Financial Perspective

Saving and Making you money

[financialperspective-blog]

Student Debt

What's your strategy for paying it off? Also, would you have lived differently while in school now that your actually paying it off ! I'm still undecided...

[financialperspective-blog]

June ' 13 CFA

Good luck to everyone writing CFA exams this weekend!

[financialperspective-blog]

[financialperspective-blog]

Fiscal Cliff - Short Term Pain, Long Term Gain

Like most things in life that are worth seeing through to the end, there has to be some sort of sacrifice or short term concession to promote positive or a desired result in the long term.

[financialperspective-blog]

STUDY, STUDY, STUDY

I am currently studying for the CFA Level 1 exam in December, anyone else preparing for the exam?

[financialperspective-blog]

Mutual Fund Load Fees

This is one of the most important part of buying a mutual fund.  Yet I find the majority of my clients have not educated themselves or their previous advisor had not educated their clients on what theses fees are, and more importantly how they work.

Basically, these fees directly compensate the advisor. Now, most all mutual funds have a management expense ratio (MER). These cover the operating costs associated with trading, administration etc. This is not to be confused with the Load fees.  Loads are paid separate from the MER.

There are several types of loads:

1. Front-End - A percentage of assets is charged and paid to the broker/advisor upon purchase of the fund.

2. Back-End/Low Load - A percentage of assets is charged and paid to the broker/advisor upon sale of the fund.  Usually expires if fund is held for a specific period of time.

3. Deferred Sales Charge(DSC) - A percentage of assets is charged and paid to the broker/advisor upon redemption of the fund.  Usually declines with each year of holding the fund.  May start at 5% in Year One and decline by a percentage point each year until expiry.

4. No Load - Self explanatory. No Fees on purchase or redemption.

If you are buying a mutual fund make sure you are fully disclosed and understand what you are required to pay and the full cost of owning a specific fund.  Most of the larger financial institutions whose advisors are paid salary may only sell No-Load funds, while an independent advisor working strictly on commission may sell a combination of loaded funds to put food on the table as an example. (However the advice you get from the independent advisor may be of more value making the addition cost of ownership justified) Make sure you know all the options that are available to you and make your decision accordingly!

Happy Investing

[financialperspective-blog]

Tax Free Savings Accounts

The introduction of the TFSA in 2009 has created a great investment option for Canadian investors.  Over the years as contribution room grows at a rate of $5,000/year this is going to allow Canadians to shelter sizable amounts of investable assets from the governments tax grabing hands. 

Any funds invested within a tax free savings account (TFSA) the growth of this money is not subject to tax, whether it be capital gains, dividend income, or interest income, at no point (annually or upon withdrawl) will you have a tax obligation.

This has created an opportunity for those with non-registered assets, to shelter more and more over time as the contribution limit increases.

Every Canadian should have a TFSA and can be combined well with your retirements savings plan in conjunction with your retirement savings plan (rsp) and non-registered assets.

I am not going to go into great length into all the account details , I have provided a link below.

http://www.tfsa.gc.ca/index.html

However, if you have any questions feel free to comment below!

Happy Investing

[financialperspective-blog]

[financialperspective-blog]

Pay Yourself First!

I think this is the most important strategy for those of you that earn a regular and consistent paycheck.  Often times many clients think they need to invest in lump sums or that they do not have enough to invest. This however is not true, time and frequency is most important.

Setting up pre-authorized systematic contributions to your investment accounts will force you to save. By investing consistently and for long periods of time you take advantage of several strategies.

1) Automatic - the contribution is done for you.  You don't have the opportunity of talking yourself out of it and spending the money of something else.

2)Small amounts - Most mutual funds will have a small initial purchase requirement and subsequent purchases can be as low as $50 in some cases.

3)Dollar Cost Averaging - By investing a many different points in time you take timing the market out of the equation.  You also are buying more units when prices are low, as well as buying less units when prices are higher.  This is beneficial to your average unit cost over time.

4)Adjustment - You will learn to live with the paycheck you receive. As your pay increases you can increase your contribution as well.

A few simple future value calculations can show you the power of saving consistently and frequently over periods of time. The younger you start the better.

Happy investing!

[financialperspective-blog]

[financialperspective-blog]

Apples cash hoarding continues.

[financialperspective-blog]

Principal Plus+ GIC Strategy

A great strategy for getting some more yield out of your GIC portfolio.  I use this strategy to introduce hesitant GIC clients into the wide world of Mutual Funds.

I have found that many retail banking clients, have a hesitancy with investing in mutual funds and a lot of that stems from a lack of knowledge or education.  I use this strategy to edge them into mutual funds to get them some experience on the behavior of the funds and use it as a educational opportunity.

I find most GIC clients are strictly concerned with the principal protection of their GICs and as many say "at least I'm making something". And with interest rates where they are currently, that something is a very small something indeed.

Again, a very simple strategy.

If a client has an investment of $10,000, has an investment horizon of 5 years +.

I would simply discount the principal of the GIC to the point where the maturity value equals their initial investment amount.

For example- $10,000 Investment , Term 5 years, Interest rate of 2.75%.

The present value would be $8731.54.  This amount invested today, for 5 years at a rate of 2.75% would equal their initial investment amount of $10,000. This ensures that they would at least get their principal returned!

That leaves the client with $1,268.46 to invest in a mutual fund for the potential for a higher return. I usually would use an index or equity fund to get good exposure to the equity indexes and common stocks.

This strategy gives me the opportunity to have more in-depth conversations about mutual funds and to broaden the scope of their investment knowledge, while giving them the opportunity to see the behavior and potential returns from the market in a principal protected way.  Also, the timing for this strategy is quite good with the interest rate environment we are in.

Happy Investing, and if you have any questions I'd be happy to answer?

[financialperspective-blog]

Article of the Day -Globe and Mail

Who's Chart is this?

[financialperspective-blog]

GIC LADDERING

Strategy #1 - GIC Laddering

A simple but effective strategy to get you a higher average rate of return on your guaranteed investment certificates, while removing some of the risk that we discussed earlier.

I will use the 5 year laddering strategy in this example but it can be used with many different terms (2, 3, 4 year. etc.)

The advantage of this strategy, is that it allows you to have portions of money maturing on an annual basis, thus removing some of the liquidity risk, also you will have money to re-invest more often, also reducing the re-investment risk.

Step #1 - Basically all you are doing is separating your investment into different terms. For example if you had $10,000 to invest.

You would set something up such as this:

$2,000 1 year term 1.25%

$2,000 2 year term 1.95%

$2,000 3 year term 2.15%

$2,000 4 year term 2.45%

$2,000 5 year term 2.75%         Effective Rate is 2.11% (Avg of the I Rates)

As you can see you have 5 different investments, all with different maturity dates on an annual basis and interest rates.

After the first year, you simply roll the matured certificate into another 5 year term, continuing the ladder. Each year you will be re-investing at the 5 year certificate rate, which will continually average your effective rate up to the 5 year.  After 4 years has passed you will have all 5 year certificates, 1 maturing each year.

4 years let may look like this:

$2,000 5 year term 2.75% (Original 5 year Certificate-1 year to Maturity)

$2,000 5 Year term 2.95% (2 years to Maturity)

$2,000 5 Year term 3.25% (3 years to Maturity)

$2,000 5 year term 3.5% (4 years to maturity)

$2,000 5 year term 3.35%     Effective Rate = 3.16%

* I assumed here you did not compound the interest payments just for math simplicity.  The point is the overall strategy.

As you can see, a very simple strategy that has many advantages over simply sticking the $10k into one 5 year term.

While this strategy works in many situations, it doesn't work for all circumstances.  I find this is ideal for clients that do not have a defined time horizon in mind, potentially may need a portion of the investment on an annual basis and obviously are looking for the principal protection that GICs offer.

Happy Investing

[financialperspective-blog]

GICs - Overview

Guaranteed Investment Certificates! I know, very exciting.

However, for many these investment products make up a sizable portion of their investable assets, as many retail banking clients can attest to.

I thought I would give a brief overview of the product before I delve into the strategies for this product.

Basic Structure - Consider this product a term deposit.  A GIC will have a specific face, interest rate and term to maturity. (ie. a $1,000 face value with an interest rate of 5% with a term of 5 years)

Different Variations - Your typical GIC will be non-redeemable, meaning prior to the maturity date it cannot be cash-in, sold or drawn from, barring an interest rate penalty or death etc. Redeemable, these certificates offer you the option to redeem prior to the maturity date, usually offer a lower interest rate for the term compared to a non-redeemable.  Accelerated rate, the rates will progressively increase throughout the term. (ie. Year 1 - 1.00%, Year 2 -   2.00%, Year 3 - 3.5%.. etc. ) Market Linked, these certificates maturity value will tied to some underlying index (ie. TSX 60) ususally have a maximum they will pay out of the term.

Interest Payments - Usually carry the option of how you would like the interest payments compounded (monthly, semi-annually, annually etc.) or paid to you (monthly, annually etc.).

Tax Treatment - GICs interest payments are taxable as interest income and taxed at your marginal tax rate on an annual basis whether you compound the interest or have it paid to you. (This applies to Non-Registered Investment Accounts.  I will cover the different account types in future posts)

Calculations - Math is very basic for these products. To find the Future Value (or Maturity Value)

GIC - Non-redeemable

Face Value (PV)= $1,000        

Interest Rate = 5.00%                                                  

Term = 5 years          

Compounding = Annual

Maturity Value = Face Value * ((1+Interest Rate)^Term)

Maturity Value = 1,000 * ((1+0.05)^5))

Maturity Value = $1276.28

There you have it! Those are the basics you need to know about GICs. Also, to add to this there are also several factors that apply to GICs you should be aware of.

CDIC Coverage - Most GICs are insured by the Canadian Deposit Insurance Corporation.  Per issuer you are eligible for coverage up to certain amounts, (currently 100,000) depending on the type of account and term.  More detailed information is available at their site.

Types of Risk - Liquidity Risk - This is the big one. Most GICs are subject to liquidity risk since they are not redeemable prior to the maturity date.  If you potentially could need access to your principal this may not be the best option for you. Interest Rate Risk - Also, known as re-investment risk, if you have a 5-year term on your GIC you really do not have control over the types of interest rates that are going to be offered for re-investment at that time.  Interest Rates may fall, leaving you to have to purchase at a much lower rate. Inflation Risk - GICs do not offer any protection from inflation.  Rates for may not be high enough to cover inflation of the term of the investment.

So my brief overview turned slightly long winded but even with simple investments there is so much to know and consider when making your investment decisions.

Let me know if you have any questions, glad to help.

Happy Investing!

[financialperspective-blog]

Guaranteed Investment Certificates (GIC's)

Guaranteed Investment Certificate Investment Strategies

Over the next few days I am going to post some of the better GIC investment strategies that I recommend for my clients. 

I'll cover the different variations on the GIC and provide some opinions on what is worthwhile and the gimmicks to avoid.

I'll discuss some of the risks that are involved with investing in these products as well as some advantages/disadvantages, and how you can make the best of this product.

Some of the Strategies include:

Principal Plus +

Laddering

Short vs. Long

Interest rates are tough so having a few different strategies to maximize these products is going to create some value for you.

Happy Investing.

[financialperspective-blog]