It’s been nearly 10 years since the global financial crisis bottomed out. Since then stocks have basically been on an uninterrupted tear, with the TSX doubling in value, and the S&P 500 nearly quadrupling in value. In that time, investors have survived the European debt crisis, Greece’s debt crisis, a Russian financial crisis, the Brexit decision, Trump’s election, and countless other doomsday predictions.
Markets have reached all-time highs so frequently that investors are understandably nervous about an upcoming crash. The problem is, nobody knows when a crash might hit, if ever, or how severe it might be if it does occur. Stocks may continue to go up for a few years, or maybe go sideways for a while, or we might suffer a small correction of 10-15 percent before the next bull market begins.
The tech bubble and financial crisis are still fresh enough in our minds to convince investors that declines of 40-50 percent are normal, when in fact these were major black swan events that perhaps we’ll never see again.
Investing at all-time highs
Let’s say you’re a nervous investor who decided to get out of the stock market at some point in the last 10 years, whether due to Europe, Brexit, Trump, or simply because the markets were looking “expensive”. What’s the cost of waiting for a correction? It turns out to be quite high.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
The Cogent Advisor blog looked at U.S. investment returns over the period 1927 through 2016. That’s 91 years, or 1,092 months. The average monthly return was 0.95 percent. But when they removed the returns from the best performing 91 months, the remaining 1,001 months provided an average return of virtually zero (0.1 percent). In other words, 8.5 percent of the months delivered almost 100 percent of the return.
Their takeaway: Even if you believe the probability of a correction is high, it’s far from certain. And when the correction doesn’t happen, the expected opportunity cost of having waited is much greater than the expected benefit.
The Crash That Never Came
One reader who I’ll call Jason emailed me and confessed that while he used to invest in index funds he got nervous after Trump’s election and moved everything to a full service wealth management firm last year. He didn’t say in the email, but I can imagine he stressed this concern with his new advisor, who placed him into a conservative portfolio aimed to provide downside protection in the event of a crash.
Here’s Jason, one year later:
I just took a look at the past 12 month performance and it was 3 percent vs the market of ~13 percent. I have a sinking feeling I made a mistake and should move it back to self manage using index funds. I sent my advisor a few questions and basically got the answer that they protect the downside, and have a lower risk targeting 4-6 percent average over five years.
I still feel nervous, but at age 42 I think I should be more in the market. We have been at all-time highs for a while so I am torn between a bear market that may start now and the downside protection would be warranted. That said, maybe not.
It’s quite common for investors to act on their fears and make a move like this. Jason got exactly what he asked for from his wealth manager, except for the crash that never came. Now he’s upset that he missed out on last year’s gains, but he can’t have it both ways. If you’re a full participant in the stock market then you take the good with the bad. The idea of stocks for the long run says the good outweighs the bad – that’s why we invest.
Bottom line: Investors need a portfolio that’s built for their risk tolerance and time horizon. If you’re two years away from retirement and worried that a stock market crash will derail your plans then it’s probably not a good idea to have your entire portfolio in equities. On the flip side, if you’re decades away from retirement and don’t plan to access your investments until then, stop trying to guess which way the markets are headed and stick to your long-term plan.
Your investment strategy is only as good as your willingness to stick with it, even in the face of uncertainty. No strategy, not even Warren Buffett’s, is in favour 100 percent of the time. Diversify your investments by owning Canadian, U.S., and International stocks. Instead of market timing, hedge your anxiety with a healthy dose of bonds to smooth out the ride.
As for Jason’s dilemma, I’m tempted to tell him to stick with his wealth manager. To me, that’s a better approach than changing strategies every year. Imagine if he switches to a portfolio of index funds (all equity) and the big crash finally happens next year. He’ll be crushed.
What’s your take? Have you made moves inside your portfolio to ‘protect’ against a crash? How did that work out for you?
As we head into mid-August my wife and I have started to look at the back-to-school lists that came home with our kids at the end of June. We like to freelance a bit from the recommended list of supplies, especially if we can find deals on similar items early in the summer.
We utilize the Flipp app to check out the latest store flyers and compare prices on everything from stationary, electronics, facial tissue, and more. From there, my wife usually takes over (she loves back-to-school shopping with the kids!) and rounds up all the items to try and save the most money. That means buying in bulk when the supplies on our kids’ lists overlap, shopping at multiple stores, and even ordering online.
Another way to save money during the busy back-to-school season is by cashing in rewards points, or leveraging your rewards program to get deals on the stuff you need to buy anyway.
I’m an RBC Rewards member and I noticed they are offering a number of exciting deals for clients from now until August 26, 2018, including savings on the latest tech, merchandise, gift cards and more.
You don’t have to be a student to take advantage of great back-to-school deals. RBC Rewards gives you the flexibility and choice to redeem points at back to school time for whatever they want – or whatever you want.
Visit rbcrewards.com to get back to school deals without the hassle of going back to school.
One smart redemption option that I wasn’t aware of is the ability to turn your unused RBC Rewards points into financial rewards, including contributions to your RRSP, RESP, or TFSA – even to pay down your mortgage or line of credit.
From August 13 to 26, 2018 you can get 20% more in value when you redeem your RBC Rewards points for contributions towards your RBC RRSP or RESP.
That means you can redeem a minimum of 10,000 RBC Rewards points (worth $100) to contribute to an RRSP or RESP, and then contribute in increments of $25 or 2,500 RBC Rewards points after the $100 minimum.
Imagine you’re sitting on 100,000 RBC Rewards points but you don’t have any immediate travel plans for which to redeem them. Instead of cashing in your points for electronics or merchandise, turn your point stash into a $1,000 RRSP contribution!
This Week’s Recap:
This week I wrote about why you should avoid group RESPs and scholarship trusts, and instead set up your RESP at a bank or credit union.
Many thanks to the Globe and Mail’s Tim Kiladze for interviewing me for his latest piece on the bizarre Aeroplan saga – this one about TD’s puzzling message to its cardholders slamming Aimia’s decision to reject the Air Canada led takeover bid. For Globe subscribers only.
Next week I’ll review a new entrant into the robo-advisor space that ticks all the right boxes for me: ultra-low cost, simple portfolio construction, and hands-off, automatic investing.
I’ll also have a mortgage renewal update in my Smart Money column at the Toronto Star. My mortgage comes up for renewal September 1st.
U.K. Trip Update
I revealed last week that we’ve book flights to Scotland for our dream family vacation next summer. We still have lots of details to fill in but we were excited to find and book an Airbnb for seven nights in Inverness. Check out that view!
Over the next two weeks I hope to book our return flights home from Dublin and secure hotel accommodation in Edinburgh. What’s the hold-up? I’m waiting for:
- United Airlines to release its inventory for our mid-July return home. They open up their flights 330 days out, so I should start to see something in our desired date range in the next 7-10 days. We’re hoping for business class seats.
- Marriott and Starwood to merge rewards programs. Marriott purchased Starwood Hotels a couple of years ago and they’re merging the two loyalty programs on August 18th. Once this happens I’ll look to redeem points for free nights in Edinburgh.
I’ll keep you posted when we have any more significant updates to share about our trip.
Weekend Reading:
Reporter David Lazarus kept a Nigerian scammer on the hook for weeks to uncover the lengths to which they’ll go to swindle people out of thousands of dollars. A lively read!
How much money will you need after you retire? Likely much less than you think.
Steadyhand’s Tom Bradley explains why you should embrace ignorance when investing:
“The next time your adviser or portfolio manager wants to make a change based on an economic view or market action, push the pause button. Ask about his long-term track record on such calls and if you get a soft answer, suggest he too embrace his ignorance.”
Two professors issued a challenge to behavioural economists suggesting that their biggest idea is not correct. Barry Ritholtz counters this and explains why loss aversion isn’t dead.
Cleveland Browns defensive end Carl Nassib gives his teammates a lesson on compound interest and the tyranny of fees.
A Wealth of Common Sense blogger Ben Carlson does his best Morgan Housel impression with this terrific take on the layers of the brain.
Speaking of Housel, here’s his latest post where he tries to explain the often irrational and bizarre behaviour of Tesla CEO Elon Musk.
You probably haven’t talked to your grown kids about where you bank, how much you’ve saved, and other key details. Here’s why it’s urgent.
Kristine Hayes lists her five money mistakes (really, only five? I’ve made many more over the years). Here’s a big one:
“It wasn’t until I was 45 years old that I became aware of the importance of being financially literate. Educating myself at a younger age would have saved me from some of the mistakes I made. It also would have increased the likelihood that I could retire at a relatively early age.”
Relevant to me right now is this piece by RateSpy’s Rob McLister who explains how to determine when you’ll pay more for a mortgage.
Common Sense Investing’s Ben Felix gives a thorough analysis of holding a mortgage alongside an investment portfolio and why you should consider a higher equity allocation if you carry mortgage debt.
Finally, the Star’s Kerry Taylor shares the ins and outs of Registered Disability Savings Plans (RDSPs) – a difference maker for Canadians with disabilities.
Have a great weekend, everyone!
Most parents should know that contributing to an RESP is a great way to save for your child’s education. But there’s one type of plan that gives RESPs a bad name. Group RESPs, or group scholarship trusts, are heavily marketed to new parents and immigrants at doctor’s offices and trade shows. These RESP dealers employ commission-based sales representatives to aggressively promote and sell their products. The firms are small, lightly regulated, and their salespeople may often cross ethical lines.
One of the more egregious violations took place in Toronto where a hospital clerk admitted to stealing more than 12,000 confidential maternity patient records and selling the information to an RESP dealer representative at Knowledge First Financial. She was fined $36,000.
Group RESPs also come with a long list of fees and complex rules. An investigation by the Toronto Star into Heritage Education Funds, one of the largest group RESP providers in Canada, found close to 500 complaints from customers who lost all or some of their contributions for violating contribution rules.
In January 2018, Knowledge First Financial purchased Heritage Education. Birds of a feather…
Avoid Group RESPs and Scholarship Trusts
Let’s be clear that group RESPs aren’t necessarily a scam – they’ll work just fine if you see the plan through to the end – however parents need to be cautious and read the fine print before signing up.
The flexibility of a group RESP is much different from the individual or family plans offered by your bank or credit union. Here’s how they work:
With a group RESP, your contributions are pooled with those of other people. The money your child gets is based on the amount of money in the pool and the total number of students of the same age who are in school that year. Funds are invested mainly in fixed income, such as bonds.
Usually you’ll need to sign a contract agreeing to make regular contributions to the plan over a set period. Group plans are offered and administered by scholarship or group plan dealers. They may be more expensive than individual or family plans, depending on your investment choices.
Group plans tend to have strict contribution and withdrawal schedules, meaning that if your plans change – a big possibility over 18 plus years – you could forfeit your enrollment fee or affect how much money your child can withdraw when they need it for school.
Here are the five main providers of group RESPs:
- Canadian Scholarship Trust Foundation
- Universitas Financial
- Heritage Education Funds
- Knowledge First Financial
- Children’s Education Funds Inc.
What To Ask Before You Open A Group RESP
Some Group RESP providers have fallen under scrutiny from the Ontario Securities Commission for providing misleading plan documentation. Before you choose an RESP provider, make sure you read the fine print and ask about:
- Fees for opening an RESP
- Fees for withdrawing money from a RESP
- Fees for managing the RESP
- Fees for services and commissions
- What happens if you can’t make regular payments
- What happens if your child doesn’t continue his or her education
- If you have to close the account early, do you have to pay fees and penalties; do you get back the money you contributed; do you lose interest and can you transfer the money to another RESP or different account type?
You can withdraw from a group RESP contract and get all of your contributions back in the first 60 days after receiving a prospectus. If you’re past the 60-day point, you might be better off seeing the plan through to the end. Otherwise you might pay fees upwards of $800 to $1,200 to collapse the plan during the first few years.
Final Thoughts
When our youngest child was born we signed up to receive free samples and coupons from a few different websites. A short time later we got a phone call from someone who asked if we received samples of baby formula. It turns out he was a group RESP salesman in disguise and he wanted to come to our house to discuss setting up a plan.
We avoided a group RESP plan and instead chose to open a family RESP account at our bank. Both of our children are named under this plan, so if one decides not to pursue a qualified education program, we don’t have to worry about closing an individual RESP – the benefits are simply shared by the children that do qualify.
As a young family with lots of competing financial priorities, we only contributed what we could afford – between $50 and $200 per month – for the first few years. We bumped that up as the kids got older and now we max out our annual contributions at $2,500 per child.
We like the self-directed RESP because we’re not tied to a specific contribution every month, plus we have the flexibility to contribute lump sums whenever our finances allow for it.
The lesson here is to avoid Group RESPs and Scholarship Trusts. Open an Individual or Family Plan RESP at a bank or credit union, not from the guy chasing you down in the maternity ward.