Thursday, 21 September 2017

Interest Rates and the role of Bonds/Fixed Income in your portfolio

With global interest rates beginning to rise due to central bank unwinding their balance sheet and low interest rates policies, this is indeed positive news for retirees, prospective retirees or investors seeking a safe haven from the volatility in investing in equities. Mind you, I think we are still in the early stages of a rising interest rate environment. Based on historical evidence, equities will continue to do well in the initial stages of rising interest rates (due to indication of economic growth).  As you know, the stock price is based on the present value of future cash flows on a company discounted using current interest rate. As rates increased, assuming everything else remaining constant (ceteris paribus), the price of the stock decreases.

Bank of Canada has increased rates twice already this year. The Government of Canada 10-year bond has spiked to 2.1%, which is the highest since late 2014.  As seen in the Canada 10-year bond chart below, the highest rate in the past 5-years was 2.8% in December 2013.  My prediction is that there will be at least 3 or more rate hikes by the end of 2018.  The U.S. is on a similar trajectory. The E.U.and  the United Kingdom have indicated an end to the easy monetary policy, but have yet to officially raise interest rates.  

From a portfolio allocation standpoint, my suggestion would be to start increasing exposure to fixed income (or bonds), and stay in the mid-end of maturity (no more than 10 years). Duration is the key measure of a bond’s sensitivity to changes in interest rates.  For example, if the duration is 5, this means that the price of a bond will increase by 5% if yield decreases by 1%.  Note that price of bond is inversely related to yield.  Conversely, the price of a bond will decrease by 5% if yield increases by 1 percent.

A sample corporate bond from Brookfield Asset Management below , which as an investment grade rating of A1 and maturing approximately 10 years from today yields 3.72%, or 150 basis points higher than a 10-year Government of Canada bond.  

If you stagger your bond maturities and purchase an equal amount of 3-year bond from Hydro One that yields 1.92% as you did with Brookfield 10-year bond above, your weighted average yield on your bond portfolio would be 2.82% . rough estimate of Duration would be approximately 6 years.  Since rates are expected to continue to rise, you would do well to stay at that duration level.

One may question why invest in bonds that yield less than 3% on average when rates continue to go up.   One can easily buy dividend paying stocks that yields more than 3%.  The biggest reason for purchasing bond is the peace of mind that bonds provide during uncertain times. Case in point, during the 2008 market crisis, a 40% allocation to government bonds specifically would have cushioned your portfolio losses by more than half.  

Another reason is that bonds typically pay more than the interest provided by banks.

Lastly, bondholders typically have priority over stockholders if a company goes bankrupt.  Hence, the dividend or more importantly, the principal amount invested in the common stock may not be totally safe.

My ideal portfolio will provide a return of 6% consisting of 60% Equity, assuming return of 8% and 40% Fixed Income assuming Return of 3%.  Returns above are assumed to be net of inflation and investment fees.  I know people are going to balk at that return and will probably say that investing in Facebook or Amazon alone can quadruple the 6% above.  I challenge anyone who can do this consistently, though. More important than the 6% return is that the portfolio above can reduce the volatility of your portfolio by reducing the expected standard deviation of returns. In other words, you have a better change of achieving a 6% return on average than hitting a home run consistently.

Sunday, 10 September 2017

How to identify the FI in you?

How do you know that you are not already a Financial Independence Retire Early)(FIRE) or aspire to be one?  If you answer "YES" to most of the following questions based on my observations and my personal traits, then I congratulate you for joining the bandwagon.

You jump for joy when you are able to purchase something on sale at the grocery store and was able to double the savings by including manufacturer coupons and vendor online bonus points.

You spend more and more time each day reading about FI-ers and their successes.

You are in awe when you see other FI-ers bloggers portfolio each month and think you can do better.

You eat out less often, but focus on cooking healthier and cheaper meals at home.

You stop looking at new car, but instead brag about how you got 300,000 km on your existing beater.

You resort to dumpster diving to look for parts to replace your decade-old BBQ gill.

You sign up for GasBuddy to save a few cents per litre on gas.

You stop shopping for new clothes.

You stop chasing risky investments, but focus on maintaining a balanced portfolio of 65% stocks and 35% fixed income.

You take advantage of  cash bonuses by opening new bank accounts, and closing old ones. Note that loyalty does not pay.

You stop worrying about earning more (in order to retire early) because you are in control of your spending, and that my friend, is the key to achieving FIRE!

Tuesday, 5 September 2017

Retirement Planning beyond just Investment

As a practicing Certified Financial Planner (CFP), I always advise my clients to look at retirement planning on beyond just the numbers. I can always input different assumptions, i.e. return on investments, allocation between equity and fixed income, longevity and inflation rate to arrive at the desired outcome. Since these are just assumptions used to project outcome for 25 years or more, there could be adverse deviations that could drastically impact the final outcome. A significant and prolonged market correction, and we are certainly due for one, can significantly lower the investment balances. 

In addition, a significant piece of the retirement planning or spending involves assumption on one’s health. Although I am not a qualified health practitioner, I do know that as one ages, our health deteriorates, thus increasing the need for medical attention.  The current system in Canada, which is a form of ‘universal health care system’ does not cover prescription drugs, nursing home care, or even the most basis preventive dental care such as cleaning.  Nursing home can cost upwards of $5,000 per month.  Prescription drug for treating cystic fibrosis can cost upwards of $50,000 per year.  

I believe if we include the coverage above, retirement planning would be a much easier goal to accomplish.  We essentially eliminate the biggest financial risk to manage, which is our health. As we celebrated Labour Day on September 4, I was pleasantly surprised by Canada Labour Congress’ call for universal pharmacare. There are currently 3.5 million Canadians or 10% of the population that can not afford to fill their prescriptions. In addition, our prescription drug costs are the second highest in the world after the United States. In a 2015 Angus Reid poll, 91% of people surveyed said that pharmacare should be included in the health plan, Lastly, the Canadian plan is the only ‘universal health care’ system in the world that does not include prescription drug coverage.  Please support the plan by signing up via this link or go to

Since the Ontario government has recently  provided free prescription drug coverage to people under 25, I think it is time the Federal government take the initiative to expand pharmacare coverage to all Canadian citizens. To me, this would be money well spent. 

A study by the National Health Services in the United Kingdom indicated that their prescription drug costs are among the lowest in the industrialized world. This is due to tough negotiation between the government and the drug companies.  And since the U.K government is the only buyer of prescription drugs in the country, the drug companies have no choice but to deal with them. 

Last but not least, drug prices are not uniform across the globe. For instance, Gilead Science, the big biotech company, recently announced that it will expand Hepatitis C generic licensing agreement to Malaysia.  This would lower the cost considerably from the current prescription using Sofosbuvir which costs as much as US$30,000 per person.  

Friday, 1 September 2017

Investing in ETFs

The cost of investing in Exchange Traded Funds (ETF) is continuing to decrease has become FREE. National Bank of Canada recently announced that investors will no longer have to pay commissions on all Canadian or US ETFs.  Prior to this, Questrade offers no commissions on ETF purchases only, while  Scotiabank’s ITrade also offers no commissions on selected ETFs.   Sooner or later, all major brokerages will follow suit.

Just as an education piece, ETFs differ from mutual fund in that you can purchase or sell them during the day at different prices, while trades on mutual funds are based on pricing at the end of the day.  The biggest advantage of ETF is the Management Expense Ratio (MER). A popular ETF traded in TSX such as XSP, which is based on the S&P 500 has an MER of 0.1%, while a similar mutual fund may have an MER of at least 1%.   Furthermore, actively managed mutual funds charge more than 2.5%, and the greatest irony is that almost all actively managed mutual funds do not beat an index fund based on the S&P 500!.

With the elimination of the commission, the gap between the cost of investing in ETF and mutual fund has further increased. There is no reason not to open a brokerage account and start investing in ETF, or move your existing mutual fund to an ETF.  
1% may not sound much, but over a longer horizon, it becomes material. See the difference below assuming one invest $1,000 per month for 40 years :

MER Differential

As you can see above, over a 40 year period, if you continue to invest in an underperforming mutual fund that charges a high MER, you stand to lose almost $245,000 assuming a 2% differential in MER.

And, to make matters worse, one also has to pay an additional fee or at least 0.5% or more to an investment advisor to manage an underperforming portfolio. As a result, you already end up paying almost $334,000 in incremental fees alone assuming a 2.5% MER differential and  0.5% in Advisory Fees.

If you wonder whether or not you have the know-how to invest in ETF, drop me a line at  for some free advice on investing in ETFs.  Note that I am a Certified Financial Planner (CFP). 

Monday, 28 August 2017

How to (almost) double your money in 10 years doing it the old fashion way -by earning it

Chart of S&P 500 

Remember the famous phrase ‘Do As I Say and Not As I Do.’ This is easier said than done, especially in the personal investment world.  I am always tempted to chase the next Facebook stock, or try to catch a falling knife like a J.C. Penney stock thinking that there is  value in bottom fishing. The only way to save myself in this case is that I always have some 'play money' allocated for such purpose, say no more than 2% of my portfolio. 98% of my portfolio is locked in ETFs or low cost mutual fund offered through the company. And as always the case, it tends to end up being a losing proposition. Cost of doing business, I guess. Overall, my net return is reduced by less than 1% a year.  I always advise my clients not to do what I am doing.  Well, some people like fast cars. I prefer the adrenaline of testing my knowledge and chase after stocks. If I found a winner, then I consider myself smart. If I lost money, I blame it on bad luck. 

I keep doing this despite countless empirical studies by academicians and advice by great investors such as Warren Buffet and Jack Bogle (founder of the Vanguard low cost investment funds) that have proven the path to successful investing is by purchasing low cost index funds on a regular basis. You just can't beat the market. Systematic risk (or market risk) cannot be diversified. Buying individual stock,however, is more risky. Being a Finance professional with an MBA, CFP and a CMA, I still think I can beat the market. 

Discipline yourself by staying the course during bad times and good times. Stop chasing last year’s winners. Do not try the impossible by trying to figure out what is value investing. No one can time the market successfully. If you had pulled out all your money when the stock market tanked 30% in 2008 and stayed in cash, you would have lost the opportunity of one of the greatest comebacks in stock market history. Nine years later, in 2017, the market is still achieving new highs. Many Financial Indolence (FI) success stories have also been achieved during this period.

Assuming you have $100,000 at the peak of the market in 2008, and your investment dropped 30%. Also assume that you continue to put $20,000 in the market at the end of each year using a 70% equity and 30% bond allocation.  

You would have still almost doubled your money in 10 years. If the starting year 2008 was not such as down year, I am almost certain you would have doubled your money. A total investment of $280,000 over 10 years returned almost $200,000 for a grand total of $485,000. Average return over the 10-year period was 7.7% using a 70% equity/30% bond allocation.

Instead of constructing the table and researching for information which took me almost 45 minutes, I used my trusty HP 10b Financial Calculator to verify the results in less than 1 minute.

$100,000 PV, $20,000 PMT each year for n=10 years, i=7.7%. FV (or future Value) = $495,000 .Darn close!!!

Total Returns
Ending Balance







Total Returns on Equity based on S&P 500 ; includes dividends
Returns on bonds based on U.S. 10-year Treasuries
Information on 2017 based on projection
Assume no contribution at end of year 2017 - achieved Retirement Goal !!!!!

Wednesday, 23 August 2017

No Frills Retirement using OAS

To continue with the discussion of OAS, here is a good example on how one can structure his or her retirement planning using just income from OAS. Please email me if you think this is useful or not as I would really appreciate your feedback. My email address is

Assuming you are aged 65 or above, does not have Canada Pension Plan (CPP) income or willing to defer to age 70 before collecting, have no other sources of taxable income, but have lived in Canada for 40 years after the age of 18, you would be eligible to receive $1,455.60 per month tax free.

If you are Married, both of you will receive $2,217.18 per month in total tax free.

I have prepared various cash flow budgeting scenarios, tax planning, stress-testing and even turned my spreadsheet upside down to conclude that a couple can live reasonably well on $2,200 per month tax free, inflation adjusted. And in Toronto! And still keep my RRSP, TFSA and other assets intact, at least until age 71!

The caveat is that you need to own your own home (or be willing to share a place and pay no more than $800 per month in rent), in reasonably good health and must be a NON-SMOKER. I included an occasional drink in my budget as well as a no-frills senior discounted gym membership – both are keys to maintaining good health.

Willingness to work part-time to earn no more than the magical $3,500 per year to afford a cruise every now and then. Read the next paragraph to figure out why. Note, too, that there are other social programmes such as Ontario Trillium Drug Benefit plan, Hydro Rebate, Property tax credits and other tax benefits that you and your spouse can qualify for at this income levels.

If you receive CPP and/or other income, the GIS benefit is reduced by $1 for every $2 earned (Single) and by $1 for every $4 earned (Couple). In addition, there is also a 15% clawback provision on OAS for net income above $73,756. Note that if you are employed, the first $3,500 of income is also exempted from the GIS calculation.

Note that the information is effective July 1, 2017: Payments are adjusted each quarter based on changes in the Consumer Price Index (CPI) (i.e. goes up). There is also a form of assistance called Allowance for Spouse aged 62 to 64.


Tuesday, 22 August 2017

Old Age Security (OAS) Facts and Figures

Unlike the Canada Pension Plan (CPP), which is funded by contributions from employees and employers, the Old Age Security system (OAS) derives its funding by revenue from government.

OAS is by far the largest federal government’s largest senior benefit programme. OAS Spending accounts for 3.2% of the GDP.  The following is based on the Canada’s chief actuary's latest report:

5.8 million: Number of OAS recipients in 2007
9.3 million: Number of OAS recipients in 2030
$52.2 billion: Projected OAS spending this year
$104.3 billion: Projected OAS security spending in 2030
15 million: Number of senior citizens in 2030 (almost 35% of Canada’s population)
3.2%: OAS spending as a percentage of the overall economy in 2030.
21: Average number of years a senior today will receive old age security benefits
The most significant piece of statistic is that one-third of Canada’s population will be aged 65 and above by 2030, which is similar to most developed countries. The key question is whether or not this is sustainable. Assuming only one half the other population is currently working (or one-third), there will be a huge burden on supporting the aged for at least 21 years (from age 65 to 86 based on the statistics above).

The other key aspect apart from the OAS spending is spending on health care and nursing homes , which have also increased significantly. The tax burden is going to ultimately fall to the working segment of the population.

Unless the issues are addressed now, we may face a much leaner OAS programme in the future, or it may cease to exist. To be honest, most senior citizens are generally healthy, mentally capable and are willing to lend a helping hand. We should borrow a page from Japan, where the ‘younger’ elderlies are expected to continue working in various capacities mostly caring for the even older generation in exchange for ‘retirement credits.’ In return, when they are older, they will be taken care of,  This will also reduce the need for costly nursing homes.

Interest Rates and the role of Bonds/Fixed Income in your portfolio

With global interest rates beginning to rise due to central bank unwinding their balance sheet and low interest rates policies, this is ind...