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Investment

If this doesn’t get you to pay attention to your investing fees, nothing will

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The brain trust for financial planning standards in Canada thinks a 50-50 balanced portfolio of stocks and bonds will make an average 4.7 per cent annually over the long term.

Every cent you pay in fees undermines that underwhelming return. If this doesn’t get people engaged with the cost of investing, what will?

The return estimates come from the 2023 Projection Assumption Guidelines published by the FP Canada Standards Council and the Institut québécois de planification financière. These guidelines are meant to provide prudent numbers for financial planners to use in their work for clients. The numbers are meant to reflect long-term results, not what you should expect for this year or next.

The 2023 guidelines are as follows:

-Short-term money, aka cash: 2.3 per cent

-Bonds: 3.2 per cent

-Canadian stocks: 6.2 per cent

-Foreign developed market stocks: 6.5 per cent

-Emerging market stocks: 7.4 per cent

The guidelines also include assumptions for a relatively conservative portfolio with 5 per cent in the short-term bucket, 45 per cent in bonds, 40 per cent in Canadian stocks and 10 per cent in foreign developed stocks. The total gross projected return for this portfolio would be 4.7 per cent, which falls to 3.4 per cent after fees pegged at 1.3 per cent.

One way to increase the potential returns of this portfolio would be to add exposure to Canadian, foreign and emerging market stocks. But asset allocation tweaks will only take you so far, especially if you have limited tolerance for stock market volatility.

This brings us to fees. The 1.3 per cent fee used in the financial planning guidelines reflects what an investment adviser or planner would charge plus the cost of owning low-cost exchange-traded funds. All-in fees for advisers using mutual funds would be higher – maybe 2 per cent or more in some cases.

DIY investing seems an obvious answer for lowering fees, but it’s not for everyone. And, there’s the reality that advice has value in providing a financial planning overlay for investing, coaching people through the emotional traps of investing and choosing investments.

The best approach to lowering fees is to examine all your costs, see if they provide value and then, where appropriate, look for cheaper alternatives. For example, mutual fund investors should compare their results with those of low-fee ETFs. This is easy to do – just look at the online product profiles that all mutual fund and ETF companies offer.

Not all ETFs are cheap, by the way. Funds that track broad, well-known stock and bond indexes have management expense ratios as low as 0.06 per cent, or thereabouts. ETFs that use more complex or niche strategies can be in the 0.5 and up range – are they demonstrably better than cheaper funds?

As for the cost of using an adviser or planner, you need to consider the fee on one hand and the services provided on the other. Your fee can be described as well-earned if you have a financial plan in place, helpful ongoing management of your portfolio and confidence that you’re making progress in reaching your goals.

— Rob Carrick, personal finance columnist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

The Rundown

Two ways yield-hungry investors can benefit from the surge in gold

Gold has been on a roll for the past several months despite rising interest rates, which normally are a headwind for the precious metal. But most income-oriented investors aren’t participating in the gold surge. That’s because gold doesn’t pay interest or dividends. But financial engineers have devised a way to have your gold and live off it too. They’ve launched exchange-traded funds that invest in gold miners and generate income by selling covered call options against some or all of the portfolio. Investors who hold these ETFs are currently receiving attractive yields as well as capital gains. Gordon Pape takes a look at two of them.

Energy stocks are down this year. But the bullish case is very much alive

Strong demand for oil amid limited production was supposed to keep crude prices elevated, rewarding investors with soaring share prices and gushing dividends. Crude oil isn’t playing along, though. The price of West Texas Intermediate briefly dipped below US$70 a barrel this week, bringing the total decline to more than 40 per cent over the past 11 months. The decline is weighing on Canadian energy stocks, which are down 7 per cent this year. But, as David Berman tell us, the bullish case for owning energy stocks is still persuasive.

Investors criticize popular sustainability-linked bonds as investors warn of false environmental claims

Sustainability-linked bonds are rapidly becoming unsustainable. The bonds have only been around since 2019, but investors are already beginning to sour on a product once heralded as the first green financial instrument with teeth. As Jameson Berkow reports, the substantial discretion granted to issuers when setting their environmental, social and governance (ESG) on these products have made sustainability-linked bonds ripe for abuse.

Others (for subscribers)

Monday’s analyst upgrades and downgrades

Ask Globe Investor

Question: I hold units of Brookfield Infrastructure Partners LP (BIP-UN-T) in my tax-free savings account. My accountant informed me that there are no taxes in a TFSA. However, my discount broker, BMO InvestorLine, has been deducting foreign withholding tax from my quarterly BIP.UN distributions. What is going on here?

Answer: As you’ve discovered, tax-free savings accounts aren’t always tax free.

BIP.UN is a Bermuda-based limited partnership that derives its income from holding companies in Canada, the United States and Bermuda. While payments from its operations in Canada and Bermuda are not subject to withholding tax, “payments from holding companies in the U.S. to a Canadian resident … may be subject to withholding taxes,” the partnership explains on its website.

You can generally avoid U.S. withholding tax by holding your BIP.UN units in a registered retirement savings plan or other registered retirement accounts, which are exempt from U.S. withholding tax under the Canada-U.S. tax treaty. However, the exemption does not apply to TFSAs, non-registered accounts, registered education savings plans or other accounts that are not specifically for retirement purposes. The same rules apply to dividends from U.S. companies, which face a 15-per-cent withholding tax unless the shares are held in a retirement account.

In the case of BIP.UN, the good news is that the amounts withheld, if any, are typically much smaller. There was no withholding tax on BIP.UN’s March 31 distribution, for example, and the amount withheld from the Dec. 30 payment was just one cent per unit. In other quarters, withholding tax has been slightly higher or lower. The reason the amounts are tiny is that withholding taxes typically apply only to a portion of BIP.UN’s distribution, not the full amount.

If you can’t stand the idea of paying even a penny of withholding tax, you could move your BIP.UN units to your RRSP. Or, you could swap them for shares of sister company Brookfield Infrastructure Corp. (BIPC), whose dividends are not subject to U.S. withholding tax. (BIPC’s dividend and BIP.UN’s distribution have the same dollar value, but the former qualifies for the Canadian dividend tax credit in a non-registered account.) However, because BIPC trades at a higher price than BIP.UN, and therefore has a lower yield, your investment income will take a hit if you purchase an equivalent dollar amount of BIPC.

I’m not sure it’s worth it to save a small amount of withholding tax every year. If you like BIP.UN as an investment, holding it in a TFSA isn’t a big deal.

–John Heinzl (E-mail your questions to jheinzl@globeandmail.com)

What’s up in the days ahead

Gordon Pape takes a look at mid-size TSX energy stocks that are continuing to pull their weight even with the recent drop in oil prices.

 

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Economy

S&P/TSX composite up more than 150 points, U.S. stock markets also higher

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TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.

The S&P/TSX composite index was up 171.41 points at 23,298.39.

In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.

The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.

The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.

The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.

This report by The Canadian Press was first published Aug. 29, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Investment

Crypto Market Bloodbath Amid Broader Economic Concerns

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The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.

The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.

Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.

The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.

Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.

Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.

Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.

Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.

The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.

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