MoneySense

Making sense of the markets this week: October 19

Dale Roberts — Fri, 16 Oct 2020 17:17:24 +0000

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

10 moat-y Canadian stocks that are on sale

In investing terminology when a company is described as having a “moat,” that means it has a protective barrier, just as a moat around a castle would provide protection from invaders. A moat means a company has limited or virtually no competition. Depending on the level of moat, there are few, or virtually no companies attacking their revenues or profits.

This article from Ruth Saldanha of Morningstar caught my eye: 10 Cheap Moat-y Canadian Stocks.

Morningstar identifies groups of companies with an economic moat and, in the best of conditions, a wide moat. The wide moat group is an exclusive lot, with Royal Bank of Canada, TD Bank, Enbridge, Canadian National Railway and CN Railway making the list.

From that post …

“Today we decided to look at Canadian stocks that are trading below our fair value estimates and also have an economic moat. 19 stocks made the list. We’ve listed the top 10 or them in the table below.”

Source: Morningstar data as of Oct. 6, 2020

On the banking sector and how Morningstar would differentiate the level of moat in the sector, the post notes…

“Royal Bank of Canada and Toronto Dominion are the two largest Canadian banks and they both tend to have the most dominant franchises at home. While their Canadian peers also produce decent returns, the individual franchises are often less strong in comparison. Toronto Dominion and RBC tend to have dominant market share in many categories, including number-one or number-two in share in most key retail banking products, in key commercial banking products, investment banking, and also key exposures to non-bank business such as wealth management.”

Using moats can be a common consideration for investors. I use them myself for my concentrated Canadian stock portfolio. I hold three of those wide moat companies: Royal Bank, TD Bank and Enbridge. I also hold Scotiabank plus a few telcos and another pipeline. So far, I have no dividend cuts in 2020 while I have enjoyed some dividend increases.

From my research, all of the sectors with moats—banking, telcos, pipelines, the major grocery companies and railways—all beat the TSX Composite over the last 20 years. I am still surprised that there is no ETF for this strategy.

If you build your own stock portfolio, or are considering layering in some stocks with your ETF portfolio, you might consider that list from Ruth and Morningstar.

You’ll find some moats and generous earnings.

U.S. earnings projected to be “not as bad”

It’s earnings season again. And that means it’s time to read the tea leaves. Earnings reports help us to get a true sense of the economic recovery that is in motion.

Here are some expectations from MarketWatch. The estimates in the following quote are with respect to the total earnings and sales trends for the total of S&P 500 constituents.

“S&P 500 companies’ overall earnings performance is expected to be less bad than the second quarter, when earnings fell the most since the 2008 financial crisis, according to FactSet data. The aggregate blended year-over-year growth estimate for S&P 500 earnings per share, which includes some earnings already reported and the average analyst estimates of coming results, is negative 20.5% as of Friday morning [Oct. 9, 2020], following a 31.4% plunge in the second quarter.

“The third-quarter outlook does stand out a bit, however, as the current estimate of a 20.5% decline compares with the estimate of a 24.4% drop as of June 30.

“Meanwhile, the outlook for sales is much better, with analyst expectations pointing to 3.5% decline overall, following a 9.2% drop in the second quarter.”

While many have been critical of the concentration of big tech companies in the U.S. market (the cap-weighted S&P 500), MarketWatch suggests big tech could lift index earnings to new highs:

“Tech is expected to stay dominant when looking at the whole of the year, however, as Golub highlights that 52% of the S&P 500 by market capitalization is projected to record 2020 earnings per share above 2019 totals, driven by the tech sector’s size and performance.”

In a cap-weighting methodology, the most valuable companies are given the most weight, so they have the greatest effect on the index.

Net-net for the third-quarter U.S, earnings season, things might be a little less bad compared to the second quarter. The economic recovery and prospects for stock earnings continue to improve. And we see that an index such as the cap-weighted S&P 500 was well positioned for the pandemic and new normal. Year-to-date that index is up 8%. Over a one-year period to October 15th, the index is up over 17%.

Patient investors who stayed the course have been rewarded.

These stats say no to a tech bubble

On the concentration in tech, and on the tech sector in general, Nick Maggiulli, the chief operating officer of Ritholtz Wealth Management, says: No, this is not a repeat of the dot-com bubble.

From that post…

“One big piece of evidence that suggests that we are not repeating the dot-com bubble is the much lower (yes, lower) growth rate of technology stocks compared to the late 1990s. For example, over the past five years the Nasdaq Composite has increased in value by 127%, which pales in comparison to the 456% growth in the Nasdaq during the heyday of the dot-com era.”

Source: YCharts (OfDollarsandData.com)

“While most of the price changes in the late 1990s were driven by high expectations, far more of the price volatility seen today are driven by changes in improving fundamentals and earnings.”

Maggiulli also adds…

“Investors in the late 1990s bid up prices very high, very quickly because they believed in a future where tech companies would dominate the economy and transform productivity and society. I don’t necessarily think these investors were wrong, but they were far too early. Today’s investors have a more reasonable gauge of tech’s role in the economy, and stock prices reflect this rationality.”

While no one knows where the stock markets or any sector will go, I’d have to agree with that last statement. In the 1990s, the rise in tech stocks was built on the hope of future sales. Today’s tech giants are very profitable and offer great growth potential.

The tech rally of 2020 is built much more on reality compared to hope.

Investing in ETFs continues to dominate, BlackRock earnings indicate

The pandemic has accelerated many trends, such as work from home and the reliance on technology for work, and staying in touch with friends and family. And it appears that the new normal has also accelerated the move by investors to passive and active exchange traded funds (ETFs).

Source: Twitter

BlackRock is the leading provider of ETFs around the globe with an incredible $7.8 trillion in assets under management. They reported earnings this week, offering an incredible beat of earnings and revenue expectations.

For the quarter (three months ending September 2020), BlackRock attracted $129 billion of net inflows, compared with $84.2 billion from one year ago. Revenue of $4.37 billion beat the consensus of $3.89 billion and rose 18% year over year. Quarterly profits of $9.22 per share increased 29% year over year. It is what one might describe as a blowout quarter. And it caught even analysts by surprise.

The pandemic is accelerating a massive trend that was already underway. The movement toward low-fee ETFs continues and is accelerating.

My excitement for seeing those results is certainly twofold. As a proponent of ETFs for Canadian investors, I’m happy to see the trend accelerate in Canada. And I am also a shareholder in BlackRock.

This trend shows no signs of letting up. For exposure, investors might also look at State Street (SST), S&P Global (SPGI), MSCI (MSCI) and Invesco Corporation (IVCO).

Mutual funds lag passive investing, again

This is always one of my favourite topics and messages. Low-fee indexing continues to beat higher-fee active management.

From The Globe and Mail:

“The vast majority of Canadian equity mutual funds has again underperformed dull, passive investing, according to the latest SPIVA Canada Report Card from S&P Dow Jones Indices.

“In its mid-year report, using one-year data to June 30, 2020, S&P said that 88.4% of Canadian equity mutual funds underperformed the S&P/TSX Composite Index—even as wild swings in the first half of the year provided plenty of opportunity for professional stock-pickers to showcase their skills at dodging losers and finding winners.”

That report stated that the underperformance was the most exaggerated in the Canadian market.

And here is a common investment saying that I like to repeat: Keep it simple and keep it cheap. It’s not a good idea to pay higher fees for lesser performance.

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com.

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The best banks in Canada

Keph Senett — Fri, 16 Oct 2020 16:01:53 +0000

Most Canadians are aware of the Big Five banks: RBC, TD, Scotiabank, BMO and CIBC. And some may even know that occasionally National Bank of Canada sneaks in and expands that list to six. But even with these accounted for, there are dozens of banks in this country, each offering its own suite of personal banking products and services. Finding the “best” is tricky, especially because it depends on the individual’s needs. Nonetheless, there are some standouts. In this article, we take a look at customer offerings from some of the best, so you can decide which works for your personal banking needs.

Summary

Unconventional ways of investing in a family RESP

Allan Norman — Thu, 15 Oct 2020 17:57:50 +0000

Q. We have had a family RESP for many years with three beneficiaries: a son of mine from a previous marriage and two kids of our own. I have been the only subscriber for the RESP as it is my understanding that in order for there to be joint subscribers (that is, myself and my wife), all beneficiaries must have a blood relationship with all subscribers. That rules out my wife as a joint subscriber, as she obviously does not have a blood relationship with my son from my prior marriage.

If my understanding above is correct, how does it work if I want to name a successor subscriber in my will? Can I name my wife, as she would then be the sole subscriber in the event of my passing? If not, who could I appoint?
–Bill

A. Bill, you’re good. Your wife can be a joint subscriber without literally being a “blood relative.” Here’s confirmation from the Government of Canada website, in sections 4(f) and (g).

Joint subscribers can be the parents, guardians; spouses or common-law spouses.

With that cleared up, I need to ask: Have you given any thought as to RESP contribution strategies?

Most people aim to contribute $2,500 a year, in order to maximize the annual grant of $500, which is 20% of $2,500.

Over the life of the RESP, the maximum grant per child is $7,200, requiring total contributions of $36,000. You can contribute up to $50,000 per child, if you like, but the additional $14,000 is not eligible for government grants.

The table below shows a few different contributing strategies and outcomes. In all cases, contributions stopped at a total of $36,000.

2020 start	SCENARIO A $2,500 x 14 years + $1,000	SCENARIO B Wait 3 years to start	SCENARIO C $36,000 lump sum in year 1	SCENARIO D $2,500 x 8 years + $16,000
Deposits	$36,000	$36,000	$36,000	$36,000
Growth (5% return)	$36,853	$26,187	$53,158	$37325
Government grant	$7,200	$7,200	$1,000	$7,200
2038 total	$80,053	$69,387	$90,158	$80,525

Now, let’s walk through these results.

Waiting three years before contributing to an RESP (as in Scenario B) results in $10,666 less money.
An initial lump-sum deposit of $36,000, while earning a grant of only $1,000, provides the most money (Scenario C).
Lump-sum investing may not be worthwhile once your child is older than 8 or 9 (Scenario D).

You probably have questions. In Scenario C, for instance, why does a contribution of $36,000 result in only $1,000 worth of grant money?

The maximum grant paid in any year is $1,000 based on 20% of a $5,000 contribution. Of the $5,000 contribution, $2,500 is considered this year’s contribution and the other $2,500 is considered either a past year’s contribution, if you have a past grant money to catch up on, or next year’s contribution. You cannot collect all future grants with one lump sum payment.

However, in the example above making a $36,000 lump-sum contribution provided the most money because it was growing at a rate high enough to overcome the absence of guaranteed grants.

What happens if you contribute the lifetime RESP maximum as a lump sum?

The table below shows that with a 3% return on investments, the lump-sum approach is about equal to making regular annual contributions of $2,500, which would allow you to collect the maximum amount of government grant money.

2020 start	SCENARIO A $2,500 x 14 years + $1,000	SCENARIO B $36,000 initial deposit
Deposits	$36,000	$36,000
Growth (3% return)	$19,282	$26,461
Grant	$7,200	$1,000
2038 total	$62,482	$63,461

We’ve established that you forgo government grant money by making a lump-sum RESP contribution, but can actually end up ahead through the growth of your investment over time. So, let’s look at how $50,000—the absolute lifetime maximum—in a lump sum would perform over time. I know for most young families this isn’t possible, given all the other competing demands for their money. However, I often see grandparents helping, or there may be an inheritance; and there are the lucky few with high incomes who have maximized their RRSPs and TFSAs, and are looking for another tax shelter.

Yes, an RESP is another tax shelter. The money grows tax-deferred and when it is withdrawn the growth and grants are taxed in the hands of your child, who will be at a lower tax rate than you. Remember, not all RESP money has to be used for education (only grant money not used for post-secondary education must be returned to the government).

The table below shows a few different ways you could contribute $50,000 to a RESP.

2020 start	SCENARIO A $50,000 lump sum	SCENARIO B $16,500 lump sum, then $2,500 x 13 years + $1,000	SCENARIO C $2,500 x 14 years, then $15,000 lump sum	SCENARIO D $2,500 x 10 years, then $15,000 lump sum + $2,500 x 4 years
Deposits	$50,000	$50,000	$50,000	$50,000
Growth (5% return)	$73,272	$57,528	$40,721	$45,286
Grant	$1,000	$7,200	$7,200	$7,200
2038 Total	$124,272	$114,728	$97,921	$102,486

Again, the strategy of making an initial deposit of $50,000 and foregoing most of the grant money produces the best results when earning a 5% return (Scenario A). A cautious person may prefer to start with a lump sum of $16,500 (Scenario B) to capture all of the grants.

The obvious thing is that if you are going to make a lump-sum deposit, the sooner the better. This is no different than any other investing advice: the sooner you start, the more time your money will have to grow; and the bigger your initial deposit, the better.

Bill, I know I’ve deviated from your original question, but I find most people don’t give much to RESP contribution strategies and I thought you might find it interesting—and, hopefully, helpful as well.

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.

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RESP investing for busy parents

Rebecca Cuneo Keenan — Thu, 15 Oct 2020 13:41:01 +0000

Saving for university isn’t always top of mind when you’re a busy new parent, knee-deep in diapers. Add the steep cost of daycare along with the stress of trying to juggle work and toddlerhood, and setting aside funds for your child’s post-secondary education can feel like an insurmountable task parents have neither time nor money for. And, so, it gets put off. According to an August 2020 report from Statistics Canada, 50% of all post-secondary students graduate with a median debt of $17,500.

Faced with the economic uncertainty brought about by the COVID-19 pandemic, longer-term financial planning may not feel like a priority for some families. But the truth is that putting a plan in place for your child’s post-secondary education is more important than ever now; with the end of the pandemic still uncertain, it’s a way to start getting ahead of future uncertainty. The good news is that CST Spark makes setting up a Registered Education Savings Plan (RESP) a snap. Parents can control exactly how much or how little they want to contribute at any given time. CST Spark’s RESP*—called CST Bright Plan—is a simple, convenient, flexible way to save for post-secondary education, giving parents the ability to start with as little as $10 a month. Here’s the rundown:

Sign up online

CST Spark is the digital-first subsidiary of the oldest education savings organization in the country, The Canadian Scholarship Trust Foundation (CST). “We are proud of our 60-year journey for CST. We were pioneers in our early days with the introduction of education savings, and we’re pioneers now in the digital age. CST Spark is one of the first to offer our RESP product online to parents who have grown up in the digital world,” says Paul Steedman, the Chief Information Technology and Digital Sales Officer for CST Spark. Today’s parents can read up about CST Spark’s offerings online and then sign up using the streamlined digital application process—all online in just a few minutes or over the phone from the comfort of your home.

Investments are professionally managed, with competitive fees

And once your RESP is set up, CST Spark will manage your contributions in a diversified mix of assets including Canadian fixed income, Canadian equities, U.S. and international equities and global real estate. CST Spark also uses a unique age-rebalancing technique to adjust your investment as your child ages with a goal of maximizing growth early and preserving gains closer to graduation. To ensure the safety of your principal, the plan gradually shifts more heavily towards fixed income investments as your child’s 18th birthday nears, and away from equities which tend to be riskier. “Combining a competitive fee with our industry knowledge, depth of experience and a unique investment strategy, we aim to maximize returns over the lifetime of the plan,” Steedman says.

Don’t miss out on government grant money

Your contributions, and the return on those investments, aren’t the only way an RESP helps to save for your children’s education. Both federal and provincial levels of government offer grants that can be combined and invested along with your own contributions. The Canada Education Savings Grant (CESG) is available to anyone with an RESP, matching 20% of your annual contributions, up to $500 per year and a lifetime maximum of $7,200 per child. British Columbia and Quebec also offer contributions to RESP-holders residing in those provinces.

Families with lower household incomes qualify for additional grants as well. The Canada Learning Bond is a federal grant that contributes $500 the first year of eligibility and then $100 for every subsequent year, up to $2,000 over the course of the RESP. Steedman notes that these grants are among the key benefits of an RESP over other types of savings tools, and wants to make sure parents are able to take full advantage of them. CST Spark applies for grants on your behalf and then invests them accordingly, and parents can rest easy knowing that’s been taken care of.

Start early if you can—and know it’s never too late

By opening an RESP early, you are able to contribute more, max out government grants and have a longer window for your investment to grow. (Yes, you can sign up your newborn, provided you have your child’s social insurance number.)

But if you haven’t set up an RESP yet, know that it is never too late. “We do have customers at CST Spark that have come to us with teenagers,” Steedman says. “They have a shorter investment window and wouldn’t be able to receive as much in government grants, but there’s nothing that prevents them from starting to save for their child’s education to make an impact.”

All RESPs at CST Spark are also family plans by default, which means additional children can easily be added as beneficiaries and the earnings can be used for any of them. If one child goes on to do less post-secondary education than their siblings, for example, the savings can be allocated to your other kids.

Now that you have gotten to know CST Spark, why not enter their Spark Their Potential Contest*—there’s no purchase necessary, and it could land you $2,500 in an RESP from CST Spark. CST Spark’s representatives will answer any questions, give you tips and tricks on how to save for your child’s bright future, share even more RESP benefits, and enter you into the contest—all commitment-free.

This is a sponsored post in partnership with CST Spark. C.S.T. Spark Inc. is the exclusive distributor of CST Bright Plan, which is only sold by prospectus.

What does the * mean?

If a link has an asterisk (*) at the end of it, that means it's an affiliate link and can sometimes result in a payment to MoneySense which helps our website stay free to our users. It's important to note that our editorial content will never be impacted by these links. We try our best to look at all available products in the market and where a product ranks in our article or whether or not it's included in the first place is never driven by compensation. For more details read our MoneySense Monetization policy .

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How to make your retirement savings go farther and last longer

Larry Bates — Wed, 14 Oct 2020 21:54:56 +0000

If you are like most Canadians, the investment choices you make during your working years may have a significant impact on your retirement. But the importance of smart investing doesn’t end when you retire. In fact, post-retirement investing can have an even larger impact on your retirement well-being. There are two reasons why.

First, retirements are much longer now. Many Canadians are living well into their late 80s and 90s. At the same time, many are retiring, semi-retiring or switching to less remunerative pursuits earlier. So, those leaving full time work at age 60 or 65 must consider the potential for a retirement of 30 years or more. As a result, many will be investing for a longer time period after their retirement date than during their working years.

Second, there is more money at stake. Hopefully your nest egg will grow as you approach retirement (assuming decent market conditions). Also, at some point you may receive a large cash infusion from an inheritance, from downsizing your residence, or selling a business. Or perhaps you have an employer RRSP or other plan that may be switched at retirement to a personal RRSP, LIRA or other registered account that you manage.

Given increased longevity and relatively large portfolios, a modest increase in your investment rate of return during retirement can have a meaningful impact on financial well-being. If you are among the millions of Canadians who invest through mutual funds, your greatest opportunity to increase returns may be to reduce your costs. Consider the following simple example.

When they retire at age 60, Nicole and Michael will have accumulated a combined $1 million in their RRSPs, which are invested in balanced mutual funds. They plan to withdraw $67,000 from their RRSPs annually. Let’s assume the mutual funds will produce an average return of 6% before charges of 2.25%, thereby providing a net annual return of 3.75%. At this rate, the RRSP will last until Nicole and Michael are age 83.

If they were to switch to lower cost index ETFs, whether through the same advisor or a new one, and generate the same average 6% return before total charges of 1.25%, their net annual return would be 4.75%. This 1% extra net return would enable the couple to continue drawing $67,000 for an additional four years to age 87.

Alternatively, if Nicole and Michael were to switch to DIY investing and buy balanced ETFs which produce the same average 6% return before charges of 0.25%, their net annual return would be 5.75% giving them a total of 12 additional years of $67,000 withdrawals to age 95. In total, a 2% reduction in costs would produce about $800,000 in added lifetime income assuming the same pre-fee return.

How long will your nest egg last?

Assume a $1 million nest egg invested at age 60, earning 6% before fees with annual withdrawals of $67,000

How can you determine whether you should reduce your investment costs in order to make your nest egg last longer? First, take some time to improve your knowledge of investment basics. The industry portrays investing as mysterious and complex, but it can be quite simple. Don’t be intimidated. You might even enjoy the learning experience and the increased confidence that comes with it! There are some great online sources like OSC’s Get Smarter About Money, BCSC’s InvestRight and this publication, as well as some excellent books focused on lower cost investing (one of my favourites is John Bogle’s Little Book of Common Sense Investing).

Next, find out how much you are currently being charged for investment products and services. All forms of investment include costs, but a lack of investment industry transparency has contributed to poor investor understanding of this critical factor. This was underscored by a recently published Canadian Securities Administrators study, which found 50% of Canadian investors are unaware they are paying any fees at all! In my experience, even among investors who know they are incurring costs, very few have a sense of the total.

To determine your costs, email your advisor with the following request: “Please provide me with details of all fees/costs/charges that I am incurring including fees charged directly by your firm and any indirect costs including MERs charged by mutual funds and any other investment products in my accounts”. I highly recommend you do so even if you are confident that you already know your costs. Once you know your costs, get a sense of their long-term compound impact with a simple online tool like the InvestRight Fee Calculator or the T-Rex Score calculator (on my website).

Once you know what you’re paying, you can assess whether you are receiving enough value in return from your advisor. If so, good for you. But if not, you might consider alternatives, including lower cost traditional advisors, robo-advisors or DIY investing though index ETFs. If you choose DIY or robo investing, you could separately utilize a fee-only financial planner from time to time to provide detailed retirement and other financial advice.

Both before and during retirement, reducing your investment costs can make your precious nest egg last years longer. No matter what your age, take some time to discover if lower cost investing may be right for you. As Warren Buffett declared: “The best investment you can make is in yourself.”

Larry Bates is the author of Beat the Bank: The Canadian Guide to Simply Successful Investing. After working in the banking industry for 35 years, and with several major financial institutions in both Canada and the U.K., including as Global Head of Debt Capital Markets for RBC, he has been an independent investor advocate, author, consultant and speaker.

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Should I stay or should I go: The real costs of moving out of the city

Courtney Reilly-Larke — Wed, 14 Oct 2020 21:04:50 +0000

Like any good urban legend, there’s always a friend of a friend who traded in their paper-thin, 400-square-foot apartment for a dirt-cheap dream house in an idyllic town.

And as the pandemic goes on, the lack of cultural events, limitations to restaurant dining and public transit, and ever-crowded streets have all contributed to a desire to flee urban centres. And if you’re working from home, why pay the overhead for an expensive downtown home office? A lot of city-dwellers feel like the premium they’re paying for proximity to those perks and their workplace just isn’t worth it right now.

But, do you really get the full farm for the cost of your condo?

Sure, some things like cost per square foot are cheaper, but there are glaring financial blind spots to leaving the city. Julie Cowan, a relocation specialist and owner of Relo To, a relocation and destination services boutique company, advises clients to “worry in the right order” when considering a move. Not bad advice for most things in life.

To help you figure out if you should move out of big Canadian cities from Vancouver to St. John’s, you really have to consider not just the housing market (have you seen the prices of houses outside of Halifax?), but the over all costs that add up. So, we talked to three Canadians who recently made moves out of the city (they happen to hail from Toronto, but their experience is representative of any urbanite wanting to make the move), as well as Cowan’s advice on how to not go broke. So make sure the grass (and your wallet) really is greener, before you purchase a few acres.

Moving from the city to a small town

Christopher Morello on moving from downtown to Dorchester

The push

Even with a solid career, Christopher Morello, a 26-year-old loyalty and e-commerce manager at a Canadian airline, still felt he was only inching toward his financial goals living downtown—and buying a home wasn’t even on the table. When the pandemic began, he decided to give up his rented two-bedroom condo in the entertainment district and stay with family in Dorchester, Ont., a small town just outside of London with a population of approximately 4,000. By chance, he stumbled upon his dream home.

The upsides

Morello realized this home fit within his budget. “I was able to make a down payment and still get a monthly mortgage that was less than my rent in Toronto.” Now he loves the small-town life, with its nature trails and warm community. “My house faces the street, so there’s still that hustle and bustle, but in my backyard, you feel like you’re at the cottage,” says Morello. “It’s the best of both worlds.”

The home itself might also bring in extra income, since Morello is in the process of turning it into a co-working space, called Le Host. “It will create a junction of locals who are co-working with people coming for a getaway from the city.”

The downsides

When renting, Morello relied on walking or public transit (he doesn’t like driving). “Right now, I have an electric scooter, but I’m not sure what I’ll do in the winter,” he says. And while his gas, hydro and property tax still come out to slightly less than what he was paying in rent, there are costs that come with owning a 100-year home.

“Anyone buying a new house should have at least $15,000 in cash ready for unforeseen costs,” says Morello. “Home inspections don’t reveal everything, and I’ve already had to shell out for new appliances and a furnace.” He also spent approximately $1,000 on the move itself, for movers, truck rental and closing costs.

And then there’s the question of the future, since he’s still in his 20s. “I see myself staying for a long time,” says Morello. “but I have goals to live abroad again at some point too.” And he feels like the decision was a win for now: “Honestly, the only thing I really miss about the city is the tacos.”

The real costs breakdown

Here are the differences in Morello’s monthly expenses.

Monthly housing costs (all-in) vs. rent: About even. “It’s a bit less than my old rent when I factor in the bills, but maybe more when you factor in unforeseen expenses.”
Monthly savings: “It’s a little harder to save now, as there are always projects and needs around the property—but the money spent does have a sense of ROI (Return On Investment).”
Disposable income: “It’s a wash. More goes into my Le Host project—buying beds, crisp linens, fixing things up—and less towards fancy cocktails.”
Commute: “No change in monthly cost, since I walked everywhere in the city and I’m still walking or eScootering here in Dorchester. Though, the scooter was shy of $500, tax-in.”

Moving to a smaller city

Domini Clark on moving from Toronto to Hamilton

The push

For Domini Clark, a 41-year-old editor at the Globe and Mail, she’s run into obstacles before even getting the chance to change her postal code.

After selling her house in Toronto’s Corktown neighbourhood and splitting the proceeds with her ex-partner, she found herself renting, as she didn’t have enough money to re-enter the Toronto housing market. “Maybe I could buy a small condo,” says Clark. “But even then, can I afford my mortgage and the condo fees?” So, she decided to look at entering the market in Hamilton.

The upsides

Aside from real estate investment, she knew of other benefits, like easy access to nature. “Travelling used to be how I got my nature fix,” says Clark. “When COVID happened, I was stuck downtown.” Since she doesn’t have a driver’s license, Hamilton’s trails being so accessible by public transit gave the city extra appeal.

The downsides

She’s found that entering the Hamilton market has its pitfalls too. “Hamilton has great housing stock, a lot of old Victorian homes,” says Clark. “But then you realize a lot of the properties priced in the $300,000s need considerable work, so you bump your budget up to $400,000.” On top of that, she found that the market is saturated, because a lot of people had the same idea.

“Houses are up 15% on average compared to last year,” says Clark of the Hamilton real estate market. “So, that low price tag that appealed to you initially suddenly becomes nearly half a million dollars.”

Clark ended up spending the maximum amount she set for herself, but chose to hold off on throwing all of her cash at the down payment. “I could have put more, but I’m choosing to only put 10% down and invest the rest of my savings,” says Clark. “In my mind, investing the additional money makes more sense rather than trying to pay it down. I feel much more secure knowing I have access to emergency cash.”

She also factored in an extra $15,000 for inevitable repairs, like electrical and plumbing that come with owning an older home, and other expenses. But she’ll be gaining a lot, too. “It becomes an investment, and I get access to nature.” Not to mention more bang for her buck: At the time of this interview, she put an offer in on a fully detached three-bedroom Victorian on a spacious lot, and the very next day, she got it.

The real costs breakdown

Here are the differences in monthly expenses Domini is anticipating.

Monthly housing costs (all-in) vs. rent: About $300 less per month. “Currently, my rent, hydro and insurance for my condo costs me $2,630 per month. For the house, mortgage, property taxes, insurance, gas, hydro and water will cost an estimated $2,385 per month. But I’m building equity.”
Monthly savings: “Overall, not much greater, but I consider paying the mortgage a way of accumulating savings. In the short term, I will save a bit by going out less but that’s really only because of the pandemic.”
Disposable income: Again, about the same. “I’m hoping the general costs of living in Hamilton are a bit less, but I don’t know for sure yet.”
Commute: Much more. “Before COVID, my commute was a short walk and I’d spend about $65 to $100 on Ubers most months. Once I move to Hamilton and the world returns to normal, I’m budgeting $275 for taking the GO Train to my Toronto office three times a week and also budgeting $50 for local transit in both cities. I’m hoping the Uber cost goes down, since Hamilton is a more compact city.”

Sight set on country living

Melissa Greer on leaving the big city, heading to the countryside

The push

For Melissa Greer, a 33-year-old freelance writer and brand consultant, the push to leave the city came from having a family. She and her husband had been happily living in a one-bedroom-plus-den in the Fort York area of Toronto since 2013. While they loved the proximity to her office and the perks of the city, the lack of space began to weigh on them when their daughter was born.

“With the rising costs of real estate plus the new expense of daycare, we didn’t feel like we could afford much more space than we already had,” says Greer. “We began to think about moving back toward family when our daughter was about a year old.” They were able to sever a lot from their in-laws’ farmland (free of charge) in the Peterborough area and start building their own house. They’re currently staying with that family while the house is being completed (re: extra savings). Should you sell your home to your kid?

The upsides

“The solution would allow us to be close to family—as in, next-door to my in-laws,” says Greer. “And we found we could do a lot of the work for the build ourselves, thus making our budget go further than if we had just purchased a home in the country.”

And with their dream home in the works, the costs of living are looking comparable to what they spent in the city. Plus, Greer left her full-time office job to pursue a freelance career and mostly works from home now. “My commute is bedroom to living room,” muses Greer.

The downsides

Additional expenses popped up. “We did buy a second car,” says Greer. “There were also a few hidden costs with permits, surveys and lawyer fees throughout the process of severing the lot and getting everything in order to be able to build.” The building costs are hefty, a permit costing $25,000, a land survey costing $10,000 and legal fees about $3,000.

But savings have popped up too, and their biggest win so far has been on daycare costs. “We’re saving just over $1,000 per month,” says Greer. “We went from paying $1,700 to under $700 in Peterborough.”

“I do miss the liveliness of the city and walking everywhere, I’m not getting in that incremental exercise throughout the day because when I leave my house it’s to drive somewhere,” says Greer. “But [with COVID-19] it’s been so nice to have access to outdoor space as well as more room within our home, which has become my office and gym.”

The real costs breakdown

Here are differences in Greer’s expected monthly expenses.

Monthly housing costs (all-in) vs. rent: About $200 less. “What we would have spent on condo fees (about $500) will cover the increase in our utilities (heating a larger house, etc). But, we are going from 730 square feet to 3,000 square feet, plus outdoor space in the country.”
Monthly Savings: An additional $300 to $400 per month.
Disposable Income: An additional $300 per month.
Commute: “I used to spent about $200 per month on a TTC pass and Uber. I’m now spending about $600 per month for a financed vehicle, including my car payment ($400), insurance ($115) and gas ($50 to $200).”

The real cost of moving from the city?

That’s for you to figure out

You have some homework—and, no, it’s not house hunting… just yet.

“Research what all of the additional expense could look like,” says Cowan. Plot out everything from the cost of moving itself, to buying and selling your home or extra deposits that may need to be offered on competitive rentals (she suggests having $250 to $1,000 budgeted for this). If you’ve decided on a place, you have to then consider extra things, like utility costs, furnishing a bigger space and the cost of living in your new area. Transportation can be huge too. “Buying an extra car is expensive,” says Cowan. “And maintenance is likely to be around $500 to $700 per year. You’ll also need things like snow tires (a set of four for an average car could be $250 to over $400) and then there’s fuel, which is the biggest expense.” And that vehicle might get run down quicker, when you consider things like popping out to do some banking could be a 35-minute drive away, depending on where you end up living.

“Build a spreadsheet with your current costs and map out what it will look like at the other end.” Include the headers “Current Living Expenses” and “New Living Expenses,” and include items that are part of your budget, including: housing, utilities (broken down – gas, hydro, water, hot water tank rental, internet and cable), phone (mobile and landline, as in some remote communities, you may continue to need a landline and need a cell booster to get better signals), vehicle(s) (financing/lease, maintenance, insurance, tires and gas), insurance (tenant and home), memberships, entertainment, and whatever else you can think of. Also, add column for “Moving Expenses.”

That pre-departure research should include every avenue of your prospective new life. “If you’re moving to a more remote community, there are issues you won’t think about, like internet connectivity, which is integral for remote working right now,” says Cowan.

A stay in your prospective area to see if you could truly see yourself living there might be in order (don’t forget to factor that expense in). “Use that time to really explore the community,” says Cowan. “If you’re somebody who loves going to the gym every day, where is the nearest gym? If you’re a real foodie, what’s that food scene like? Any cultural imperative, whether it’s a music or art scene, needs to be checked out. Also, will you have access to green space?”

Overall, Cowan advises to be realistic. “Take the romance out of the equation,” says Cowan. “Do your search during the coldest months of the Canadian year and see if you can imagine yourself there.”

Before you dreaming of sprawling farmland, take a long, hard look at what you want out of your lifestyle and how you want to spend your time. “Things like commuting and maintaining a larger property can be things some people love and other people loathe,” says Cowan. There’s also access to culture and resources to consider, as well as the future. “Perhaps you’re single now but may have children eventually. In that case, are you still going to work downtown?” she says. Even shorter-term: “We’re in a pandemic now, but what happens in a year or two when things kind of go back to normal?”

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5 tips for saving money on insurance costs

Lisa Hannam — Wed, 14 Oct 2020 16:57:18 +0000

Saving money on insurance isn’t as big of a task as you might think. At first, it can feel overwhelming to navigate your insurance bill, looking for ways to reduce your premiums (and future costs too!). But the truth is, by making simple changes to your insurance policies and as well as handling a few tasks on your own end, you can reduce the amount you pay for insurance coverage. Here’s how.

Bundle up!

Bundling isn’t just for phone and cable services; your insurance provider should reward you for bundling up your home and car policies. Not only does it make your life easier—you’ll have a single payment and one place to renew your policies—but you can also get discounts too. For example, Ontario insurance provider Onlia* offers 10% off auto when you bundle it with your home insurance. And if you have more than one car, you save another 10%. It’s like a loyalty program that gives you the discounts upfront.

Get on schedule

Owning a home–or even a condo–should come with a manual. You know how your car’s manual lets you know how often to get oil changes, get your brakes checked and when to rotate your tires? Your home has a maintenance schedule too. Did you know that you should have the brick on your home cleaned every 30 years? Or add insulation in your attic every five years? Replace carbon monoxide and smoke detectors every 10?

Home and car maintenance are known to help with preventing damage and theft, and in turn the risk for claims and increased insurance premiums. But, unlike your car with its seasonal maintenance or window-sticker reminders to help prevent unexpected issues from popping up, your home relies on you staying on top of things. You can set up a virtual home checkup with Setter*, a Toronto-based home management concierge that can help you figure out what needs updating. When you bundle your home and auto insurance with Onlia, the Setter home checkup is free.

Don’t wait for things to break down

Ever notice when something breaks down on your car or in your home, other things need repair or maintenance? It’s not that things seem to happen in threes (or fours or fives for that matter)—it’s more likely that these issues impact each other. It’s also referred to as a domino effect, where things that are connected or have similar life spans start needing repair around the same time. One way to combat this is to have regular safety checkups or maintenance checks. Again, Setter can look into things like the condition of your pipes, remind you to turn off outdoor faucets before winter weather freezes them up, door seals, loose shingles, trim back impeding tree branches…. These checks—like seasonal maintenance for your car—ensure that your home is ready for the weather changes and should help avoid any damage, as well as the likelihood of making any claims. Setter will also recommend local contractors and other professionals to handle the maintenance tasks for you.

Show off your good driving record

Saving money on your auto insurance is a download away: the Onlia Sense* app tracks your driving habits and rewards you with cash back on your car insurance for safe driving. Anyone, whether an Onlia client or not, can download it. Using your smartphone sensors, the app tracks speed, how you take corner turns, braking and more. The payoff? You can earn up to $480 in annual cash back on your auto insurance, as well as Ultimate Dining Cards. The gaming-style app experience encourages young drivers (and all of us, really) to be safer behind the wheel—and a safe driving record can help reduce your insurance bill.

Raise your deductible

There are some situations when you can decide to pay out-of-pocket instead of making a home or auto claim to help keep your home and auto premiums low. Those are usually quick DIY fixes, or a reasonable cost for a mechanic or contractor repair. But there can be bigger situations, from accidents to theft, that require you to make a claim.

To get ahead of those situations, you can lower your monthly insurance payments by agreeing to pay a higher deductible (the amount of money you put toward an insurance claim). It’s best to establish the amount of your deductible before you need to make a claim, so consider how much you could affordably pay. These things usually pop up unexpectedly, so be realistic.

What does the * mean?

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Should you sell your home to your kids?

Jason Heath — Tue, 13 Oct 2020 18:05:59 +0000

Q. A scenario we are thinking of is “selling” our principal residence to our three adult children. We would use the proceeds to build a vacation home that they will eventually inherit. When they buy our home, it will not be a principal residence for any of the children, as they all have homes. Instead, it will become an investment for them, while their mother and I rent from them until the vacation home is built and beyond.

The house is worth just over $600,000. We need $450,000 to $500,000 at most to build, and would be willing to sell the principal residence to all three of our kids for that price. Does this sound workable? Can we choose this lower price without any tax implications?
–Graham

A. First off, Graham, kudos to you for creativity. This is an interesting proposal and an opportunity for your family.

Assuming you have not owned another home during the years you have owned your principal residence, the sale—whether to your children or otherwise—should qualify for the principal residence exemption. There are limitations on acreage, so that a home with more than ½ hectare (1.24 acres) of land may not fully qualify unless you can demonstrate that the extra acreage is necessary to use and enjoy your home. A common example of this situation may be if you live in a municipality that has a minimum lot size of more than ½ hectare.

According to the Canada Revenue Agency, “if you sell property to someone with whom you do not deal at arm’s length and the selling price is less than its fair market value, your selling price is considered to be the fair market value. Similarly, if you buy property from someone with whom you do not deal at arm’s length, and the purchase price is more than the fair market value, your purchase price is considered to be the fair market value.”

Selling the house to your kids at an artificially low price would not be beneficial given the sale proceeds are presumably tax-free to you, Graham. The kids would actually benefit from the price being higher, to reduce their future capital gains tax given the rental property would not qualify as a principal residence when they eventually sell it. But, as CRA notes, the purchase price will be considered to be the fair market value regardless of the price you use.

Consider alternatives to “selling low”

There is nothing to stop you from selling it for the $600,000 fair market value and gifting your kids $100,000 to $150,000 to accomplish the same thing as you’ve proposed. However, I would encourage you to be sure that you do not need that money to fund your retirement and could comfortably afford to give it to them.

Another alternative would be to sell your house to your kids for $600,000 and lend the $100,000 to $150,000 to them. They may need a down payment of 20%, or $120,000, to buy the property from you, and could finance the rest with a mortgage from a bank.

If you charged interest on the loan to your kids, they could deduct the interest on their tax returns, as they will have borrowed the money for investment purposes. You would have to report the interest income on your own tax returns. If you charge no interest, that is OK in this instance as well, Graham.

In order for your kids to treat the property as a rental property to deduct their mortgage interest and the other associated property costs on their tax returns, the rent you pay them must be equal to fair market rent. In other words, you cannot choose an artificially low rent to reduce their net rental income or increase their net rental loss.

Besides that, if you want to pitch your kids on this being an investment for them, the rent they are earning should be reasonably competitive.

I think your idea here has merit and is a great example of an alternative to a reverse mortgage. Seniors can do this without involving their kids, as well, potentially listing their home for sale with the condition that they want to remain as long-term tenants. It may limit the potential buyers for the home, but an investor may appreciate the opportunity to buy a home with a tenant who has money (from the house sale), who will treat the property well (having been the previous owner) and who may stay for a number of years (providing stable rental income). A real estate agent could help develop the proper listing details for the home and prepare a residential tenancy or lease agreement to sign at the same time as the agreement of purchase and sale is completed.

Real estate should be a complement, not a replacement, to other long-term investments

That said, there are a couple things I will question about this proposal, Graham. The result, from the sounds of it, is that you and each of your children will end up owning two real estate properties. Home ownership can be good for a lot of reasons and rental real estate can be a good way to invest. But whenever I talk to someone who is going out of their way to own multiple properties, I encourage them to consider whether that is the best approach.

Real estate has appreciated significantly in many Canadian cities, including Vancouver, Toronto and Montreal, in recent years. However, prices have decreased in other cities, particularly in Alberta. Rental real estate is likely to provide a comparable rate of return over the long run to a balanced investment portfolio. But real estate has significantly higher acquisition and sale costs (land transfer tax, real estate commissions, legal fees, etc.). As long as someone has a long-term time horizon and is not expecting real estate to make them significantly wealthier than stocks and bonds, especially given the already high prices in many Canadian cities, that is important to consider.

Your kids may have other opportunities, like Registered Retirement Savings Plan (RRSP) or Registered Pension Plan (RPP) tax deductions, which they forgo to buy this home from you. Or opportunities for tax-free growth in their Tax Free Savings Accounts (TFSA). If they have children—your grandchildren—and may forgo contributions to Registered Education Savings Plans (RESPs). They should be sure the one-third rental property ownership is a complement to their other long-term investment and financial goals, and not a replacement.

Calculate the opportunity cost

Finally, let’s say you build a vacation property for $500,000, as planned. If you sell your home and then have the choice to invest the proceeds in stocks and bonds, or build the property, there is an opportunity cost from not investing the proceeds, and building instead.

Let’s say you could have otherwise earned a 3% after-tax return on investing the money. A 3% “cost” to you on not investing that $500,000 is $15,000 per year.

Now what about property tax, insurance, utilities and maintenance? These could vary depending on the property, but let’s assume another 3% per year. We are up to 6%, or $30,000 in costs. But the property will grow in value, right? Over the long run, real estate has historically grown at slightly more than inflation, despite the growth we have seen in some big cities in recent years. So, call it 3% growth, or $15,000 per year. A 6% cost of $30,000 less 3% growth, or $15,000, is 3 per cent or $15,000; that’s the net cost for your notional $500,000 property. Are you going to get $15,000 of use out of the property? If you were only going to use it a month or two each year, what could you rent for the same $15,000 that owning would cost you?

If you were going to use it six months a year, that is different. Now we are up to 26 weeks and $15,000 divided by 26 weeks is only $577 per week. If you thought your usage was going to be that much, buying may be better than renting.

If you did not think you were going to use the vacation property that much but were open to offering it up for short-term rental, you might still be able to justify owning from a financial perspective. That extra income would help cover the costs.

This is not to say that financial considerations should drive all your decisions, but if you would not use your notional vacation home much, consider renting a vacation property.

As I said from the start, you have come up with an interesting proposal and opportunity for your family. I am neither for nor against it, and have tried to raise some questions to help you make a good decision. I hope my input has been helpful.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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Making sense of the markets this week: October 12

Dale Roberts — Fri, 09 Oct 2020 20:36:27 +0000

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

It’s October. Will stock markets get spooked again?

October is, historically, the most volatile month for U.S. stocks. In fact, it was kind enough to author two of the most violent stock market crashes in history. Those showed up in 1929 and 1987.

So hang on to your hat, because October 2020 might be a wild ride. But MarketWatch says it’s also an opportunity…

“October is coming. The most volatile month of the year for the U.S. stock market is here but if you’re prepared there’s nothing to fear. In fact, the market typically rises in October and combined with the volatility, gives investors one of the best opportunities for getting into stocks of the entire year.”

The month also precedes elections that land in November. Does that timing factor in? MarketWatch also offered…

“You might also wonder if October’s above-average volatility can be traced to the month coming immediately prior to elections (both presidential and midterm). But again the answer is ‘no.’ The stock market in October is more volatile than in any other month even if we focus only on the first and third years of the presidential cycle.”

So, it isn’t election-related. Across the board, October is simply a spooky month. And if stock market history repeats, those tricks (corrections and lower stock prices) might turn out to be a treat. Stick to your investment strategy.

Out with the old energy stock and in with the new

ExxonMobil was once the most valuable company in the U.S.—and on the planet. It held one of the top weighting positions in the S&P 500 for many years. But said planet is changing and, for a while, anyway, ExxonMobil was supplanted by NextEra Energy as the most valuable energy company in the U.S.

From CNN…

“NextEra Energy, the nation’s largest renewable energy company, briefly surpassed Exxon in market capitalization on Friday, according to UBS. That made NextEra the most valuable company among all US energy and utility stocks. It’s a stunning feat given that Exxon was the most valuable publicly-traded company on the planet as recently as 2013. By Monday afternoon, Exxon had a market value of $142.2 billion, about $1 billion more than NextEra.

“But the fact that NextEra is even close to Exxon in market value is also stunning because it generates much less revenue. Exxon raked in $265 billion in revenue last year, compared with just $19.2 billion for NextEra.”

NextEra has become the poster child for renewable energy. The Florida-based company calls itself the world’s largest utility and the biggest generator of wind and solar energy. Once again we see that the stock markets look to the future. And at times that can mean looking many years out. The market makers who price stocks see a major structural shift in the energy sector, and energy policy. That CNN post also suggested…

“Wall Street is betting NextEra could be a beneficiary of a Democratic sweep in November that ushers in a $2 trillion climate spending plan.”

In the Sept. 14, 2020, edition of this column, we observed that the value of electric vehicle maker Tesla could buy these 6 major global automakers.

The markets are looking forward and seeing green technologies as the winner.

Canadian snowbirds might be stuck in the snow

Many Canadian retirees head to the warmer climes of the United States each Winter. They are known as snowbirds. And mostly they like to fly (or drive) to California, Arizona and Florida. But, of course, the U.S.–Canada land border is closed to nonessential travel. (For the record, heading south to keep warm and work on your winter tan is deemed nonessential.)

This story is creating many headlines and articles these days. And it’s certainly causing a lot of stress for Canada’s snowbirds. There is so much to consider on the health and financial fronts.

It’s estimated there are more than 300,000 Canadians who make that annual pilgrimage. And this year many snowbirds, faced with the prospect of being stuck in Canada, are still looking to head south. As the CBC offered…

“Canadian snowbird Elizabeth Evans is determined to head south next month. That’s because her only winter home is parked at an RV resort in Williston, Florida. ‘I don’t have a [winter] home here,’ said Evans, who’s currently living in her summer trailer at a campground in Niagara Falls. ‘I don’t have any winter clothes.’

With the border closed, other Snowbirds who might be trapped in Canada are those who drive their campers or RVs to their U.S. winter destination. And as we’re seeing COVID-19 cases spiking in Canada and the U.S., it’s highly unlikely the border rules will be relaxed any time soon.

Even for those who are able to fly to their destination, there are so many complicated issues to consider. Insurance policies might be complicated, and it’s important to read the fine print of any policy. Another complication might be the possibility of local hospitals being overrun due to a severe COVID-19 outbreak. A Canadian snowbird might have ample insurance coverage but not have the ability to get care.

If you want to follow this story, a go-to resource is The Canadian Snowbird Association, which has 110,000 members.

U.S. stocks tumble as Trump says no to U.S. stimulus deal

This story is making the most market noise this week as President Trump announced there will be no stimulus bill until after the election. That could leave many individuals and businesses without much-needed support.

Source: Twitter

Soon after the announcement the markets reacted. From Seeking Alpha on Tuesday…

Source: Seeking Alpha

Then the markets started to recover as President Trump announced his own plans for limited stimulus in a stand alone bill. Earlier, Fed chief Jay Powell said it would be riskier for lawmakers to do too little on the stimulus front than too much.

We might say or conclude that stimulus is propping up the markets. And in a recent MoneySense post (it’s a very good read) Bryan Borzykowski said it’s all about the stimulus. From Bryan…

“One reason why stocks have done so well so far is because of the money stimulus has put into people’s pockets, such as through the Canada Emergency Response Benefit here, or the $1,200 stimulus cheque in the U.S. If that money dries up, then markets will surely react negatively.”

And, once again, the stock markets are forward-thinking. U.S. and Canadian stock markets have largely clawed their way back from the lows seen in March, even though the economic recovery is a work in progress and many sectors continue to struggle. The buoyant stock markets suggest confidence that continued stimulus can successfully carry us through to the other side of the pandemic.

My reading and research leads me to believe that we are in the early innings of the pandemic. Many sectors are likely to need support for years to come.

At what point do the stock markets get tired of waiting?

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com.

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