Weekend Reading – Market predictions for 2020, reasons for FI, ETFs for your 2020 TFSA and more #moneystuff
Welcome to my latest Weekend Reading edition where I share some of my favourite articles from the week that was across the personal finance and investing blogosphere.
The end of 2019 is near…
What are your reflections?
What did you accomplish?
What did you want to accomplish but you’ve put that on your to-do list for the next decade?
I know I intend to write answers to those questions myself in the coming weeks via various posts.
Quite recently, I posted our success stories (and failures) in this 2019 goals update.
Will we reach this major financial goal in 2020?
Can we kill our mortgage debt in the coming years to start semi-retirement?
I’m just as curious as you are to find out!
With my last Weekend Reading edition for 2019 now published, this is great opportunity to thank the nearly 900,000 pageviews this site had in 2019. I appreciated every reader comment, “like”, and counterpoint to my thinking. You make this site enjoyable to run.
I wish you and your family a very Happy New Year with good health and happiness along the way.
Mark
Weekend Reads
Always interesting to read predictions of the past, and see how they actually turned out. I found this article that suggested our TSX should return 8% for the coming decade (article posted in 2010). In fact, for the 10 years ending December 20th, I read the S&P/TSX Composite Index posted an average annual gain of 3.9%. By contrast, the S&P 500 in the U.S. rose by a whopping 11.2% on average. It will be interesting to see over time if there is a reversion to the mean when it comes to these U.S. gains. Regardless, I will continue to own more U.S. stocks and ETFs for more diversification beyond Canada’s borders. I’ve been buying more U.S. stocks and ETFs in my portfolio since about 2010. I recall Johnson & Johnson (JNJ:US) was my first big purchase.
How did my Canadian dividend stock portfolio compare to that 3.9% reported 10-year TSX gain to date?
My non-registered account has delivered over 8.8% annualized over the same period.
My TFSA posted a return of just over 8%.
My wife’s TFSA posted a return of 7.5%.
My secret? Own the same top stocks the big funds own and reinvest all dividends paid. That’s my strategy. In one sentence.
Dividend Earner compared discount brokerages.
Some leading economic strategists are predicting the following for the Canadian market in 2020. Here are some highlights:
- From Bank of Nova Scotia: TSX will end up at 18,500. “The S&P/TSX even ends up outperforming the S&P 500. The U.S. dollar will weaken once global growth rebounds, he said, and the number of investors looking towards the U.S. markets as a safe haven will decrease. That will push some towards Canada.”
- BMO Capital Markets are calling for the TSX to finish at 18,200.
- National Bank strategists are more cautious, the TSX will finish at 17,900.
The Fioneers shared their reasons for financial independence.
Good advice from the financial planner not to cash out the RRSPs to kill the $385,000 mortgage in this financial facelift article. I’ve always considered cashing-in any tax-deferred assets as borrowing money from your future self. It’s really not wise to do since you can never get back the compounding time ever again. Thoughts on borrowing from your RRSP?
I’ve been reading a bunch of articles that talk about people killing debt in 2020, as a major New Year’s Resolution. That, and better eating habits and more exercise too. You know, the usual stuff!
A reader recently wrote to me after a post on my site, referring to my “bucket” approach for semi-retirement in a few years. Here is that post.
In the coming years I wrote about my plan to “live off dividends” to a degree, spending the dividends and distributions earned from our portfolio to the tune of about $40,000-$45,000 per year. I also mentioned I plan to hold “a bucket of cash savings”; as in one year’s worth of savings as part of my overall portfolio.
Here is what the reader wrote to me about his approach:
Hi Mark,
I have read many financial blogs and advice columns about the need to keep cash on hand as an emergency fund. Pretty sure you have also mentioned this as part of your own “Buckets” strategy. But I have an issue with the logic of keeping too much cash on hand.
I hate (I mean HATE) having dead money not generating income (preferably dividend income of course!). Rather than keep a bucket of cash in a low interest savings account, why not deploy all your invested funds in a properly diversified portfolio and if an emergency occurs, use your line of credit to fund your expenses in that emergency?
Caveat: All of this assumes you have enough credit to be able to get a line of credit. As well, I know HELOCs can get out of control in a hurry, so this strategy is probably only suitable for people with a good disciplined savings and debt/mortgage repayment plan.
Thoughts readers?
My main arguments against this approach for us are the following:
- A major emergency is the wrong time for me to get stressed about money. I would rather have the cash on hand (than go into more debt) in any emergency.
- With a “live off dividends” approach I would like some buffer if any stocks do lower their dividends and/or the ETFs I own may lower their distributions in a bad, prolonged market.
Readers, what works for you?
Boomer & Echo highlighted ways to make savings a priority in 2020. I think the simple step of making savings automatic is one the easiest and best things you could ever do.
Reader question of the week (adapted for site):
Mark, I hope you are doing well and enjoying your new place. I have been following you for a while now and enjoy reading your posts.
I am here looking for some guidance for my RRSP and TFSA. I have been reading books and your blog wanting to get more knowledge about investing but there is so much to absorb and learn
which will take time. My biggest dilemma is that I have about $50,000 in my RRSP and $30,000 in my TFSA with a leading brokerage which isn’t making me anything. It’s been over two years now and I really need to put this money into good use.
My reason for contacting you is I know you know so much about low-cost ETFs, and dividend paying stocks, I figured you might have some suggestions. My holding period is for the long term so I don’t have to switch every year.
Your blog is full of expertise but sometimes it’s hard to make the leap and gain the confidence to invest.
I have talked to a couple of financial advisers but I always feel they are suggesting what’s best for them.
Being a single mom, I do have RESPs for my kids but not sure if I should switch that now because my daughter just started her first year of university; seems OK to keep in my 2020 target date mutual fund.
I know you are a busy man but any help will be appreciated and thanks so much!
Lots of questions and things to consider there! Thanks for your email and questions.
First, I won’t comment too much on the RESP since you’re right, 2020 is pretty much here and that fund is likely re-balanced to ensure you’re not owning too much equities (therefore stock market risk) this year if your daughter needs the money intact for her schooling. As a rule of thumb for me, best to keep any money you need in 1-2 years in cash or in a guaranteed form (e.g., GICs) that is readily attainable.
When it comes to low-cost ETFs (thanks for the kind words by the way….) I believe if you’re unsure, simple is better. Heck, simple is usually better any day. What I’m getting at is to consider an all-in-one ETF that will allow you to invest in companies and countries from around the world. This will provide you with tremendous equity diversification; allowing you to participate in long-term growth. Based on the fund you choose, it can also provide some “protection” from bad markets using some bond allocation. Finally and maybe most importantly, the fund can also re-balance its stock and bond split for you. All you need to do is to contribute money and make some ETF purchases a few times per year.
What are my favourite all-in-one funds? Check out this post. In the post, I’ve even included some considerations about the best of the best to own given your risk tolerance and investing time horizon.
Certainly $50,000 (in your RRSP) and $30,000 (in your TFSA) is a lot of money that “isn’t making you anything”. So, consider an approach whereby you invest in one of those all-in-one funds and get that money working for you. Be sure to ask your brokerage to reinvest all ETF distributions/ask to enroll the fund in a DRIP (dividend reinvestment plan). That way, money that makes money, can make more money next time when ETF distributions are paid!
You can read up about dividend reinvestment plans on this page here.
There are absolutely hundreds of other ETFs you could consider investing in, but I’ve distilled my favourite low-cost ETFs to own in these posts below:
This is how you can diversify your TFSA in 2020 using low-cost ETFs.
These are some of the best ETFs to own for your RRSP.
When it comes to buying and holding various dividend paying stocks, well, that’s very subjective. That said, I believe there are only about 50-60 companies ever worth owning in Canada outright for their dividends. The reason I say this is because there are only a few dozen established dividend-paying companies in Canada, companies that have proven they can reward shareholders in good times and in bad over many investing years. I’ve outlined how I built my Canadian dividend portfolio (and how you can too) in this post here.
Thanks for your reader questions and I have another 5-6 in my inbox I will get to, I promise!
Happy investing for 2020.
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Debt only becomes a problem when you cannot service the debt comfortably from your cash flow. We have always used a HELOC to cover major expenses, emergencies and build some assets. The original reason for establishing the HELOC was to cover expenses during a teachers strike. Thank goodness it only lasted two weeks. The current monthly cost to service my HELOC debt is slightly more than my cell phone bill! Look at your debt to asset ratio. If we were forced to liquidate,we could sell the house and still walk away in the black. I think it’s incredibly important to protect the cash flow.
Disagree re: RRSP vs TFSA
1) If you withdraw from RRSP or TFSA to purchase house you lose the time value of money in whatever account you draw from. I would rather have my TFSA grow by 10% than my RRSP grow by 10% because the RRSP growth will eventually be taxed. TFSA will not.
2) When you deposit to RRSP you get a refund at your marginal tax rate. If you withdraw from RRSP to purchase a home you are essentially transferring that refund from an asset that will be taxed (eventually) to an asset that won’t be taxed. Same rational as why we look for ways to move money from RRSP to TFSA.
3) The RRSP home loan is interest free. Having to pay RRSP loan back is forced savings.
4) If you have some form of company pension do not let your RRSP get big. I have several relatives who are withdrawing from RRSP at a higher tax rate then they contributed. Fill TFSA first and leave it alone while in accumulation phase.
Great roundup. I totally agree with you about not “borrowing” from your RRSP. Yes, you can put the money back if you borrowed it using the Home Buyers’ Plan for Lifelong Learning Plan, but as you mentioned you can never get that compounding time back. The TFSA is a great alternative to these programs.
Great stuff. Thanks for all the social media shares in 2019 Maria – very much appreciated and happy to continue sharing your brand in 2020!
Best wishes,
Mark
By the way, I do believe not all debt is bad. I have some car loans with low interest-rate right now although I won’t have problem to pay with cash. I invested the money instead. If I could borrow more money at the same rate, I will borrow more for sure.
No, fair, debt can be used wisely. Just that for the majority of folks large sums of debt is bad because it can be easily mis-managed. Just like a big bag of potato chips. Bet most folks can’t eat just one chip! 🙂
I think there is no best portfolio for everyone, there is only the most suitable portfolio for each individual and that portfolio could be different at different phases of the same individual too.
As most likely we will retire before the kids going to the university, we probably will always keep a big chunk of cash (at least two years expenses), and even a bigger chunk of FI (cash and bonds together). I don’t want to take any risk with my kids. I want to be sure even after we quit our jobs (it will be almost impossible to earn the same salary once we retire for couple years) our kids will still be sufficiently provided. I am aiming for (number of years until my younger one graduate from university) X (annual expense) in FI. Right now we have 40% FI, not enough if we retire now. With my portfolio increase (hopefully) and my kids older (time is flying), hopefully
we won’t need more than 40% when we retire.
Also, we will begin a glide path once we retire to increase equity and reduce FI. Basically, for the first few years, I see all our expenses will be from investment income and FI part of our portfolio once we retired. Once the kids leave the house and their tuitions are secured too, I assume we will have a portfolio with a high percentage of equity and a low percentage of FI. I will be much more flexible to cut my expense at that time and also to begin CPP/OAS at any time if needed (ideally defer them but it will depend).
I think once any CPP and/or OAS kicks in for many Canadians, they can easily increase their equity allocation to offset that new fixed income.
Kids’ tuition can be very expensive now. I think mine was just over $2,000 or so per semester back in the early 90s. Good luck with that now – probably closer to $2k per course! Crazy.
Post secondary is expensive depending on what they take. We told our kids if they took something that was employable we would help pay their way. If they were going to find themselves – forget it. Find yourself in a job. All the kids ended up in technical schools and have employable skills. Came out debt free. Had a buddy who became an electrician first and then went to University. He always had work. There is lots of money available to reduce post secondary cost – It’s still a bargain in Canada. BTW I paid $400 per semester in early 80’s, lived at home and worked my butt off during summer to pay for it. Got nothing from parents. Same program today costs about $3500 per semester. Five courses plus University fees. Average student debt in Canada is about $16K upon graduation.
Interesting that we have all these unemployed University Grads but nobody can fix anything.
Interesting post on strong opposition to holding a moderate amount of cash in retirement and with a 7 figure portfolio remainder all in equity. I agree with what you wrote Mark. Going into debt in the event of any emergency is a lot different than having cash. I can think of numerous things that might go sour with that approach- debt costs, selling assets at wrong time, cash flow issues, stress etc.
In our case at this point its a live off work pension and investment income generated from all assets approach- global equity, bonds, GICs and ~5% cash in HISA. For us this is being properly diversified, and an appropriate use of assets to meet our needs, risk tolerance and keeping us happy. Strange as it sounds, this way I am intentionally not trying to maximize income and growth. To coin your phrase yes that way we feel almost bullet proof. I acknowledge this certainly may not be the approach others want and I encourage everyone to think and do what is right for themselves.
We’re pretty well in that same frame of mind and close to same ages as well RB. One difference is that we are living off the two DB pensions, a wage replacement disability (ends in 6 years) and CPP disability (changes to reduced regular CPP in 6 years). Our investment stuff (RRSPs, TFSAs and non-reg) is not being utilized for consumption so will continue to compound for at least another 6 years. No need to chase growth or income anymore. I’ll still play a bit but I ain’t gonna lose any sleep or nap time over it.
That’s the thing eh Lloyd, if you’re already “won” then you don’t need to take on any more risk than necessary. Kudos!!
Best wishes to you in 2020. I enjoy your comments on the site.
Mark
I screwed up…the wife just informed me, in no uncertain terms (and not a very pleasant tone of voice), that she is NOT 59, she is only 58 so seven years before the wage replacement and CPP conversion takes place. My bad.
LOL 🙂 I get those comments too!
LOL. Next time mistake with a younger age and the wife won’t be unhappy.
For quite a few years, my kids thought their mom is 28 years forever.
Yup, one would think that at my age I’d know better. Having said that, any day I only make one mistake is a *great* day!
Smart 🙂
I’m wired to be a bit conservative with money. I know that. It’s my bias. But, that said, I think that has served me well getting to this point in my financial life.
For a small or modest emergency, I think going into debt when dealing with that (an emergency) just seems unwise but that’s my lens. Everyone is different. There is enough stress with an emergency vs. adding on debt repayments. Just me!
As long as folks think through their own pros and cons with debt I have no issue with using an LOC as a short-term ATM.
I understand and can relate.
I’ve found it interesting that since transitioning into retirement the conservative side is winning even more here. What you said above about winning the race is, as you know, something I’ve referred to often. Perhaps thats it.
There are many paths that can get a person to where they want to be. The trick is to determine that, follow it or adjust if you’re off track or decide on a different route or even a different destination.
re the bucket dilemma
How about a down the middle Canuck solution – setup a line of credit (LOC) and also have a (smaller) cash reserve?
The cash reserve (maybe 6-9 months of expenses?) could live in a HISA (EQbank (2.3%) comes to mind or occasionally Simplii when they have bonus interest currently 2.8%)
The LOC could act as a backstop to the cash bucket.
A major emergency could be covered by the cash on hand and if further funds are required one taps in the LOC.
You know, I would be OK with that except people simply don’t know how big their emergency might be or how long it might last. Job loss/loss of income is #1. Getting sick, #2. Major house issues could be #3. Sure, not everyone needs nor wants 1-year of cash in the bank but I would feel very safe with that cash level along with a 7-figure portfolio and of course, no debt. I would feel almost bulletproof financially.
I would absolutely keep any cash reserve (1-month, 3-months, 6+ months) in a higher interest savings account like Simplii, EQ, etc.
The LOC would be a backstop. Definitely a last resort should be withdrawing investment funds but I have heard of some folks doing that. Far from ideal.
Happy Holidays to you!
Mark
“I would feel very safe with that cash level along with a 7-figure portfolio and of course, no debt. I would feel almost bulletproof financially.”
yup. I’d bet an extra large double/double and a large box of Tim Bits that no reasonable financial planner would criticize that position.
I’ll take that bet!
Looking forward to TFSA room in another few days! Just need to figure out what to buy and hold. EMA is near top of list.
I’ve been looking at what the heck to do with new TFSA as well. I have to do a bit of clean-up on the wife’s TFSA. Liquidate the small position in the e-series Euro and the TDB8150. Combined with the lazy cash and the new contribution, I’m looking at 12.7K to park somewhere for that account. Might consider some more REI.UN or maybe even just temp park it in XEI (I could also change my mind a dozen times between now and Thursday).
My TFSA is just the new contribution and a few hundred of lazy cash. Probably just temp park it in XEI or maybe some more BIP.UN although we’re probably already overweight in that position. Or I might just wait. Can’t make up my mind so when in doubt, do nothing might apply.
Why not put $12.7k into HISA and use TFSA as your dividend account? XEI isn’t a bad call with 4%+ yield, some upside and decent CDN diversification.
I will likely buy more BIP.UN <> BIP (in USD $$ RRSP) and more BEP in same USD $$ RRSP in 2020. Love those companies.
“Why not put $12.7k into HISA and use TFSA as your dividend account?”
I’m not sure if I understand the question. Our TFSAs are all equity and we’d like to see close to, if not at or slightly above, a 5% yield. If you are asking why not use the 12.7K within the TFSA for interest as opposed to dividends the answer is we’d like to see a better yield in the TFSAs than a HISA or GIC can offer.
BIP.UN is definitely a consideration. I’d even look at more BPY.UN but don’t really want another small position in the TFSA. I could swap out some BIP for BPY in the RRSPs and then buy BIP in the TFSA. Will ponder (procrastinate) some more.
Sorry, I misunderstood when I read this:
“Combined with the lazy cash and the new contribution, I’m looking at 12.7K to park somewhere for that account.”
Ya, I have some thinking to do on the TFSA as well…
Mark
Sounds like a wise plan to me.
Hi Mark,
Here are my returns over the last 10 years. I am quite pleased since I knew nothing about investing when I started. With your help and good advice I think I was a good student.
non registered account 8.37%
RRSP account 13.99%
TFSA account 10.71%
Health and happiness for 2020
Non-reg. over 10 years above 8% is great!! Well done!
XIU for a reference, the top-60 stocks and arguably the best dividend payers in Canada delivered just north of 7% with a few days in 2019 left.
https://www.blackrock.com/ca/individual/en/products/239832/
RRSP is excellent for 10-years. You must have some U.S. stocks in there for that!
Health and happiness back for 2020.
All the best and stick with the plan!
Mark