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).

BMO ETFs: Tax Loss Harvesting

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illustration of a man on a laptop with charts and graphs behind him, sitting on money to illustrate investing

By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Content)

With volatile markets, rising inflation and a potential economic slowdown, 2022 has proven to be a challenging year for investors. Exchange traded funds (ETFs) are effective tools for investors to help navigate these uncertain markets and can be used to help crystallize losses from a tax perspective. As 2022-year end approaches, this article provides trade ideas to help you harvest tax savings from under-performing securities.

What is Tax-Loss Harvesting?

By disposing of securities with accrued capital losses, investors can help offset taxes otherwise payable from securities that were sold at a capital gain. The proceeds from the sale of these securities can then be reinvested in different securities with similar exposures to the securities that were sold, in order to maintain market exposure.

  • Realized capital gains from previous transactions can be offset by selling securities, which are trading at a lower price than their adjusted cost base.
  • Investors can then use the proceeds from the security that is sold to invest in a different security, i.e. BMO Exchange Traded Funds (ETF).
  • In addition to common shares, tax-loss harvesting can also be applied in respect of other financial instruments that are on capital account, such as bonds, preferred shares, ETFs, mutual funds, etc.

Considerations:

If capital gains are not available in the current year, the realized losses may be carried back for three years to shelter gains realized in those years or carried forward to reduce capital gains in upcoming years.

Continue Reading…

The seven money myths that stand in the way of a good financial plan

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Financial Literacy Month is natural moment for a reality check-up

By Jennifer Cook, EPD, PFA, PFA™, QAFP™

For the Financial Independence Hub

On the path to financial security, there are natural peaks and valleys that can be navigated via the help of a good advisor.  It’s the map in the form of a personal plan that can help guide an individual toward their goals, whether it is saving for a house, planning for retirement or protecting against unforeseen events.  But more than any other hazard along the journey, is when road signs are misread or misunderstood.

Financial literacy is key to unlocking an individual’s ability to realize their dreams, and that is why Financial Literacy Month in November is so important to us at Co-operators.  It’s a moment for all of us to fill in some of the gaps in our knowledge about planning.

Many of us have developed habits or rely on inherited ideas about finances, so I look at financial literacy as an opportunity to put to rest some of the myths that can affect good financial planning.

As Canadians face year-end decisions on investments, taxes, and RRSPs, we at Co-operators have identified common gaps in financial preparedness stemming from the spread of money myths. There are many myths that can derail planning, but I’d like to talk about the top seven and offer a remedy in the form of a reality.

Myth 1: Saving is safe. Investing is risky.

Reality: As Canadians feel the impact of raising interest rates and inflation, it’s tempting to embrace the idea of “safe” or “lower-risk” investment options. But this strategy comes with a risk of considerable lost earning power. Investing in a diversified portfolio that matches individual needs with the help of a Financial Advisor can build long-term returns, while managing risk.

Myth 2: Single, young people don’t need insurance.

Reality: No one is free from the risk of loss or liability. When budgets are tight, tenant or renters’ insurance can provide critical coverage for unforeseen events like theft, fire, or water damage. Young people can also take advantage of lower insurance rates that provide continuing benefits as their lives develop and their needs grow.

Myth 3: RRSP season starts in mid-February.

Reality: Though the typical RRSP frenzy may suggest otherwise, there is no rule that says lump sum payments must be made to RRSPs before the annual March 1 deadline. Canadians can contribute to their RRSPs (up to individual contribution maximums) at any time of the year. The March 1 date is used to determine how tax benefits will apply to the previous year’s income. Depending on a person’s situation, a Financial Advisor may recommend contributing smaller amounts to an RRSP on a weekly, bi-weekly, or monthly basis.

Myth 4: Those who invest in mutual funds have sufficiently diversified portfolios.

Reality: Today’s spectrum of mutual funds is widespread. It’s not easy to gauge whether an individual investor is appropriately diversified. And that can leave some people vulnerable to losses from sectors. Leveraging the expertise of a Financial Advisor can help investors make nuanced adjustments to ensure their portfolio has the right balance of diversification aligned with their risk tolerance. Continue Reading…

12 unique ways to Change your Spending Habits

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What is one unique way someone can change their spending habits for the better? 
To help you improve your spending habits, we asked CEOs and business leaders this question for their best tips. From trying to not purchase anything online for one month to trying the envelope method, there are several unique tips to help you change your spending habits for the better.

Here are 12 unique ways to change your spending habits: 

  • One Month No Online Purchases
  • Check How Long You Can Go Without Something
  • Change Paid Activities to Be Cost-effective
  • 30-day Challenge
  • Track Your Spending for One Week
  • Buy from Your Local Market
  • Reduce Impulsive Purchases
  • Shop With Lists Only
  • Ask a Friend
  • Use Cash as a Payment Option
  • Set Savings Milestones and Rewards
  • The Envelope Method is One Way to Change Spending Habit

 

A Month with no Online Purchases

My wife and I recently did a one-month challenge on not purchasing anything online. The breaking point was coming home after a long weekend and finding over 10 packages on our doorstep between the two of us ordering online. We heard of a challenge where you don’t purchase anything for a month, but knew that wouldn’t work for us. We decided just not to purchase any items online. If we needed something we had to go to the store and purchase the item. We realized we didn’t have to buy as much stuff as we were previously ordering online. After the challenge month was over, we did both change our spending habits and don’t buy nearly as much as we previously did online. We also found out that the physical store tends to be less than purchasing your items online. –– Evan McCarthy, President CEO, SportingSmiles

Check how long you can Go without Something

When you’re contemplating buying something, the best way to evaluate your intentions is to check how long you can go without it. If you decide on a date until which you believe you will not need this product or service, postpone your spending until that date. Once the new date arrives, ask yourself the same question and set another date. Do this thrice, and chances are the futility of adding it to your list of purchases will finally hit. It’s also highly probable that you won’t even choose to remember the later dates and forget all about spending your hard-earned money on something you never required in the first place. —Riley Beam, Managing Attorney, Douglas R. Beam, P.A.

Change Paid Activities to be Cost-effective

Going out for drinks, going bowling with friends, dancing at the club: these are all fun activities that are definitely worth your time and money. These expenses, however, add up in the long run and one way to still enjoy yourself but save a little money in your wallet is to substitute some activities with cost-effective alternatives. For example, instead of going to a bar for drinks, create a makeshift bar at home. Try hiking or scope your community newsletter for other free, public events. — Adam Shlomi, Founder, SoFlo Tutors

30-day Challenge

One unique way someone can change their spending habits for the better is by doing a 30-day challenge. One of the most significant barriers to saving money is impulsive buying. It’s easy to fall for an online advertisement that claims to anticipate your needs and wants. But there is a workaround:
– Take a screenshot of the ad rather than clicking on it.
– Create a folder on your desktop to store all these screenshots.
– Check the folder after 30 days to see if you still wish to purchase that item.


The 30-day challenge is also applicable to offline purchases. Write down what you want to buy, give yourself 30 days, and then decide if you still wish to purchase. After a 30-day wait, you may be shocked by the items that no longer interest you. —Tiffany Homan, COO, Texas Divorce Laws

Continue Reading…

Young Investors vs Inflation

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By Shiraz Ahmed, Raymond James Ltd.

Special to the Financial Independence Hub

Until recently young investors were not terribly concerned with inflation. Why should they have been? It was so low for such a long time that we could predict with pretty good accuracy what was around the corner, at least, in terms of the cost of living. But those days are long gone.

Simply speaking, inflation can be defined as the general increase in prices for those staple ingredients of daily life. Food. Gas. Housing. What have you. And as those prices rise the value of a purchasing dollar falls. When these things are rising at 1% a year, or even less, investors can plan and strategize accordingly. But when inflation is rising quickly, and with no end in sight, that is very different and this is where we find ourselves today.

Someone with hundreds of thousands of dollars to invest, but who must wrestle with mortgage payments that suddenly double, is into an entirely new area. It happened back in the early 1980s when mortgage rates went as high as 21%. Many people lost their homes. But even rates like that pale in comparison to historical examples of hyperinflation.

In the 1920s, the decade known as The Roaring Twenties, the stock market rose to heights never seen before and for investors it was seen as a gravy train with no end in sight. But that was not the case in Germany where a fledgling government – the Weimer Republic – was desperately trying to bring the country out of its disastrous defeat in World War I. Inflation in Weimer Germany rose so quickly that the price of your dinner could increase in the time it took to eat it!

Consider that a loaf of bread in Berlin that cost 160 German marks at the end of 1922 cost 200 million marks one year later. By the end of 1923 one U.S. dollar was worth more than four trillion German marks. The end result was that prices spiralled out of control and anyone with savings or fixed incomes lost everything they had. That in no small way paved the way for Adolf Hitler and the Nazis. Let us also not forget that the gravy train of the Roaring Twenties eventually culminated in the stock market crash of 1929 which led to the Great Depression.

Continue Reading…

Retired Money: What Asset Class charts can teach about risk and volatility

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My latest MoneySense Retired Money column addresses a topic I have regularly revisited over the years: annual charts that help investors visualize the top-performing (and bottom-performing!) asset classes. You can find the full column by clicking on the highlighted headline here: Reading the “Annual Returns of Key Asset Classes”—what it means for Canadian investors. 

As the column notes, I always enjoyed perusing the annual asset classes rotate chart that investment giant Franklin Templeton used to distribute to financial advisors and media influencers. I still have the 2015 chart on my office wall, even though it’s years out of date.

Curious about the chart’s fate, I asked the company what had become of it, and learned it’s still available but now it’s only in digital format online. As always I find it enormously instructive. It’s still titled Why diversify? Asset classes rotate. As it goes on to explain, “one year’s best performer might be the next year’s worst. A diverse portfolio can protect your from downturns and give you access to the best performing asset classes this year – every year.”

The chart lists annual returns in Canadian dollars, based on various indexes.

Right off the top, you see that U.S. equities [the S&P500 index] are as often as not the top-producing single asset class. It topped the list five of the last nine years: from 2013 to 2015, then again in 2019 and 2021.

On the flip side, bonds tend to be the worst asset class. Over the 15 years between 2007 and 2021, at least one bond fund was at the bottom seven of those years: global bonds [as measured by the Bloomberg Global Aggregate Bond Index] in 2010, 2019 and 2021, US bonds [Bloomberg US. Aggregate Bond Index] in 2019, 2012 and 2017, and Canadian bonds [FTSE Canada Universe Bond index] in 2013. And consider that all those years were considered (in retrospect) a multi-decade bull market for bonds. You can imagine how bonds will look going forward now that interest rates have clearly bottomed and are slowly marching higher.

As you might expect, volatile asset classes like Emerging Markets [measured by the MSCI Emerging Markets index] tend to generate both outsized gains and outsized losses. EM topped the chart in five of the last 15 years (2007, 2009, 2012, 2017 and 2020) but were also at the bottom in 2008 and 2011. EM’s largest gain in that period was 52% in 2009, immediately following the 41% loss in 2008. Therein lies a tale!

The latest Templeton online charts also include a second version titled “Risk is more predictable than returns.” It notes that “Higher returns often come with higher risks. That’s why it’s important to look beyond returns when choosing a potential investment.” It ranks the asset classes from lower risk to higher risk and here the results are remarkably consistent across almost the entire 15-year time span between 2005 and 2021.

The missing alternative asset classes

This is all valuable information but alas, these charts seem to focus almost exclusively on the big two asset classes of stocks and bonds, precisely the two that are the focus of all those popular All-in-one Asset Allocation ETFs pioneered by Vanguard and soon matched by BMO, iShares, Horizons and a few others. Continue Reading…