Toronto District School Board Continuing Education. Investment Planning. Winter 2018, Week 4. Instructor Gail Bebee

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1 Toronto District School Board Continuing Education Investment Planning Winter 2018, Week 4 Instructor Gail Bebee gbebee@gailbebee.com

2 What was the most important thing you learned from last week s lecture?

3 Week 3 Take Aways 1. IPOs just wait 2. Preferred shares (Can.) low tax rate 3. ADRs - easy global investing

4 Week 3 Take Aways 4. Real estate land & bricks vs. RE stocks/reits 5. Impact of currency hedging 6. Mutual funds- easy investing, low MERs rule

5 Today s Topics Exchange-traded funds Developing and implementing your investment plan Government savings programs

6 Exchange-Traded Funds Like mutual funds but trade on stock exchange Most track reference group investments Some actively managed

7 Benchmark Index Reference group investments ETF objective is returns (minus fees) of index Buy & hold all index members Statistical sampling 3 main index types

8 1. Market Capitalization - weighted Indices % each holding = market value holding x 100 value all holdings index e.g. S&P/TSX 60 Index Big company bias Max. % any one holding

9 2. Equal Weight Index Weight index members equally e.g. S&P/TSX 60 Equal Weight Index More diversification

10 3. Factor-based Indices Smart beta Use specific characteristics to select holdings Low volatility, price momentum, quality, dividends e.g. S&P/TSX Canadian Dividend Aristocrats Index

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12 Why ETFs? Instant diversification Lower cost: MER equity funds: mutual funds av. 2.35% ETFs most <0.50% Access U.S.-listed ETFs *Morningstar Fund Research. Global Fund Investor Experience. 2015

13 Better Returns % Active Mutual Funds Outperforming Benchmark, (Can$) Category 1yr 5yr 10 yr Canadian Equity US Equity International Equity Reference Standard & Poor's SPIVA Scorecards June 30, 2017

14 Low maintenance Low knowledge requirement Tax-efficiency Trade all day long Transparent

15 ETFs - The Downside 1. Brokerage account needed 2. Commission on purchase/sale invest higher dollar amounts costly for small/regular contributions No commission some online brokers

16 ETFs - The Downside II 3. Slaves to their index Oct. 25, 2000, Nortel crashed 25.5%, TSX Composite Index lost 8.12% 4. Tracking error % deviation from index return

17 ETFs - The Downside Need brokerage account Commissions to trade invest more at once costly regular, small amounts some no commission Slaves to benchmark index Tracking error vs. index

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19 Over 600 ETFs listed in Canada

20 Top 5 of 28 Canadian ETF Suppliers 1. BlackRock Canada (ishares) 2. BMO Asset Man. 3. Vanguard Canada 4. Horizons ETFs 5. RBC Global Asset Man.

21 South of the border

22 Over 2000 US-listed ETFs Canadians can buy US-listed ETFs (not US mutual funds) Diversification & lower fees U.S. ETF Database & screener Vanguard & Schwab - lowest cost U.S.-based ETFs

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24 Choosing an Exchange- Traded Fund 1. Decide on assets type 2. Screen for candidate ETFs Morningstar ETF finder DEMO 3. Research - fundco & major financial web sites - ETF Facts Vanguard ETF comparison tool DEMO XIC vs. ZLB

25 5. Review benchmark indices 6. Review past performance index returns minus expenses tracking error reasonable? 6. Review how fund managed 7. Check costs MER, other fees 8. Decide price - Net Asset Value (NAV)

26 Canadian Equity Funds Total Return to December 31, 2017 ishares TSX Capped Composite Index ETF, XIC BMO Low Volatility Canadian Equity ETF, ZLB 1 yr 3 yr 5 yr 10 yr Horizons S&P/TSX 60 ETF, HXT Mawer Canadian Equity Fund

27 Case Study Vanguard Total Stock Market ETF, VTI-N Total U.S. stock market index Vanguard website ETF Database profile Morningstar Canadian-listed versions: VUN-T VUS-T (C$ hedged)

28 More Info on ETFs ETF Insight includes screener Morningstar ETF finder Chapter 15 No Hype - The Straight Goods on Investing Your Money Investor Education Fund

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30 How to Decide Where to Invest Your Money

31 Define Your Investor Profile Personal goals Investing experience & interest Timelines Risk tolerance & risk capacity Financial advisor role

32 Investing is Risky Ret. Rate, % Cash Can. Bonds Can. Stocks US stocks Data from Libra Investment Management Inc, Scotia Capital, Canadian Institute of Actuaries

33 Understand your Risk Tolerance Risk profile quiz DEMO BMO Risk Profile Questionnaire

34 Choose Target Asset Allocation Match Investor Profile 1. Conservative never lose money 2. Lower risk 3. Balanced risk 4. Higher risk 5. Aggressive risk taker

35 Sample Target Asset Allocation Balanced Portfolio Real Estate 5% Cash 5% Equities 45% Bonds Can. 40% Bonds- Foreign 5%

36 What Returns can you Expect?

37 As of December 31, 2017

38 Canadian Couch Potato Portfolios as of Dec 31, 2017 Annualized Return, % Conservative 30% equity 70% bonds Balanced 60% equity 40% bonds Aggressive 90% equity 10% bonds 5 yr 10 yr 20 yr Worst 12 mo. return

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40 Choose Portfolio Building Approach 1. Individual stocks, bonds, etc. 2. Mutual funds 3. ETFs 4. Combination of above

41 New Investors/Small Accounts Funds best approach Control costs, diversification Choose funds based on: Fund mandate Above average performance Low fees

42 All-in-one Funds Multi-asset classes Small accounts Regular contributions Lazy or busy

43 Tangerine Investment Funds 4 funds, various risk levels Tangerine Balanced Portfolio, MER 1.07% Tangerine, some online brokers No minimum

44 Vanguard Asset Allocation ETFs NEW 3 funds - conservative, balanced, growth Management fee 0.22%, MER TBD, estimate about 0.25% Brokerage account to buy

45 Lower Cost Balanced Mutual Funds MAW104 Mawer Balanced Fund MAW105 Mawer Tax Effective Bal. Fund RBF1350 PH&N Bal Fund Series D BTG772 Beutel Goodman Bal.-Class D SIF125 Steadyhand Founders Fund

46 Mawer Balanced Fund $5,000 min. Brokerage account, small acct. maintenance fees Mawer Fund Profile Morningstar Canada Fund Profile Globe and Mail Fund Profile Tax effective version for non-reg. accounts

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48 Portfolios of Mutual Funds or ETFs

49 Sample Portfolios 11 Model Portfolios To Simplify Your Investments DEMO Most ETF providers Canadiancouchpotato.com Model Portfolios Canadian Portfolio Manager ETF portfolios - tax optimized Vanguard model ETF portfolios

50 Portfolios of Individual Assets Ch 25 No Hype -The Straight Goods on Investing Your Money

51 Keep your Plan on Track Check account statements regularly Quarterly review of holdings Review financial plan annually portfolio return rate vs. benchmarks holdings rebalance to target asset allocation other changes as needed

52 Taxes and Investing It s after tax that counts CRA

53 Ontario Marginal Tax Rate 2018 Taxable Income Income Capital Gains Eligible Dividends first $42, % 10.03% -6.86% over $46,605 up to $75, % 14.83% 6.39% over $75,657 up to $85, % 15.74% 8.92% over $220, % 26.76% 39.34% Data from taxtips.ca

54 Maximize After-tax Returns Highly taxed (bonds, GICs, REITs, foreign dividend stocks) in RRSP, TFSA Lower taxed in taxable accounts File IRS W-8BEN form - reduce U.S. withholding tax U.S. dividends interest

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56 Government Savings Plans

57 1. Registered Education Savings Plan 2. Tax Free Savings Account 3. Registered Retirement Savings Plan 4. Registered Retirement Income Fund 5. Registered Disability Savings Plan

58 Common Features Federal government programs Dedicated registered account Lots of rules

59 Eligible Investments Not just bank savings account! Stocks, bonds, GICs Mutual & exchange-traded funds Gold, silver, mortgages etc. CRA Bulletin Qualified Investments

60 Transferring Registered Account Never withdraw money to redeposit in new account Take old account info to new bank/fi Fill in transfer form at new bank/fi New firm handles transfer You monitor

61 Registered Education Savings Plan (RESP) Save for your kid s education Save up to $2,500/year/child to age 17 Get Canada Education Savings Grant 20% contribution, max. $500/child/year (lifetime $7,200) That s 20% return to start!

62 RESP II Money grows tax-free Student pays tax withdrawals (profits, grant money) Family plan is better Group RESPs pricy, restrictive Government RESP website Stretching your education savings

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64 Tax Free Savings Account (TFSA) Great way to save & avoid tax Adults contribute max. $5,500 after tax dollars annually Total contribution room from 2009 debut $57,500 Carry forward unused contribution room catch up

65 TFSA II No tax on profits earned Withdraw tax free any time Re-contribute amount withdrawn following year Government TFSA website

66 TFSA III Everyone needs TFSA Save tax, flexible, don t need employment earnings Possible uses emergency fund save for car, house or? invest

67 Registered Retirement Savings Plan (RRSP) One way to save for retirement Income tax deferral program Government RRSP website

68 RRSPs II Contribute up to 18% prior year s earned income get tax deduction Max. $26,230 (2018) if no pension Carry forward unused contribution room See prior year s CRA Notice of Assessment for your contribution limit

69 RRSPs II Investments grow tax-free Must be closed age 71 Convert to Registered Retirement Income Fund (RRIF) or annuity Prescribed taxable withdrawals begin Early withdrawals taxed as income

70 Registered Retirement Income Fund (RRIF) Can set up any age Mandatory taxable withdrawals based on your (or spouse s) age Investment choices like RRSP

71 Annuities Pension for those without pensions Insurance contract buy regular, guaranteed income for specified time Can buy with RRSP or non-reg. money Many options & IRREVOCABLE Research & shop around, quotes Examples of annuity rates A low-risk alternative for post-rrsp investing

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73 RRSP Drawbacks Tax deduction = future tax liability All withdrawals taxed as income No claims capital losses, timing sales to min. capital gains tax Required withdrawals could mean OAS claw-back

74 TFSA or RRSP? Both if possible TFSA if tax bracket higher when funds withdrawn RRSP if tax bracket lower when funds withdrawn

75 Registered Disability Savings Plan (RDSP) Provide for long term financial security of disabled person Eligible for disability tax credit Beneficiary (competent adult) or others contribute until age 59 no tax deduction, $200,000 max.

76 RDSP II Matching government grants Family income-tested max. $3,500 each year $70,000 beneficiary lifetime limit Gov. bonds paid if modest income Payments to beneficiary are taxable (profits, grants portion)

77 Registered Disability Savings Plan Government RDSP website Article Support for the disabled Steps to set up RDSP Canadian Personal Finance Blog RDSP roadmap

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79 Suggested Homework Compare your mutual funds to analogous ETFs. Which is the better investment? Determine your investor profile. Assess whether your investment portfolio aligns with your profile. Are your highly taxed investments in tax-deferred accounts?

80 Next week Retirement Planning Investing information Financial advisors Direct investing Online broker demo