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Weekend Reading: What’s In Your Wallet Edition

By Robb Engen | October 27, 2019 |
Posted in
Weekend Reading: What's In Your Wallet Edition
My approach to credit card spending has evolved over the years. Once I got out of debt and got my spending under control, I quickly realized (if you paid off your card in full each month) that using a rewards credit card was much more advantageous than paying with cash or debit.

I started out years ago with a basic PC MasterCard and earned rewards in the form of free groceries. This was handy when our kids were still in diapers and we were grateful for every additional $20 we could get back on our spending. Then, with a little more research, I found a cash back credit card that helped us double our rewards on the very same purchases.

Now that our kids are older, and we’re travelling more often (Scotland and Ireland last summer. Maui and Italy next year), I’ve found travel rewards cards to be way more lucrative for our spending. I don’t mind paying an annual fee to unlock free flights, hotels, and other perks like airport lounge access and additional travel insurance.

Core Spending Rewards Cards

So what’s in my wallet today? I’m fortunate to have a grandfathered version of a Capital One Aspire Travel World Elite MasterCard (no longer open to new applicants) that my wife and I use as our primary spending card. That’s because it pays 2 percent back on every purchase and comes with 10,000 bonus miles each year on my card anniversary. That’s worth $100 and almost completely offsets the $120 annual fee. This card is particularly useful for grocery spending, since the majority is done at Costco, which only accept MC.

A No Frills grocery store and gas station popped-up nearby our house a few years ago and so we find ourselves shopping and filling-up our tanks there fairly often. That led me to getting the PC Financial World Elite MasterCard, where we earn additional PC Optimum points on our spending at Loblaw’s stores and Shoppers Drug Mart. I don’t track these rewards closely, but it seems I’m redeeming $20 at least once a month.

Rounding out my core spending is what’s arguably considered the best all-around credit card on the market today – the American Express Cobalt Card. This card pays 5x points on eats and drinks, so I use it primarily at Safeway, Save-On-Foods, and at liquor stores and restaurants that accept American Express. I use the Membership Rewards-Select points to transfer to the Marriott Bonvoy hotel rewards program at a rate of 5:6 (5,000 MR-S points = 6,000 Marriott Bonvoy points).

Travel Rewards Cards

I’ve also found the American Express Platinum card to be extremely valuable, even at the outrageous $699 annual fee. I get an annual $200 travel credit, automatic gold elite status at Marriott hotels, plus unlimited airport lounge access for me and my wife. I use the highly flexible Membership Rewards points to either transfer to Aeroplan or simply to redeem points for travel purchases.

I mentioned the Marriott Bonvoy hotel rewards program – which is easily the best in Canada. I applied for the Marriott Bonvoy American Express Card last year to take advantage of the 50,000 bonus points and decided to keep the card and pay the annual fee because it comes with an annual free night at a category 5 hotel (35,000 points).

Finally, I hold the WestJet RBC World Elite MasterCard for the annual round trip discounted companion voucher anywhere WestJet flies.

These are the cards in my wallet throughout the year, however I often supplement my rewards by taking advantage of special promotions on other credit cards. My criteria for this activity is that the card must have an attractive sign-up bonus ($200 or more), be easily attainable (welcome bonus triggered at first purchase is great, but a reasonable minimum spend is okay, too), and offer the annual fee free of charge in the first year.

A good example of that, currently, is the TD Aeroplan Visa Infinite Card. You can earn up to 40,000 Aeroplan miles and the annual fee is waived in the first year.

This Week’s Recap:

This week I took an in-depth look at house down payment options, including the pros and cons of putting down 5 percent, 10 percent, and 20 percent.

Over on Young & Thrifty I reviewed the robo-advisor RBC InvestEase. From the article:

“For RBC clients currently invested in a managed mutual fund portfolio, switching to InvestEase is an absolute no-brainer to save on fees and achieve better investor outcomes.”

From the archives: Can robo-advisors hold up in a market downturn?

Promo of the Week:

I mentioned that we shop fairly regularly at No Frills and also at the Real Canadian SuperStore. I’m not sure what took me so long, but I recently signed up for the PC Insiders program. In my opinion, it’s one of the hidden gems in the Canadian rewards and loyalty space.

The annual subscription costs $99 and it unlocks some fantastic benefits, including:

  • Extra points
  • Free shipping
  • Free online grocery pickup
  • $99 travel credit
  • Annual surprise gift

Plus:

  • 20% back in points on all brands of baby diapers and formula
  • 20% back in points on all PC Organics Products
  • 20% back in points on all PC Black Label Collection purchases
  • 20% back in points on all Joe Fresh® purchases, in store and at joefresh.com
  • 20% back in points on all beautyBOUTIQUE online orders

Use my referral code – RE1483 – to join the PC Insiders program and take advantage of all of these benefits.

Weekend Reading:

The Scotiabank Gold American Express card got a refresh and now comes with no foreign exchange fees, in addition to 25,000 welcome points.

The streaming wars are about to begin, with Apple TV+ and Disney+ set to launch next month in Canada. Here’s a great look at all the streaming services soon to be available.

Studies show that for every retiree who is spending too little, there is another one who is spending too much. Will your savings outlive you, or vice-versa?

The Blunt Bean Counter Mark Goodfield with a great explanation of what to do when your spouse dies before you.

Is real estate still a good investment for Canadians? Why we shouldn’t be making property investment decisions based on headlines.

Is investing risky? PWL Capital’s Ben Felix takes a deep dive into what exactly you’re risking in his latest common sense investing video:

I loved this piece by Morgan Housel on why new technology is a hard sell:

“Convincing people that you can solve their problems is harder than it seems because people don’t want to be told that the way they’ve always done things is wrong.”

Rob Carrick tackles a controversial topic with a balanced look at the give and take of reverse mortgages.

This New York Times pieces takes a look at the advice in three of the most popular personal finance books ever sold.

Finally, I love Wealthsimple’s Money Diaries series and their latest explains why baseball legend Mike Piazza was successful because you booed him.

Have a great weekend, everyone!

Buying A House? Here Are Your Down Payment Options

By Robb Engen | October 23, 2019 |
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Buying a House? Here are your down payment options
Housing prices are ticking up again, with the national average price for homes sold in September reaching $515,500, according to the Canadian Real Estate Association’s latest report.

Rising prices puts prospective home buyers into a dilemma when it comes to saving for a down payment. Putting down the minimum five percent on a $500,000 home gets you into the housing market for a reasonable $25,000. Saving up a 20 percent down payment, on the other hand, avoids costly mortgage default insurance premiums (mortgage loan insurance from Canada Mortgage and Housing Corporation).

Note that the minimum amount required for a house down payment depends on the purchase price of your home. Homes valued at $500,000 or less need a down payment of five percent, while homes valued between $500,000 and $999,999 require five percent on the first $500,000 and 10 percent for the portion above $500,000. Home buyers need to put down 20 percent on homes valued at $1 million or more.

There are pros and cons putting down more or less on your home purchase. I reached out to Robert McLister, mortgage expert and founder of RateSpy.com, to discuss house down payment options.

Pros and Cons of a 5% House Down Payment

Pros: The obvious advantage to making the minimum five percent down payment is there’s less capital required to become a homeowner and reaching that threshold requires less time to save.

“So many young buyers stay on the sidelines scrimping for a bigger down payment only to see home prices run away from them,” says McLister.

He points to the past two decades of price growth as evidence that getting into the market quicker can pay off, “provided home buyers don’t overextend themselves.”

Putting down less than 20 percent requires the buyer to purchase mortgage loan insurance to protect the lender against default. While the borrower must pay those insurance premiums, McLister says an advantage to having an insured mortgage will give you access to the lowest interest rates available.

A five percent down payment is also compatible with the First Time Home Buyers’ Incentive – the shared equity mortgage with the Government of Canada – and other governmental home subsidies.

A deliberately smaller house down payment can leave a borrower with a larger cash cushion, saving for more immediate closing costs and furnishings, or simply retaining more money for emergencies and other needs.

Another advantage is that automatic monthly mortgage payments create a forced savings plan for those who might otherwise squander that money away as a renter.

Cons: The financial impact of putting the minimum amount down on your home is that it comes with a 4 percent default insurance premium. While this amount can be rolled into the mortgage, it creates a highly leveraged situation with risk of negative equity should home prices fall.

“On day one you’re almost 99 percent financed. It doesn’t take much of a home price selloff to trap you in your home, preventing a sale,” says McLister.

A five percent down payment also means more interest expense over the life of your mortgage, compared to a larger down payment.

Note that the amortization for buyers with 5 percent down is limited to 25 years. The property also cannot be a non-owner-occupied rental property.

Another caveat to consider: Prospective home buyers can borrow the 5 percent down payment (even from a credit card) so long as they meet the lender’s debt limit ratio. This means, “they can essentially owe more than their home price on day one,” says McLister.

Pros and Cons of a 10% House Down Payment

Pros: A down payment of 10 percent gets you all of the benefits of a 5 percent down payment, plus saves you money on insurance premiums (borrowers pay 3.1 percent instead of 4 percent).

An increased down payment also allows you buy a more expensive home. For instance, a 7.5 percent down payment makes it possible to purchase a $999,999 home.

Finally, a 10 percent down payment increases the chance you’ll be able to refinance at the end of a 5-year fixed term. That’s because refinancing typically requires a loan-to-value (LTV) ratio of 80 percent or less.

Cons: A 10 percent house down payment still means the borrower must pay mortgage default insurance premiums of 3.1 percent.

Your purchase price is also capped at $1 million, while your amortization is limited to 25 years. The property cannot be a non-owner-occupied rental property.

Also consider that 10 percent is the minimum down payment if

  • The home has 3-4 units
  • You want an insured stated income mortgage (for self-employed borrowers who can’t prove their income in the standard fashion)
  • You’re buying a non-winterized or seasonal access vacation property

Pros and Cons of a 20% House Down Payment

Pros: The primary advantage of putting down 20 percent or more on your home is to avoid default insurance premiums, saving you thousands of dollars over the life of your mortgage.

A larger down payment offers more flexibility, giving buyers the ability to purchase a home priced at $1 million or more, and allowing for amortizations over 25 years, along with refinancing.

Putting 20 percent down gives buyers more product choices, such as re-advanceable mortgages, standalone home equity lines of credit, interest-only mortgages, and non-prime financing.

More importantly, buyers with 20 percent down avoid the federal mortgage stress tests if the borrower uses a credit union or alternative lender.

Cons: A 20 percent down payment ties up more of an investor’s capital, which comes with an opportunity cost.

It also subjects most borrowers to a stricter stress test, since the mortgage would be uninsured.

“The uninsured stress test equals the greater of the benchmark rate or your contract rate + two percent, whereas the insured stress test is just the benchmark rate,” says McLister.

Finally, a 20 percent deposit is typically required for many new build properties.

Final Thoughts

In summary, McLister says the size of your house down payment shouldn’t only be dictated by your available resources, but by your investment alternatives.

“Often times it makes more sense to put less down so you can allocate cash to purposes with a higher return on investment.”

My wife and I put 10 percent down when we bought our first home together in 2003. We committed to a 20 percent down payment before we built our current home in 2011. That meant waiting and saving for 18 months to come up with the cash. It was a good thing house prices didn’t run away from us like we’ve seen in Toronto and Vancouver.

Weekend Reading: Passive Investing Returns Edition

By Robb Engen | October 19, 2019 |
Posted in
Weekend Reading: Passive Investing Returns Edition
One concept Couch Potato investors need to accept is that their portfolio will move up and down with the market(s). Since the essence of passive investing means tracking a particular index, or set of indices, an investor’s returns must closely mirror those of the index (minus a small fee).

That notion can be downright scary for nervous investors wondering when the next stock market crash will occur. Indeed, one of my biggest fears as a passive investing advocate is that there will be a massive correction at some point and all the investors I’ve helped move to a low cost portfolio of ETFs will blame me for their losses.

But I know that’s not rational and there’s a mountain of academic and empirical evidence to support a passive approach. That, and I sleep better at night knowing I give the best advice based on these three principles:

  1. Future returns are unknowable, but the best and most reliable predictor of future returns is cost. The lower the better.
  2. Active management, including the idea that market timing can deliver all of the upside while also protecting the downside, sounds better in theory than it works in practice.
  3. Asset mix matters. You need to be comfortable with your portfolio mix in good times and bad to avoid panic selling and second-guessing.

That last one is important. If you’re thinking about a passive investing strategy, or have recently started one and are nervous about an inevitable correction, it might be helpful to consider the range of possible returns you’d be willing to accept.

For example, a conservative portfolio of ETFs with 70 percent bonds and 30 percent global stocks had 20-year annualized returns of 5.25 percent. Its lowest 12-month return (March 2008 to February 2009) lost 7.93 percent.

Alternatively, an aggressive portfolio of 90 percent global stocks and 10 percent bonds surprisingly had identical 20-year annualized returns of 5.25 percent. However, the dispersion of those returns was much more volatile. The worst 12-month period saw losses of 31.09 percent.

Finally, a traditional balanced portfolio made up of 60 percent global stocks and 40 percent bonds had 20-year annualized returns of 5.38 percent (the highest of the three portfolios), and saw its worst 12-month period lose 19.62 percent.

Source: Canadian Couch Potato model portfolio returns

We’ve lived through an unprecedented bull market going on now for more than 10 years. It’s perfectly normal to feel like you want a more aggressive 100/0 or 80/20 portfolio. But do you have the temperament to hold that portfolio when faced with a 30 percent drawdown? Or will you completely abandon the strategy, thinking “it’s not working anymore”?

There are many ways to implement a passive investing portfolio. I have direct experience with three of those methods, with the one-ticket solution (VEQT) in my RRSP and TFSA, the TD e-Series funds in my kids’ RESPs, and a robo-advisor solution with my wife’s Wealthsimple RRSP.

All three portfolios have had a turbulent year, suffering big losses in May and August, but otherwise gaining steadily throughout the year and more than making up for the short correction at the end of 2018. Here are my personal rates of return so far this year:

  • RRSP – One-ticket ETF (VEQT) – up 13.13 percent
  • TFSA – One-ticket ETF (VEQT) – up 14.36 percent
  • RESP – TD e-Series funds – up 13.69 percent
  • Wife’s RRSP – Wealthsimple 80/20 portfolio – up 10.4 percent

As you can see from both the data on long-term returns, and the individual returns of various portfolios, it doesn’t necessarily matter which passive portfolio you adopt. What matters is your behaviour and how you react when markets (and your portfolio) move up and down.

A passive portfolio won’t protect you from a market crash. As investors, we must accept that occasional losses are inevitable. To cope, we need to design a portfolio with an appropriate asset mix for our risk tolerance and time horizon – and have the patience to stay the course.

This Week’s Recap:

This week I wrote about five retirement planning options to help you reach your retirement goals.

Thanks to Jonathan Chevreau for sharing my thoughts in his latest piece for the Financial Post: How investors can navigate the new world of ETF overload.

And Justin Bender from PWL Capital launched his long-awaited podcast this week and included a question from me about the benefits of U.S. dollar ETFs.

Weekend Reading:

An excellent and informative piece from the How To Save Money blog on the 7 best travel insurance credit cards for people over 65.

Which Canadian rewards program is worth the most? Check out this comprehensive guide from the Credit Card Genius team.

Here’s Rob Carrick on how seniors should prepare for the day when they can no longer look after their retirement investments.

Read this complete guide to your RRSP from the Handful of Thoughts blog.

Nobel Laureate Daniel Kahneman explains why trying to convince other people to change their mind is a waste of time. It turns out, the key isn’t to apply more pressure but rather to understand:

Head over to the Farnam Street blog to listen to the full episode.

The Canadian financial advice industry needs higher standards and higher education requirements. It begs the question: Is it unethical to be incompetent?

The evidence is clear that ETFs give the best returns for investors. Here are seven strategies for maximizing returns from ETFs.

A Wealth of Common Sense blogger Ben Carlson gives a eulogy for the 60/40 balanced portfolio.

Nobody wants to lose money, so it is common to wonder what can be done to avoid the potentially negative stock returns that often come with a recession. Ben Felix explains:

Dale Roberts asks what would it take to reach F.I.R.E., and really retire early?

Finally, My Own Advisor Mark Seed answers an age old question of whether to pay down your mortgage or invest.

Have a great weekend, everyone!