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).

Navigating the Student Loan Dilemma: Unlocking Financial Independence with RESPs

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By Andrew Lo, President & CEO of Embark Student Corp.

(Sponsored Post)

The pursuit of higher education is a cornerstone of personal and professional growth for many young Canadians. However, this pursuit often comes at a hefty price, with student loans being a significant barrier to financial independence. The burden of student debt can haunt graduates for years, affecting their ability to save, invest, and achieve financial stability. But there’s good news: opening a Registered Educations Savings Plan (RESP) can lighten the burden of student loans and help you help your children start their adult life debt-free by encouraging regular and early savings, offering valuable government grants, and harnessing the power of compound interest.

The Student Loan Conundrum

Canada is home to a world-class education system, but the cost of pursuing post-secondary education can be daunting. Tuition fees, books, accommodation, and other expenses can quickly add up, leaving many students with no choice but to turn to the most common method of affording post-secondary:  student loans.

What some students don’t fully understand when they use student loans is that they come with interest rates that accrue after graduation. For many young Canadians, this means they start their careers with substantial debt, and few resources to help them repay their loans.

In a recent poll of Canadian students, 79% admitted that the amount of debt taken on to afford post-secondary can be debilitating. This burden of student debt can have a profound impact on a young graduate’s financial journey, with 57% of students surveyed agreeing that graduating with student debt will make it harder for them to become financially independent from their parents.

Unfortunately, the constant struggle to make loan payments often hampers their ability to save and invest in their futures. Despite this, student loans are still the most normalized way of paying for education in Canada.

There’s a better way pay for post-secondary education

One effective way to combat the student loan conundrum is to start saving for education expenses early. It can be hard to think about university and college when a child is a few years old but by beginning to save as soon as possible, families can significantly reduce their need for student loans. You’re probably thinking, “accumulating savings to cover educational costs while managing the rising cost-of-living is no easy feat.” This is where a Registered Education Savings Plan [RESP] comes into play.

RESPs are powerful tools that Canadians can take advantage of to fit the post-secondary bill. They can be opened by the parents or guardians of a child, other family members, or friends, to save over a total period of 35 years. By contributing regularly to an RESP, families can build substantial savings to cover tuition and related expenses. Starting early allows for smaller, manageable contributions over time, reducing the financial stress associated with higher education. The most valuable part of this savings tool is that it opens your savings up to a world of government grants that you can qualify for.

Unlocking “Free Money” with Grants

One of the most compelling features of RESPs is the opportunity to acquire “free money” in the form of grants. The Canadian government provides a generous grant called the Canada Education Savings Grant (CESG) as a reward for saving, allowing you to collect up to $7200.

This grant matches 20% of your contributions on the first $2,500 saved annually. Over the years, if you contribute $2500 annually to an RESP, this works out to an additional 20% being added to your first $36,000 saved without even considering investment gains. By maximizing these grant opportunities, families can alleviate the financial strain of higher education and better prepare for the future. Continue Reading…

The changing perceptions of Normal

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Image courtesty Outcome/Creative Commons

By Noah Solomon

Special to Financial Independence Hub

In response to rapidly accelerating inflation, central banks began raising rates aggressively at the beginning of 2022. Ever since, wild swings in bond markets have had a tremendous impact on virtually every single asset class.

This month, I examine the recent spike in rates from a historical perspective. Importantly, I will discuss the likely range of interest rates over the foreseeable future and the associated implications for financial markets.

When the Fed and other central banks were confronted with financial disaster in late 2008, they slashed interest rates to zero and deployed additional stimulative measures to ward off what many thought could be another Great Depression. Global rates then remained at levels that were both well below historical averages and the rate of inflation for the next 13 years.

In 2008, the runaway inflation of the 1980s and the painful medicine of record high rates that were required to subdue it were still relatively fresh in people’s minds. At that time, had you asked anyone what would be the most likely result of keeping rates near zero for over a decade, their most likely response would have been runaway inflation. And yet, inflation remained strangely subdued. According to most experts, this unexpected result is largely attributable to a relatively benign geopolitical climate and a related push toward global outsourcing.

This led to the notion of a “new normal” in which inflation was permanently expunged. Over the span of only 13 years, people went from fearing inflation to believing that it was a relic of the past unworthy of serious consideration. This false sense of comfort caused central banks and investors alike to be caught off guard in late 2021 when they realized that inflation had not been permanently vanquished but was merely hibernating.

These sentiments were evident in bond markets. After rates were slashed to zero during the global financial crisis, investors were skeptical that they would remain there for long before stoking inflation. Longer-term rates remained well above their short-term counterparts, with the yield on 10-year U.S. Treasuries retaining an average 1.9% premium above the Fed Funds rate from 2009 – 2020.

However, 13 years of ultra-low rates with no sign of inflation allayed such fears, with the yield spread crossing into negative territory late last year and reaching a low of -1.5% in May of 2023. Even the rapid acceleration in inflation in late 2021 failed to fully disavow investors of the notion that the era of low inflation had come to an end, with current 10-year rates falling below their overnight counterparts.

10 U.S. Treasury Yield Minus Fed Funds Rate (1995 – Present)

 

Equity markets danced to the same tune as their bond counterparts. When central banks cut interest rates to zero during the global financial crisis, investors were dubious that inflation would not soon rear its ugly head. Multiples remained relatively normal, with the P/E ratio of the S&P 500 Index averaging 16.4 for the five years beginning in 2009.

Over the ensuing several years, investors became complacent that the world would never again experience inflation issues, with the S&P 500’s P/E ratio climbing as high as 30 by early 2021. Multiples have since remained somewhat elevated by historical standards, indicating that markets have not fully embraced the fact that inflation may not be as well-behaved as what they are used to.

S&P 500 P/E Ratio (1995 – Present)

 

The Rising Tide of Declining Rates: Not to be Underestimated

According to legendary investor Marty Zweig:

“In the stock market, as with horse racing, money makes the mare go. Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”

The 2,000-basis point decline in interest rates from 1980 to 2020 not only turbocharged aggregate demand (and by extension corporate revenues), but also dramatically lowered companies’ cost of capital. In tandem, these two developments were nothing short of a miracle for corporate profits and asset prices. Continue Reading…

These three ETFs are responsible for most of my wealth

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AlainGuillot.com

By Alain Guillot

Special to Financial Independence Hub

I was a day trader for almost 10 years.

Oh, I was so smart. I was smarter than the market and all its participants. But I was not, I was delusional. I wasted my time trying to guest the direction of the markets. I had good months in which I felt I was going to be a millionaire, and then in one bad trade I would lose most of my gains.

The one lesson I discovered, and maybe was worth the price of all my losses was that passive investment works.

The strategy create by John Bogle many decades ago is till paying huge dividends. Mr. Bogle was the founder of Vanguard Funds, the inventor of Passive Investing, a strategy created for the masses. Ever since I started passive investing my portfolio has been going up at a staggering rate.

My investments are composed of three main investments:

VFV (Vanguard S&P 500 US Index ETF)
XIU (iShares S&P/TSX 60 Index ETF)
VIU (Vanguard FTSE Developed all caps ex North America)

Plus other individual stocks that mostly lose me money. Continue Reading…

A Wake-up Call for those choosing Mutual Fund fees over Robo-Advisors

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Image courtesy Questrade/iStock

By Scarlett Swain

(Special to Financial Independence Hub)

It’s that time of year. The leaves have started to shift to brilliant shades of crimson, orange, and yellow. The days are getting shorter. And, suddenly, it’s “jacket weather” again. For many Canadian families, the transition into cooler months signals a time to begin the process of reviewing their finances from the past year with the goal of being better prepared in the years ahead.

With the cost of living in Canada incrementally higher than it has been in recent memory, there is a renewed opportunity for families to ask a familiar question: what is a simple, one-step investment strategy that they can use to help stretch the most out of their money, both now and for the long haul?

Well, like the changing seasons, it may be a good time for families to consider changing up a dated investment approach in favour of one that will take their money a little further. That is, using a low-fee, low-touch, robo-advisor in place of costly mutual fund investments … and, here are a few reasons why:

Accessibility

Robo-advisors have ushered in a new era of accessible investing. Designed to be user-friendly from the get-go, they are an excellent choice for both novice and experienced investors. With just a few clicks, investors can select a portfolio that matches their risk tolerance and fund it with little to no hassle.

Diversification

A well-constructed portfolio needs variety. Robo-advisors excel at this by spreading investments across different asset classes, thus reducing risk. Mutual funds, while also diversified, often lack the customizability and personalization offered by low-fee robo-advisors.

Automated Rebalancing

Investing with a robo-advisor provides nimble, automated rebalancing, ensuring that investments stay aligned to goals, even as market conditions shift. Mutual fund investors often need to manually (and worse, reactively) adjust their portfolios, potentially missing out on market opportunities or exposing them to unnecessary risk. Continue Reading…

How do Non-Registered Accounts differ from RRSPs and TFSAs?

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Canadian investors have several account types at their disposal to build an investment portfolio. This typically starts with registered accounts – RRSPs and TFSAs – to take advantage of tax deductions, tax deferred growth (RRSP), and tax-free growth (TFSA). But registered accounts come with contribution limits, so once those accounts are filled up many investors will open a non-registered account to invest any extra cash flow or a lump sum of money.

In this article I will explain what a non-registered account is, how it works, how it’s taxed, who should use one, and who shouldn’t. Plus, I’ll look at the pros and cons of using a registered account versus a non registered account to save and invest.

What is a non-registered account?

A non-registered account is something that can be used for savings – such as an emergency fund – or as a complement to your other investment accounts. It does not have any special tax attributes, contribution or withdrawal limits, or age restrictions – other than the fact that you must be 18 (or 19 in some provinces) to open an account.

At its core, a non-registered account is a taxable account. That means any investment income earned inside the account will be taxable to the investor each year. Investment income typically comes in the form of interest or dividends. I’ll explain how those are taxed later.

Investors using a non-registered account don’t have to pay tax when their investment(s) increases in value. That taxable event doesn’t occur until an investment is sold inside a non-registered account. If the investment increased in value, the investor would have to pay taxes on 50% of that gain (called capital gains tax). If the investment decreased in value from when it was purchased, the investor could claim a capital loss on 50% of that loss in value. Capital losses can be carried forward indefinitely but can only be used to reduce or eliminate a capital gain.

A non-registered account could be an individual investment account, a joint investment account, or a high-interest savings account.

How does a non-registered account work?

Anyone age 18 or older (or 19 in some provinces) can open a non-registered account for the purpose of saving or investing. For most people, their first non-registered account is a savings account. Any interest earned inside the account is taxable to the investor. For example, if you held $10,000 in a non-registered savings account and earned 1% interest for the entire year – you would add $100 to your taxable income for that year.

A non-registered investment account is typically used by investors who have reached the contribution limit inside their registered accounts – their RRSP and TFSA. There’s no contribution limit in a non-registered account. Some investors may choose to invest in a non-registered account instead of their RRSP if their tax bracket is lower now than it is expected to be later in life.

Investors can purchase stocks, mutual funds, exchange-traded funds (ETFs), and other investments inside their non-registered account. Any investment income earned, such as interest on cash savings, interest from bond investments, and dividends distributed by stocks, mutual funds, or ETFs, are taxable in the hands of the investor each year.

Non-registered investors need to pay close attention to their buying and selling activity inside the account. Unlike RRSPs and TFSAs, where investments can be bought and sold without any tax consequences, selling a non-registered investment is a taxable event and subject to capital gains. One tip is to use the website AdjustedCostBase.ca to track your non-registered transactions.

When to use non-registered accounts

Most people should strive to max out the contribution room inside their registered accounts first before opening a non-registered account to invest. But non-registered accounts can and should be used as part of your financial plan for savings and investing.

The easiest way to utilize a non-registered account is to open a high interest savings account to start building your emergency fund, or as a place to fund your short-term goals. I’d suggest doing this in a non-registered savings account rather than your TFSA for two reasons:

  1. Your TFSA should be used to invest for longer term goals like retirement
  2. The taxable interest earned on your “high interest” savings account will likely be so minimal that it’s not worth using up your valuable TFSA contribution room to shelter that interest income

I’ve already mentioned two situations when investors should open a non-registered investment account:

  1. When you’ve maxed out the contribution room inside your RRSP and TFSA and still have extra cash flow available to invest
  2. When you’ve maxed out the contribution room inside your TFSA but your tax bracket is lower now than you expect it to be later in life – meaning an RRSP contribution would be less advantageous today

There’s also a third scenario that makes sense to use a non-registered investment account: If you’re the type of investor who likes to carve out a small percentage of your portfolio to speculate on individual stocks, sector ETFs, or cryptocurrency.

Related: The Problem With Core and Explore

Speculative investments are more likely to suffer losses than a broadly diversified portfolio of passive index ETFs. Why use your valuable RRSP and TFSA contribution room to speculate and potentially lose money on an investment when there are no tax advantages? Furthermore, any money lost on a bad investment means contribution room is also lost forever.

Instead, if you must scratch that itch, use a non-registered investment account to house your speculative bets on meme stocks, tech ETFs, and crypto coins. If you strike it rich and then sell, only 50% of the gains are taxable. And, more likely, if your investments lose money, you can sell and claim 50% of the loss as a capital loss. This can offset future capital gains down the road.

Types of non-registered investment accounts

Outside of the non-registered savings account there are two types of non-registered investment accounts: a cash account and a margin account.

A cash account is a regular non-registered investment account that can be used to hold cash, bonds, stocks, mutual funds, ETFs, and other investments. These accounts can be held individually or jointly.

A margin account can hold the same investments as a cash account, but with a margin account the investor will have the ability to borrow money to invest – i.e., use leverage. Investors cannot use margin in a registered account.

Certain online brokerages have different names for their non-registered accounts. I’ve heard it called a non-registered account, an unregistered account, a cash account, an open account, or a margin account. Questrade calls its non-registered accounts “margin accounts,” even though investors don’t need to use margin to invest in one. Wealthsimple Trade calls its non-registered account a “personal account.”

Pros and cons of non-registered investments

Here are the pros of using a non-registered account:

  • No contribution or withdrawal limits
  • Anyone can open an account once they’ve reached the age of majority in their province
  • Capital gains are only taxed when sold, and only 50% of the gain is subject to taxes
  • 50% of investment losses can be used to reduce or eliminate future capital gains.
  • Useful when you’ve reached the contribution limits of your registered accounts, or when you don’t want to use your RRSP or TFSA contribution room to hold your emergency savings or speculative investments Continue Reading…