ll do so at a price already discounted to reflect it. In short, you’ll lock in a loss, rather than ride out the storm. Continue Reading…

RBC leads Big 5 banks in Retirement planning, Dalbar study finds

Posted By Jonathan Chevreau | February 17, 2020

The big 5 banks ranked by DALBAR in order of client preparation for Retirement

The Royal Bank of Canada (RBC) topped the list of big Canadian banks in serving the Retirement needs of Canadians, according to a new DALBAR study released this month. A first of its kind, the study — released on Feb. 5th and covered in the trade press — sought to assess how the Big 5 handled Retirement conversations through its retail branch network. It also rounded out the study with research on smaller banks, credit unions and regional financial institutions: 1,800 Canadians were polled, all with ten years or less until Retirement. 57% were males and and 74% had portfolios in excess of $100,000.

5 major alternative Financial Institutions ranked by client preparation for Retirement.

In this press release, DALBAR said “Retirement is an ever-growing concern for many Canadians, with increasing life expectancies, diminishing pensions, and a rising cost of living: the retirement nest egg has become more important than ever.”

Well, you’ll get no argument from me on that score, now that I’ve personally started to draw down on my own little nest egg. (Our family uses both RBC and TD, both for banking and through their online brokerage divisions. That’s typical, by the way: 29% of those polled had retirement money with more than one institution.)

Percentages of clients polled at major banks and other financial institutions

“RBC representatives used their experience and expertise to ease client fears, imparted useful knowledge about closing retirement shortfalls, and made the client feel it was a financial coaching experience instead of a transactional one,” DALBAR said. To me, the significant phrase their was “financial coaching experience instead of a transactional one.” Clients rated their experience with RBC to be one of “financial coaching” 70% of the time, higher than the 53% rate at the other big banks.

Only 50% of bank reps introduced the benefits of proper financial planning, although 82% of clients were promised a financial plan. Only 44% of the meeting featured itineraries. And while CIBC, RBC and National Bank led in offering followup meetings with 90% or more of clients, Scotiabank (number 2 overall) led in talking about digital retirement tools at 80% of meetings.

DALBAR vice president Anita Lo said many Canadians realize that government safety nets alone (i.e. CPP/OAS/GIS) are not enough to support healthy retirement lifestyles, so “this is the time for the banks to shine in helping Canadians plan for retirement.”

No surprise that when it comes to Retirement (and I’d argue just about everything else), Canadians prefer speaking to a real person for financial advice instead of relying on online information: DALBAR cited a CIBC study that found that’s the case for 70% of us.

Wide variance in placement of CFPs and PFPs before clients

Staffing with personnel with key financial designations is obviously a plus. DALBAR found RBC places staff with either the CFP or PFP designation 83% of the time for client conversations about Retirement, compared to just 40 across financial institutions generally. Continue Reading…

Questrade Poll find many investors still oblivious on how fund fees hurt performance

Posted By Jonathan Chevreau | February 14, 2020

MoneySense.ca: Photo created by pressfoto – www.freepik.com

My latest MoneySense Retired Money column looks at a press release slated for release next week from discount brokerage Questrade Inc. You can find the full column by clicking on the highlighted headline: Canadians are still paying too much in investment fees.

According to the RRSP study commissioned by the independent discount brokerage (a copy of which was provided to me in advance) finds 87% of Canadians don’t know or underestimate the difference that a 2% or 1% fee has on their portfolios over the long run (of 20+ years).

While the majority think Canadian mutual fund management expense ratios (MERs) are too high compared to the rest of the world, given the increased regulatory climate of greater disclosure, I was surprised by the finding that almost half of mutual fund investors still don’t even know what they’re paying for mutual funds.

There are also disturbing generational differences. According to Questrade, 28% of Canadians agree that paying more for an investment will give them better returns. That’s in contrast to the operative principle behind the surge in indexing and ETFs that “Costs matter,” and the lower the costs the better. Yet Millennials seem ripe for the picking here: 42% of investors aged 18 to 34 believe paying more for investments will give them better returns (vs just 18% of the 55+ cohort).

Or as the teaser under the main headline at MoneySense puts it: Millennials and Gen Z missed the memo on how much management fees erode returns over the long term, according to a new Questrade survey.

Questrade estimates a 1% decrease in fees over a typical 30-year investing horizon could result in 27 to 29% more money in one’s retirement kitty, assuming a 7 to 8% return in a tax-sheltered account and a portfolio between $1,000 and $50,000. But try telling that to the group of investors Questrade polled: 87% either didn’t know or underestimated the difference a 2% fee makes versus a 1% fee’s impact on the value of their portfolio over the long run. 41% think a 1% cut in fees adds 20% or less to the long-run value of their portfolios. And only 43% of RRSP investors believe cutting fees from 2 to 1% will have a big impact on returns over 30 years.

Questrade notes that on average we still are paying 2% or more in fees, which “are some of the highest fees in the world.” It cites this research from Morningstar.com, which looks at fees in 26 countries worldwide.

47% of mutual fund investors still don’t know what fees they’re paying

I find it shocking that a whopping 47% who invest in mutual funds still don’t know what fees they’re paying. A majority (52%) think Canadian mutual fund fees are too high but a third don’t know if a 2% fee for a mutual fund should be considered high. Continue Reading…

RRSPs are not a Scam: A Guide for the Anti-RRSP crowd

Posted By Robb Engen | February 13, 2020

The anti-RRSP crowd must come from one of two schools of thought:

1.) They believe their tax rate will be higher in the withdrawal phase than in the contribution phase, or;

2.) They forgot about the deduction they received when they made the contribution in the first place.

No other options prior to TFSA

RRSPs are misunderstood today for several reasons. For one thing, older investors had no other options prior to the TFSA, so they might have contributed to their RRSP in their lower-income earning years without realizing this wasn’t the optimal approach.

RRSPs are meant to work as a tax-deferral strategy, meaning you get a tax-deduction on your contributions today and your investments grow tax-free until it’s time to withdraw the funds in retirement, a time when hopefully you’ll be taxed at a lower rate. So contributing to your RRSP makes more sense during your high-income working years rather than when you’re just starting out in an entry-level position.

Taxing withdrawals

A second reason why RRSPs are misunderstood is because of the concept of taxing withdrawals. The TFSA is easy to understand. Contribute $6,000 today, let your investment grow tax-free, and withdraw the money tax-free whenever you so choose.

With RRSPs you have to consider what is going to benefit you most from a tax perspective. Are you in your highest income earning years today? Will you be in a lower tax bracket in retirement? The same? Higher?

The RRSP and TFSA work out to be the same if you’re in the same tax bracket when you withdraw from your RRSP as you were when you made the contributions. An important caveat is that you have to invest the tax refund for RRSPs to work out as designed.

Future federal tax rates

Another reason why investors might think RRSPs are a bum deal? They believe federal tax rates are higher today, or will be higher in the future when it’s time to withdraw from their RRSP.

Is this true? Not so far. I checked historical federal tax rates from 1998-2000 and compared them to the tax rates for 2018 and 2019.

Federal tax rates 2018-2019 federal-tax-rate-1998-2000

The charts show that tax rates have actually decreased significantly for the middle class over the last two decades.

Someone who made $40,000 in 1998 would have paid $6,639 in federal taxes, or 16.6 per cent. After adjusting the income for inflation, someone who earned $59,759 in 2019 would pay $7,820 in federal taxes, or just 13.1 per cent.

Minimum RRIF withdrawals

It became clear over the last decade that the minimum RRIF withdrawal rules needed an overhaul. No one liked being forced to withdraw a certain percentage of their nest egg every year, especially when that percentage didn’t jive with today’s lower return environment and longer lifespans. Continue Reading…

Apply this 7-point checkup to your portfolio

Posted By Adrian Mastracci | February 11, 2020

We keep regular tabs on many factors throughout our lifetime. I submit that a best practice is to apply the same principle to the family nest egg: whether it is the starting portfolio or your retirement fund.

A new year often prompts investors to consider making changes to portfolios. Hopefully, well thought out changes that improve your desired outcomes.

I’ve designed a simple checkup tool and I invite you to adopt it. If you desire to manage family wealth, you should be conversant with each point. I suggest making it high priority.

The 7-point tool is a small bundle of steps that assesses your precious nest egg. A big picture check of family wealth typically delivers more simplicity alongside value.

However, it’s easy to get swamped. Too many investors latch onto walls of worry that cloud decisions. Fears of low returns, rising health care and running short of money come to mind.

My checkup tool helps seal the cracks found in a variety of financial foundations. Particularly for investors who make high demands on the nest egg.

Vital Issues

You need to first identify the cracks, as opposed to the minutia. Then initiate swift, corrective actions for the long run. The resulting analysis is a simple grouping of your “Yes/No” answers.

Let’s probe your portfolio on these vital issues:

Vital Portfolio Issues	Your Replies
1. ▶Are your goals achievable with the current action plan?	Yes: ___ No: ___
2. ▶Are you saving enough to fund the retirement targets?	Yes: ___ No: ___
3. ▶Are your retirement assumptions realistic for today?	Yes: ___ No: ___
4. ▶Are you investing within a comfortable asset mix?	Yes: ___ No: ___
5. ▶Are you aware how the advisor is paid?	Yes: ___ No: ___
6. ▶Are you happy with the direction of the portfolio?	Yes: ___ No: ___
7. ▶Are you receiving objective and unbiased advice?	Yes: ___ No: ___

A fitting portfolio starts at five “Yes” replies. Now to assess your portfolio health:

Number of “Yes” Replies	Your Portfolio Health
6 to 7	Robust nest egg
4 to 5	Needs some tweaks
2 to 3	Urgent attention required
0 to 1	Design new action plan

Apply my concise suite of nest egg checks to establish a sense of your direction. They are also early warnings that highlight portfolio weakness.

Any one of the issues can impact your family’s progress. For some, two or more “No” replies can inflict undesirable outcomes.

These remedies provide you added values:

Make certain your game plan is logical and sensible.
Revisit your asset mix targets every three to five years.

Prune some investments if you own too many.
Reduce excess complexity in your nest egg.

Ensure that your family nest egg delivers on expectations. Actions that turn “No” into “Yes” replies improve your portfolio pillars. Continue Reading…

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