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 RESP

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Image via Pexels: Ketut Subiyanto

By Megan Sutherland, BMO Private Wealth

Special to Financial Independence Hub

The days are getting shorter, nights a bit cooler and with September now upon us, back to school is on the minds of parents nation-wide.  Since 2007, the average cost of undergraduate tuition fees in Canada has increased 55% and, according to a 2023 poll, 81% of parents believe it’s their responsibility to help pay for post-secondary costs.  Conversations I’m having with clients, friends and family certainly corroborate these numbers, making it timely to talk about the Registered Education Savings Plan (“RESP”).

For decades Canadians have been able to utilize the RESP, a program developed to incentivize savings with grant money (Canada Education Savings Grant, “CESG”), and preferential tax treatment.  Who doesn’t love free money!

Okay, so what’s the deal?

  • What is the maximum amount I can contribute per beneficiary?
    • A lifetime contribution limit of $50,000 per beneficiary.
  • How can I receive the maximum CESG?
    • Contribute up to $2,500 per year to receive 20% in CESG.
  • What if I’ve missed years of contributing?
    • You can catch up one additional year of CESG per year.
  • How much is the CESG grant?
    • Maximum of $7,200.
  • Is there an age limit on receiving CESG?
    • The CESG is available until the calendar year in which the beneficiary turns 17. However, there are specific contribution requirements for beneficiaries aged 16 or 17.
  • What is the tax treatment?
    • Contributions are not deductible but can be withdrawn tax-free.
    • Investment growth and CESG are taxed to the beneficiary when withdrawn for qualifying educational purposes.
  • Do you have to be the beneficiary’s parent to open one?
    • Any adult can open an RESP on behalf of a beneficiary – parents, guardians, grandparents, other relatives or friends – however, contribution across all plans must not exceed the maximum per beneficiary.

If you hope to have an aspiring doctor on your hands, consider harnessing the power of compounding to amp up your savings and open a plan as soon as possible!

Compare:

  1. Contribute a total of $36,000 over 14.4 years and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$80,000
  1. Contribute a $14,000 lump-sum in year one, then $36,000 over 14.4 years, for a total of $50,000, and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$115,000

 

Net benefit from additional $14,000 contribution in year one: approximately $20,000.

Saving to Attract CESG Only vs. Saving to Maximize Growth and Attract CESG 

Just like everything in life, make sure to read the fine print.  Keep in mind the following tips and traps:

  1. Open a Family Plan. Growth can be shared by all beneficiaries and the CESG money may be used by any beneficiary to a maximum of $7,200.
  2. Be prepared if the funds aren’t depleted by school costs. Contributions can be withdrawn by the subscriber without penalty. However, remaining CESG is clawed back. Growth in the RESP can be contributed to your RRSP (up to $50,000 if you have available contribution room), otherwise it is taxed at your marginal tax rate upon withdrawal by the subscriber, and there is an additional penalty tax of 20%.
  3. Choose investments wisely. Taking too much risk could result in losses that may create hard feelings or regret. Make sure to plan for withdrawals, potentially transitioning assets to cash, laddered bonds or GICs to ensure funds are available to pay for education costs.
  4. Put it in your estate plan. If you are married, consider opening the RESP in joint name. If you aren’t married or open the RESP in your name only, name a successor subscriber in your Will.
  5. U.S. citizens beware! The U.S. does not recognize the RESP as an exempt account type. Therefore, any earned income in the account is reportable on your U.S. tax return and can result in double taxation. Continue Reading…

How a Fed Rate Cut could bolster Canada’s largest Covered Call Bond ETFs

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By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog) 

In late August, Federal Reserve chairman Jerome Powell caused a stir among the investing community when he provided the strongest signal yet that the U.S. central bank is gearing up for interest rate cuts starting in September.

At the time of this writing, we are just one day away from that crucial decision. So what will this mean for  the yield curve, the direction of the Fed, how the change in policy is affecting markets, and the implications for Harvest Premium Yield Treasury ETF (HPYT:TSX) and the Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX) in the final third of 2024. Let’s explore!

How does the yield curve function?

The yield curve, which is a representation of different bond yields across various maturities, can take varying shapes and curvatures. However, the most talked about is the shape of the yield curve in particularly one that’s either normal or inverted. A normal yield curve will have short-term bond yields that are lower than long-term bond yields. This encapsulates the time and risk premium associated with investing further into the future. However, in a period wherein central banks are seeking to slow economic growth/inflation, near-term rates will be raised in a manner that leads to higher short-term yields versus long-term yields. This is called an inverted yield curve, a much rarer occurrence.

Source:  Bloomberg, Harvest Portfolios Group Inc., September 12, 2024

In practice, the difference between the 10-year yield versus the 2-year yield of government bonds is the go-to measure or gauge. The yield curve has been inverted for some time and became dis-inverted (Normal) in August 2024. That is a sign that shorter-term rates are coming down. This likely precedes meaningful interest rate cuts.

Source:  Bloomberg, Harvest Portfolios Group Inc., September 12, 2024

What drives the Federal Reserve?

The Federal Reserve (Fed) has a dual mandate: to achieve maximum employment, and to keep prices stable. Despite taking on one of its most aggressive interest rate hiking cycles in history to regain price stability, inflation has failed to return to the target of 2%, albeit subsiding in recent months. The lower levels of inflation come with slowing economic data and weaker-than-expected jobs data, which belies the Fed’s goal of achieving maximum employment. So, what’s next?

With inflation coming down, the Fed members seem ready to cut short-term rates to alleviate the negative impact of higher interest rates on the economy. But before we get excited, it’s worth noting that the Central bank tools traditionally take time to filter through to the economy. Interest rate cuts may not have an immediate impact on the economy and broader markets but will filter over time.

Ultimately, this shift in policy should return the inverted yield curve to a normal yield curve.

Rate expectations: What is already priced in?

The next Fed rate announcement meeting is on September 18, and the market is already pricing in the first rate cut. The size of the cut is still up for debate, but it is likely to be 25 basis points, with a smaller chance that it could be larger at 50 basis points.

Looking further out to the Fed’s remaining two meetings for the rest of the year, the market expects the Fed to cut rates again. That would represent a total of 100 basis points of cuts expected by the end of 2024. Moreover, the market has priced in 10 rate cuts, or 250 basis points, of total interest rate cuts. These are priced in and expected to occur throughout 2025 with the ultimate destination of 3.00% on the overnight rate.

However, interest rates further out the yield curve have also recently moved down quite a bit. This is what’s known in bond-speak as a “bull steepening” — as the curve normalizes yields across maturities shift lower too, and thus bond prices move higher. Indeed, the narrative continues to shift toward the imminent start of this rate cutting cycle.

The 10-year yield was 3.65% at the time of writing. That is already down significantly – 137 basis points – from the peak of interest rates in October 2023.

The implications for the yield curve

What will happen to the yield curve going forward? Portfolio Manager Mike Dragosits, CFA, expects the yield curve to normalize due to several existing factors. The tightening cycle is ending, and the Fed is poised to embark on a rate-cutting cycle. So, this would mean that short-term bond yields may fall faster and stay relatively lower than long-term bond yields. Continue Reading…

Why it’s never too late to Invest your Money

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Worried you’re behind the “Magic 8 Ball” when it comes to investing in retirement savings? If your retirement fund is a bit anemic (or nonexistent), there’s no time like the present to get started! It’s never too late to invest your money but do you know where to start? Will explore active, passive, and wise investment options in this quick guide to your financial freedom.

Adobe image courtesy Logical Position

By Dan Coconate

Special to Financial Independence Hub

Investing is often seen as a young person’s game. But the truth is, it’s never too late to start investing your money.

This is especially relevant for retirement planners and seniors. Whether you’re planning ahead or looking to make your savings work harder, investing can play a crucial role in your financial future. Below, we take a closer look at why you should start investing, what to look for when you invest, and how to prepare your family for the future with this wise financial decision.

Is it really never too late to Invest?

Many people think investing is only for the young. But countless success stories prove otherwise. Take Colonel Sanders, for example. He started Kentucky Fried Chicken (KFC) at the age of 65. Another prime example is Ray Kroc, who expanded McDonald’s in his 50s. These stories highlight that it’s possible to achieve financial success later in life, including when you think it’s time to retire.

Certain investments work for different age groups, which makes it easier for seniors to start investing. For instance, dividend-paying stocks offer a steady income. Bonds provide low-risk options suitable for conservative investors. Even real estate is a lucrative investment at any age.

Starting later can be just as rewarding as investing early. The key is finding the right opportunities. By doing so, you can make your money work for you, irrespective of your age and stage in life.

Active vs. Passive Investments

Active investments require regular attention. Examples include actively managed mutual funds and day trading. These investments aim to outperform the market. They need more effort but can offer higher returns.

Passive investments, on the other hand, are more hands off. Index funds and ETFs are good examples. These options track market indexes and require less management. They are ideal for those who prefer a simple approach.

Understanding the differences between active and passive investments is important. By knowing your options, you can choose the one that suits your lifestyle and risk tolerance. Whether you prefer to be hands-on or hands-off, there’s an investment strategy for you.

Benefits of Investing at a Later Stage

Investing later in life offers long-term financial security. It helps grow your money and secures enough funds for retirement. A well-planned investment can provide a steady income stream and offer peace of mind. Continue Reading…

My Own Advisor’s Top 5 Stocks

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By Mark Seed, myownadvisor

Special to Financial Independence Hub

Over the years of running this site, I have received numerous requests to share everything in my portfolio. For today’s post, I will reveal a bit more to help other DIY investors out since they are curious: what are my top-5 stocks?

Read on for this update including what has changed over the last year in this pillar post!

My Top-5 Stocks

As I approach 15 years as a DIY investor, a hybrid investor no less, we inch closer to our semi-retirement dream. Long-time subscribers will know we’ve always had two major financial goals to achieve as part of that journey:

1. Own our home.

Well, that goal is done!

You can read about our journey to mortgage-freedom / debt-freedom here below.

2. Beyond two workplace pensions, beyond our future CPP or OAS benefits, beyond any future part-time work – another big goal was for us to own a $1 million dollar investment portfolio for retirement.

Well, we accomplished that as well a few years ago.

We’ve actually been investing beyond that goal for some time only until recently – which I outlined in this Financial Independence Budget update.

Our investing goals have been accomplished using a hybrid investing approach – something that might appeal to you as well:

  • Approach #1 – we own a number of Canadian dividend-paying stocks for income and growth. We have essentially unbundled a Canadian dividend ETF for income and growth – and built our own ETF – without any ongoing money management fees.
  • Approach #2 – we own a few low-cost ETFs that focus on growth. We believe it is wise to invest beyond Canada for growth/diversification and so we do via a few low-cost ETFs like XAW and QQQ in particular. Our U.S. stocks are down to a handful now and potentially less over time in favour of those ETFs above.

A bias to getting paid – my top-5 stocks

With a bias to getting paid and getting more raises over time as a shareholder, we own a few stocks in particular. Before sharing my top-5 stocks, some highlights why DIY investing works for me.

1. Fees are forever.

With investing you usually get what you don’t pay for.

Based on all the information available today, to buy an index fund in particular, I don’t believe you need a money manager to perform indexing work on your behalf. That decision is up to you of course.

2. I/we control the portfolio.

Ultimately nobody cares more about your money than you do.

I run my site to help pay forward my successes but also share what’s not working. I have no problems admitting I am not perfect. I make investing mistakes. Most people do. Via my site, I share those lessons learned so you don’t have to make them. While there is no perfect portfolio you can design a portfolio that should meet many of your needs over time. Many DIY investors, readers here, have learned that sustainable dividend and distribution income is one such path to financial independence. In some cases, these DIY investors have been investing long enough that their portfolio income now exceeds their expenses – some of them earning over $100,000 per year from their portfolio after decades of investing. They’ve learned that the power of compounding is an incredible force if left uninterrupted. These DIY investors manage their investments based on their income objectives.

I simply hope to follow the same formula. 🙂

Given I control our portfolio, I feel I can manage our investments aligned to our objectives. A reminder about my free e-book below:

  • Chapter 1: Spend less than you make and invest the difference. Invest in mostly low-cost products. Strongly consider diversifying your investments including stocks from different sectors and countries that pay dividends and offer growth.
  • Chapter 2: Avoid active trading. Celebrate falling stock prices – buy more when they fall in price.
  • Chapter 3: Disaster-proof your life with insurance, where needed, to cover a catastrophic loss. Otherwise, keep investing and just keep buying.
  • Book conclusion: Read Chapters #1-3 and rinse and repeat for the next 30 years. Retire wealthy.

That’s the basics within 80,000+ personal finance books in just four bullets. 🙂

As a DIY investor I believe you have some powerful decisions most money managers will never possess:

  1. A money manager has to demonstrate value by trading. Otherwise, why use them when you can buy your own quality stocks or indexed funds instead?
  2. Money managers usually need approval for their transactions. Instead, you can decide when to celebrate lower prices to get your stocks on sale without another manager, director or VP-scrutiny involved.

To paraphrase the index investing community, with no way to consistently identifying manager performance ahead of time, there is very little chance of finding any money manager who after fees charged to clients can consistently best a basic index fund performance over the long-haul.

There are simply too many low-cost, diversified, easy-to-own ETF choices to build wealth with. As a DIY investor, you don’t ever have to pay someone else to do your work for you.

In the spirit of going it alone, doing it yourself and being accountable for your own results, I feel my hybrid approach offers the best of both worlds:

  • In Canada, we own many of the top-listed stocks in the TSX 60 index for income and growth.
  • Beyond Canada, beyond a few U.S. stocks, we use indexed ETFs for extra diversification.

We fired our money manager years ago and have never looked back … that approach might work for you too.

Without further delay, here are our top-5 stocks in our portfolio by portfolio weight current to the time of this post.

My Top-5 Stocks

1. Royal Bank (RY)

Since publishing the original post in fall of 2023, I can share that Royal Bank of Canada (RY) remains our largest single stock holding. About 4-5% of the total portfolio. We’ve owned RY for many years – profiled here.

Here are the returns compared to one of my favourite low-cost ETFs (XIU) for comparison:

Royal Bank September 2023

All images/sources with thanks to Portfolio Visualizer. 

 

2. TD Bank (TD)

While the management team at TD is certainly due for some changes, I will disclose that TD is our second largest stock position at the time of this post. Like RY, we’ve owned TD for many years – profiled here – as early as 2009.

Again, returns for comparison purposes:

TD Bank September 2023

Banking is just one important sector in our Canadian economy. Fortis owns and operates multiple transmission and distribution subsidiaries in Canada and the United States, serving a few million electricity and gas customers.

Last time I checked, just like people need to bank or borrow money (see the desire for us to own banks!) folks love electricity and power.

I own Fortis for steady dividend income and some capital gains. I started my ownership in Fortis also back in 2009. You can read about that here.

Again, historical returns for context:

Fortis September 2023

Our Canadian stock market operates in an oligopoly, meaning there are a few dominant players controlling the market. We see this in banking, utilities, and it continues with our telco industry. As a shareholder, Telus has been focused on expansion in recent years but in doing so has also taken on some debt in the process. The share price has lagged. With interest rates due to come down further over the coming 24 months, I believe Telus is a great buy to add more to my portfolio.

You can read about when I started buying Telus here.

Again, returns for comparison purposes:

Telus September 2023

5. Canadian Natural Resources (CNQ)

Following the stock split and rise in share price, CNQ continues to be a stock on the rise in my portfolio.

I’ve been a CNQ shareholder for many years – the evidence is here since 2013.

Again, some recent returns for comparison purposes current to 2024:

CNQ vs. XIU August 2024

My Top-5 Stocks Summary

You’ll notice a few things in this post. Continue Reading…

Now (and always) is the worst time to invest in bonds

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Image courtesy AlainGuillot.com

By Alain Guillot

Special to Financial Independence Hub

With friends on a rainy day
With friends on a rainy day

Anytime anyone consults a financial advisor, two things typically occur:

  1. The financial advisor tends to recommend their “in-house” products, which often come with high management expense fees ranging from 2-3%
  2. They inquire about your age and then miraculously present a fund tailored to individuals in your age group.

We’ve discussed point #1 in previous posts. Financial advisors invariably promote funds with high expense fees because they receive kickbacks known as trailer fees, which constitute a significant portion of their income. However, it’s important to note that these trailer fees come out of your pocket. It is in the financial advisor’s best interest to consistently suggest products that offer the most generous commissions.

Despite the fact that there are numerous low-cost index funds and ETFs that might be the best options for their clients, financial advisers seldom recommend them because they do not generate commissions. The success of investment advis0rs often depends on their clients’ lack of knowledge.

As for point #2, they are equally inadequate. The typical formula for selecting a stock-and-bond portfolio is to subtract your age from 100%. This implies that if you are 30 years old, your portfolio should consist of 70% stocks and 30% bonds. If you are 50 years old, the recommended allocation is 50% stocks and 50% bonds, and so on.

Is age really the most significant factor? What if I am already a millionaire? What if I am struggling to pay my rent? What if I am in good health? What if I am in poor health? These factors seem to be overlooked, as financial advisers simply refer to tables provided by their employers and assign clients to predetermined brackets from their sales manuals.

Historically, stocks have consistently outperformed bonds as an investment, but investing in bonds can create a false sense of security. In reality, bonds offer reduced volatility, but less volatility does not equate to lower risk. Over the long term, bonds are not less risky than stocks; they are simply less volatile.

The truth is that the more bonds you hold in your portfolio, the more you limit your growth potential. Why would anyone sacrifice their potential for earnings simply because they are older? When you are older and in need of your money the most, that’s precisely when you would want your money to work its hardest for you. Continue Reading…