Tag Archives: personal finance

Should You Borrow to Invest?

With interest rates at historic lows, a rising market, and money starting to flow again, some investment advisors are encouraging investors to look at the merits of leveraged investing.

Is this a good idea? Maybe, but first look at your reasons for why you want to borrow to invest. Are you hoping to make up the money you lost in the stock market over the past year? Do you feel like you’re just not getting ahead fast enough and want to implement what can sound like a “sophisticated” investment strategy? Or perhaps you’re facing increasing pressure from your investment advisor to put more money into a hot market.

There are conscientious advisors out there who can be of great assistance in advising you about the pluses and minuses of leveraged investing, but you should also take responsibility yourself to make sure this strategy fits with your goals, your psychology and your risk tolerance. Here are a few pointers to help guide you along the way:

Pluses of Leveraged Investing:

  1. You can magnify portfolio returns;
  2. You can deduct interest rates at your marginal tax rate. (Note, however that your investment must have the capability of producing income – not just capital gains. You might need to consult a tax expert.)
  3. The cost of borrowing has never been lower. Some firms are offering an interest rate of prime + 1% on investment loans – or about 3.25%;
  4. Dividend yields on many corporate stocks and bonds are outpacing interest rates;
  5. Investors who are best suited to leveraged investing are generally those with no mortgage and low debt, a stable cash flow and a thorough understanding of the risks of leverage.

The Down Side:

  1. While leverage can magnify gains, it can also greatly magnify losses;
  2. Leverage adds a whole new level of risk to investing. You could be putting the collateral of your loan at risk, such as your house or mutual funds;
  3. Buying “on margin” through your investment dealer typically means you can borrow up to 50% of your investment on margin. The danger is that if the markets drop, you are liable for a margin call requiring you to put money into your account to cover any shortfalls;
  4. Remember, there is never a good time for a margin call. Just ask anyone who has experienced one in the last year what they now think of buying on margin.
  5. Debts of any kind can dramatically increase your stress load. Paying off debts on investments that have just tanked is no fun;

Leveraged investing can be an attractive way to accumulate dividend-paying stocks and bonds if you have a long term investment horizon of ten years or more. Unfortunately many ill-equipped, ill-advised and ill-prepared people are also lured by the prospect of borrowing easy money to speculate in the market. Not only is that just plain bad business – it is also a recipe for disaster! Be careful out there. – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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Mischievous Strangers & A Steadyhand

Economic depressions, recessions, downturns, slumps and hard times are nothing new. In his novel “Hard Times” written in 1854, Dickens comes down hard on the bankers and other financial experts of the day and rages against their dubious use of statistics to confound and befuddle the common man.

There is a rather poignant passage in Dickens’s rant against the economic power brokers of his day that bears some reflection during our own “hard times”:

“Now, you have always been a steady hand hitherto; but my opinion is, and so I tell you plainly, that you are turning into the wrong road. You have been listening to some mischievous stranger or other – they’re always about – and the best thing you can do is, to come out of that.”

Tom Bradley hardly claims to be a latter-day Charles Dickens. But as President of Steadyhand, a rather aptly named Canadian mutual fund company, he does write frequently on what he sees as the problem of relying on those “mischievous strangers” to do our financial thinking and investing for us. As Bradley puts it, “I am continually impressed by just how wrong economists and financial analysts can be.”

I personally like Bradley’s investment philosophy that relies on a straightforward lineup of no-load, low-fee mutual funds that Steadyhand offers directly to investors. He believes that most Canadians are over-diversified and overwhelmed with too many investment choices and too many flavors of the month. His firm offers 5 funds with concentrated portfolios largely unconstrained by geography and market cap size.

Steadyhand is also firmly committed to “transparency” when it comes to rates of return and fees. Their statements are simple, clear and easy to read – a rare and welcome occurrence in the industry.

Before launching Steadyhand, Bradley was President and CEO of the highly respected investment firm, Phillips, Hager & North. “I learned from the best, like Art Phillips and Bob Hager. They tried to keep it simple – and they were right!”

Despite his many years in the business, Bradley is still shocked by how few investors have an investment plan, even those with large portfolios. He insists that even a “back-of-the envelope” plan would provide a framework to help guide investors through a maze of often contradictory information, advice and, yes, statistics. “Even a simple spreadsheet can tell you a lot about a proper asset mix”, he insists. “Most people are way too diversified. Without a plan it is difficult to know what a good asset mix is.”

Bradley is committed to educating the public about the investment industry from an “insiders” perspective and isn’t afraid to express controversial views in his regular blog posts and Globe & Mail column. For an interesting read on how the company started out, check out The Steadyhand Diaries.

Steadyhand runs a series of info session across Canada where investors can “kick tires” and, as Bradley puts it, “learn how Steadyhand is changing investing in Canada.” Not sure that Canada needed yet another mutual fund company, but this one just might be on to something. – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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How Much Cash Should you Hold?

Risk averse Canadians are sitting on an “astoundingly massive” $1 trillion or more in cash, or near cash holdings, according to a recent study by Scotia Capital Inc. While we might pride ourselves on being prudent savers, some experts are warning that our rainy day funds are now so large that they could jeopardize the country’s economic recovery. They also fear that you are not getting a good return on cash holdings. So what is right for you?

It is certainly true that cash investments aren’t very exciting these days. Rates of return for so called “high” interest savings accounts run at around 1.5% or less, and 5 year GICs are only returning 3%. And of course, over the long run, cash investments haven’t done as well as bonds or stock investments. But still, I like cash – a lot.

There’s much more to investment planning than just getting the best rate of return. Sure inflation is an important consideration. So, too, is outliving our money. So is having enough money to meet future expenses and goals. BUT – if our investments are ultimately designed to help us enjoy our life, then we need to consider the emotional as well as “dollars and cents” implications of financial security. Being stressed about money doesn’t make for good investment decisions or a happy life.

As a financial educator, I know firsthand the value to clients of being more educated about how money and investments work – greater understanding of money usually leads to better financial decisions and less worry. But I also know that graphs, charts, and financial calculations can only go so far to relieve the anxiety caused by market fluctuations.

So what do these concerns mean to your portfolio?

Let’s start with a simple and obvious fact. We’re human. Sometimes we make irrational decisions based on emotions – sometimes fear, sometimes greed, sometimes wishful thinking. Even though we “know” we should keep our emotions from dictating our investment decisions, it is unlikely that our species is going to change this type of instinctual behavior anytime soon.

So you need to make investment decisions that suit all of your needs — including the very human need and desire for security. This means that cash investments should always be an integral part of your portfolio. The amount of cash you should hold is largely dependent on two factors. First is your tolerance for risk. Second are your cash needs for the near future.

So for instance, if you don’t want to take any market risk at all, then your choices are pretty much limited to a 100% cash or government bond portfolio. (If you take this strategy, you should run the precise numbers to be sure that you’ll have enough to cover your long term needs after tax and after inflation.)

And even if you can accept a high level of risk in your overall portfolio, but need to use some of your funds in the next 2-3 years, your best bet is to hold the total amount you will need in cash or near-cash investments.

How does this work?

Let’s say you want to buy a house in 2 years but first have to save for the down payment. Your existing savings and new money should be held in cash investments so you can be sure that the money is there when you need it – regardless of what happens in the markets.

Or if you’re at retirement age and you need $3,000 a month ($36,000 annually) to fund your lifestyle, then keep a reserve of about $100,000 in cash to fund the next three years. This will give you the emotional upside of knowing that you have cash in the bank and you will be financially ok for the next few years.

By holding cash for your 2-3 year short term needs, you will be more comfortable with your other higher risk investments that you need for growth. Then even when the markets fluctuate wildly, it will be easier for you to resist the temptation to react emotionally because you know that some of your portfolio is protected. Not an exciting strategy but a good night’s sleep sure make sense to me.  – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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The Bank Account that Can Save your Marriage

“What’s the best way for couples to manage their money?” is a question I’m often asked. While there’s no perfect answer – couples differ in how much they want to merge their finances – it’s a question that every couple is wise to give some thought to. What is vital, is that you agree upon a plan.

While talking about money can be often be more difficult and emotionally charged than talking about sex, religion or politics, a simple conversation about money can save you a lot of tension and resentments throughout married life. The ideal is to sit down with your partner and discuss your finances together on a regular basis – schedule a “money date”. If this is difficult for either or both of you, then you might want to get a third party, such as a financial counselor, planner or trusted friend to get you started on the right track.

The question of whether or not to co-mingle your money is one of the most important decisions the two of you need to make regarding your finances. The extent of the financial merger often depends on the length of time that you have been together, but not always.

One of my client couples has been happily married for more than 30 years and they prefer to keep their finances very separate.  Each dutifully writes me a separate cheque for ½ of my fees every year and that’s the way they handle all their expenses.  Older couples and those on their second marriage generally keep their finances separate longer.

While there’s no perfect system, I find the one that works best is:

  1. Set up a joint account.  Both of your pay cheques, and any other income such as stock dividends and investment earnings, go into this “operating account”;
  2. Pay common expenses like mortgage, food, and monthly bills from your operating account;
  3. Transfer an agreed-upon amount into long-term investment accounts, and into short-term savings accounts for travel, emergencies and any big ticket items, such as home renovations.
    • Note: Ideally, investments should be managed with a common plan – even if you prefer to use separate investment companies.  If there is no agreed upon plan and coordination, then you can end up paying higher fees and having investments that aren’t optimal for the family as a whole;
  4. After the essentials are taken care of, transfer an agreed upon amount into your “marriage saver” accounts set up for each of you to cover personal discretionary expenses.  The agreed upon amount can be a percentage of each person’s income or an equal amount. Once you set up this system, neither of you has any say over how the other person spends this money. That’s the rule!

It might take a little negotiating to decide what you consider common expenses to be (golf memberships or season’s tickets to the opera might be a bit tricky) and what are strictly personal items (triple-shot caramel macchiato, pedicures), but it’s worth duking it out early to create a system that will avoid misunderstandings and arguments down the line.

Having your own money that you can spend however you choose can greatly reduce arguments over money. That simple little bank account might just save your marriage. – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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It’s September – Do you know where your kid’s RESP’s are?

Going back to school in September was always one of my favorite times of year. I loved shopping for school supplies – books, pens, calculators, new clothes. While I’m sure my parents were glad to see me back in class every Fall, I’m not sure they shared my enthusiasm about the shopping or tuition part. If you’re a parent, you know that education is one of the biggest expenses that families face and with the costs expected to keep rising, you definitely need a plan.

The Costs

To give you an idea of what to expect, a four-year English degree at Carleton University in Ottawa will run about $16,100 per year, including double-occupancy campus housing and a meal plan. The total, no-frills, estimate for four years at Carleton: about $64,400. If your child lives at home, expect to pay between $5,000-$8,000 a year for tuition and books alone.

Different types of programs, accommodations and meal plans will affect your calculations. To estimate costs, contact prospective post-secondary institutions and check out the tuition and expense calculators that are readily available on-line.

The Canadian government’s CanLearn web site is one of the most comprehensive RESP info sites with detailed on-line calculators. Most financial and educational institutions also have their own on-line calculators, but be careful some of them neglect key expenses like books and supplies.

Also keep in mind the hidden/ignored/forgotten expenses that not even the best calculators allow for. These costs can include computers, software, art supplies, cell phones, long-distance calls, special health or medical needs, trips home at Christmas etc.

Paying for Education

Now – how to pay for it. This can be a mix of student loans, family savings, summer jobs or part-time work, scholarships and so on. I’ve noticed how much pressure parents put on themselves these days to cover the full cost of university. Sure costs are higher than ever, but having your kids contribute in some way to their education is a good long term lesson in financial responsibility for them.

Registered Educational Savings Plans (RESPs) are now the most popular and flexible vehicles for education savings.  Available through most banks and financial advisors, I particularly like that parents aren’t the only ones who can contribute to them. Grandparents, aunts, friends can get on the act too.

It also helps that the Canada Education Savings Grant (CESG) can add as much as $500 per child per year to your savings. (See tips on Setting up an RESP)

Make sure You Have the Right Investment Mix

As with any investment, it is crucial that you review your RESPs at least once a year to know whether you’re on track to meeting your education funding goals.  You also need to make sure that the asset mix is in line with your investment time frame. If you need to start drawing on the RESP within the next 3-4 years, make sure that your RESP holds some cash investments. The last thing you want is to have a market downturn wipe out your hard-earned savings at the eleventh hour. – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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Financial Advice – Are you Getting What you Pay For?

I was pretty surprised to read about a rather dramatic change to the financial planning profession in Australia.  Financial planners certified under the Financial Planning Association (FPA), will have to abandon the practice of receiving trailing commissions from investment products if they want to remain members. The organization has asked their members to go to a “fee-for-service” model which means that certified financial planners will only be able to receive payment directly from their clients instead of accepting commissions from product providers, such as mutual fund companies.

Will this happen in Canada? Probably not anytime soon. The Financial Planners Standards Council, the Canadian counterpart to Australia’s FPA, currently doesn’t take a position on how financial advisors are paid other than requiring that financial planners fully disclosure the way they are being compensated to their clients. Barring a major scandal such as the one that triggered these reforms in Australia, there is unlikely to be an immediate call for major changes here in Canada. But this doesn’t mean that investors shouldn’t be looking very carefully at the compensation issue here.

Under the current system in Canada, even if the compensation model is disclosed, it’s often only done so by way of a prospectus. Financial advisors selling funds are required by law to provide investors with a prospectus, but let’s be honest – they are notoriously hard to understand and seldom read. Often there is no open and meaningful discussion of fees between client and advisor and details are often glossed over.  The bottom line is that even if the industry is doing what it needs to do to fully comply with the law — most people really don’t understand what fees they are actually paying.

Having worked under the mutual fund commission model in the past, I’m not a fan of mutual fund companies paying planners to provide advice to clients.  It muddies the waters and it’s a complicated system that isn’t easy to explain to clients. Not to mention that the commission-based system can — overtly or subtly — affect a financial planner’s recommendations – even those who are scrupulously ethical and honest. I know, I was there.

So how do you know if you are getting value from your financial planner?  Start by finding out how your advisor is being paid and what fees you are actually being charged. This isn’t always as easy as it sounds, but you can either ask your planner directly or check your mutual fund prospectus.

To give you an idea of how mutual fund compensation works, here’s a typical scenario (actual fees will depend on the mix of funds you are invested in):

If you invest in mutual funds distributed through a financial advisor (usually referred to as “load” mutual funds), and you have a portfolio of $200,000 with a mix of stock and bond mutual funds, you’re probably paying an annual management fee of around 2%. This means that, every year, you are paying $4,000 to have your investments managed.  Roughly speaking, between 0.5%  and 1% of this fee (or $1,000-$2,000 per year) goes to compensate your planner for providing you with service and advice. The rest of the fee goes to the mutual fund company to pay for investment research and selection, administration, marketing, etc.

You then need to ask yourself – am I getting $1,000-$2,000 worth of financial planning and investment advice every year directly from my advisor? Using an hourly rate of $200 (a typical rate for an independent fee-only financial planner), this means you should be getting between 5 and 10 hours of your planner’s time and attention.  If you are, then you’re likely getting a good deal, if not, well, maybe it’s time for a serious heart to heart chat with your planner. – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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What Are We Willing To Do For Money?

I’m finding it hard to resist reading the stories about our white collar scoundrels – like Bernie Madoff and Earl Jones —  who managed to siphon dazzling amounts of money from investors. And then there’s the case of Paul Champagne, who stole $100 million from the Department of National Defence. From what I can tell, it didn’t seem all that hard for any of them to do it – either morally or technically.

Let’s start with the moral side.  So what were they thinking?  I mean, really?  What was it exactly that made each one of them risk their freedom, their family, their integrity and their livelihood?  Ok sure, there’s the serious cash part, but did they truly think the money would make them happier, more fulfilled, more successful?  Study after study tells us that more money doesn’t make us happier, but perhaps they missed those issues of Psychology Today.

More likely the reason they did it, was simply that they could.  They tried it, they liked it and they didn’t get caught.  Obviously they were in the wrong ethically and legally, but could their wrongdoings have been averted if the other side was paying closer attention?  I know this is a tricky question, but I also know that it’s lot easier to look the other way when everyone is making money.  And for a while, everybody was.

Certainly Madoff, Jones and Champagne seem to be guilty of committing major money crimes, but it made me wonder what we may be compromising everyday in the name of material gain.

When asked, most people say that money isn’t the most important thing in their life, but when you consider how we allocate our time and energy, you really have to wonder.

  • Are we spending money on stuff that’s inconsistent with our values?
  • Are we working at jobs that we don’t like (or at least working harder than we want)?
  • Are we spending less time with our families than is healthy?
  • Are we racking up debt we can’t afford to pay back?

Not exactly activities that will get us thrown in jail, but small “crimes” against ourselves and society that can add up and weigh heavily on our hearts.

I think Lynn Twist, author of The Soul of Money, got it right when she said that “money is the most universally motivating, mischievous, miraculous, maligned, and misunderstood part of contemporary life”.  And, ain’t that the truth! – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-for-service financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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Aging Parents – Reversing the Roles

I’m not sure when it happened, but sometime a few years ago I realized that tables were turning in my relationship with my parents.  Although still extremely healthy and vibrant 70 years olds, my parents were starting to ask me for advice and I could feel a subtle shift in the power balance.  I didn’t (and still don’t) feel ready to for what’s likely to come – but whoever is?

Most of the children of aging parents that I know are busy, stressed and ill-equipped to deal with the added time and financial demands of caring for elderly parents.  And often the need to step in comes during a crisis.  Needless to say, this isn’t a great time to make the emotional, financial and legal decisions that are often necessary.

If at all possible, have a conversation with your parents early.  Find out what your parents have in mind for their future, get a sense of where they stand financially and get an idea of the role that you and siblings might be called upon to play.  None of these points is easy to talk about and there is a need to be sensitive and to respect your parents need for privacy, dignity and sense of control.

Here are some simple guidelines to help in developing a “Care-Giving Plan of Action”:

1.  Start your dialogue with parents and siblings as soon as possible – strive for practicality and openness.  Remind yourself, and each other, that these issues will eventually have to be faced – and that it is best to be prepared well in advance.

2.  One of the chief objectives of your plan should be to maintain your parents’ self-esteem and a degree of personal independence.  Studies have shown that most seniors want to stay in their own homes as long as possible.

3.  Get informed.  Find out what services and assistance is available in your community. Local senior’s centers can provide a wealth of information and advice.

4.  Get a sense of your parents’ financial capacity and their desires.  Do they have enough money to cover medical expenses, the costs of home care or a retirement home?  Do they have a retirement community in mind?  Would they like to live nearer to you or other family?

5.  Find out where your parents keep financial and legal documents.  You don’t need to know all the details unless there’s a crisis, but know how to access the information quickly and easily if something does happen.

6.  Find out if your parents have up to date wills, powers of attorney and health care directives.

7.  Create a list of names and contact information for doctors, lawyers, accountants, brokers, financial planners, bankers, etc.

Don’t be discouraged if you try to broach the topic with your parents and it’s a non-starter.  Be patient and gently persistent.  (It took a couple of glasses of red wine to get the conversation going with my Dad!)

Knowing where your parents stand on these issues and having a plan in place will save your family much grief later. – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-for-service financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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Smart Giving

It’s not surprising that the recent recession has affected the number of cheques we are writing to support our favorite charities.  According to Community Foundations Canada, donations are down 37% compared to a year ago.  But fortunately there are other ways to satisfy our philanthropic desires that don’t hit our pocket books quite so directly.

Here are a few of the most popular alternatives to consider:

  • Donating stocks and bonds that you already own
  • Leaving a sum of money to a charity in your will
  • Establishing a charitable trust
  • Naming a charity as beneficiary on your life insurance policy

Depending on how the gift is structured, you can reduce the amount of income tax you pay now, or you can offset estate taxes in the future – and sometimes both.  In all cases, you can create a win-win for yourself and your favorite charities.

Here are 10 steps you can take to give wisely and comfortably:

  1. Decide on the charitable organizations that you would like to support.
  2. Ask yourself: Can I support these charities now and/or do I want to leave a legacy after I’m gone?
  3. If you would like to donate now, review your cash flow to see if you can free up even a small amount to give to your favorite causes. If you set up a regular monthly contribution, you probably won’t even feel a pinch.
  4. Or consider donating stocks or stock mutual funds that have a capital gain. If you donate publicly traded securities to a registered charity or private foundation, you will not pay any capital gains tax.
  5. If you would like to leave a legacy, make sure you have a will and it is up to date. Without a will, you lose the ability to direct how you want your assets to be distributed.
  6. Meet with a legal advisor and discuss the best way to leave monies to your favorite charity. This could be a specific dollar amount, specific securities (like stocks which could save on capital gain taxes) or a percentage of your assets. Even if you have children, why not consider leaving a small amount to the causes that are important to you.
  7. You can also name a charity as a beneficiary of your RSP, RIF, pension or insurance policy.
  8. Or you can transfer the ownership of a life insurance policy to a charity and receive a tax credit for the premiums you pay during your lifetime.
  9. If you wish to donate a lump sum of money but still require the capital that money generates, you can establish a charitable remainder trust. You would collect the income for as long as you live and the charity receives the remaining funds at your death.
  10. Educate and inform yourself on the best giving strategies for your unique circumstances so you can be smart with your money and caring at the same time. – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-for-service financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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