Welcome to the Money Bag, where I answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about any money topic that’s on your mind.

This edition of the Money Bag answers your questions about bonds behaving badly, investing USD cash in a TFSA, active management during a market crash, and how I’m managing my credit card rewards points.

First up is Wendy, who wants to know why her bond cushion didn’t do the job she expected it to do during the market crash. Take it away, Wendy:

Bond Cushion Not Working

Hi Robb,

I am in my early 60s and a regular reader and fan of your blog. I hold bond ETFs in my portfolio, along with some equity ETFs. The 30+% recent drop in portfolio value certainly made me flinch but I never once consider selling. I’m a firm believer in index investing and holding to my plan for the long-term.

However, the bonds have not done the job I’ve expected them to do. Even before the pandemic, my bond holdings have been in the “red”.

I hold ZCS in my RRIF, which has performed okay with only +/-5% difference, nothing to quibble about. But I also hold ZHY and ZEF in my TFSA. Today they are down -18.4% and -13.9% respectively, twice that a few weeks ago and more than ZLB at -13.28!

Why have the High Yield US and Emerging Market bonds done so poorly since I bought them in 2017?

Hi Wendy,

Corporate bonds can behave much differently than government bonds because they are much riskier assets. Especially ‘high yield’ bonds like ZHY – high yield typically means riskier debt has been issued by companies with not so stellar balance sheets. These bonds took a massive hit during the pandemic as investors flocked to the safety of government bonds.

A more diversified bond ETF like VAB (Canadian aggregate bonds) did much better throughout the crisis, with a return of 2.95% YTD. Here’s a better look at what has happened in the bond market during the coronavirus crisis:

During a crisis, investors look for safe-havens and the bonds issued by the U.S. Treasury Department are backed in full faith by the U.S. government and therefore free from any credit risk. That’s why long-and-medium-term U.S. treasury bonds performed so well, while high yield corporate bonds and emerging market bonds got hammered.

As for what to do, I find investors often get trapped in thinking they’ll just wait for their initial investment to “recover” before selling and switching strategies. But, I’d re-frame that thinking and consider if you had that money sitting in cash right now, would you invest it in the high yield bond funds or would you invest it in something else that had a higher expected rate of return and/or was better aligned with your investment strategy? 

Investing USD Cash in a TFSA

Next up is Martha, who wants some advice on how to invest the USD cash in her TFSA:

Hello Robb,

My TFSA contributions are maxed out and is comprised of CAD $52,000 (invested in the Canadian Portfolio Manager Ridiculous Portfolio of 80% stocks / 20% bonds) and USD $16,500 cash.

I don’t want to convert this USD to CAD just yet, but rather prefer to grow it somehow. Do you have any suggestions on specific Canadian listed USD ETFs, GICs or bonds that would be suitable to park my USD?

I put this into my TFSA because of the tax-free nature of the account and all the gains/interest coming back to me. I say Canadian listed because of the foreign withholding taxes eating away at my portfolio. I’m still a newbie to the DIY investing and have to move forward from analysis paralysis.

Hi Martha, thanks for your email. So, I think there are couple of points to clarify here:

1.) There is no such thing as a Canadian-listed USD ETF. There are U.S.-listed ETFs that you can buy with U.S. dollars – such as Vanguard’s VOO, which tracks the S&P 500. And there are also Canadian-listed ETFs that track U.S. or International indexes, such as Vanguard’s VFV, which also tracks the S&P 500. You buy these ETFs with Canadian dollars.

2.) There is no real advantage to investing in U.S.-listed ETFs inside your TFSA. They’re more advantageous, tax-wise, to use inside your RRSP. That’s because you cannot avoid foreign withholding taxes in your TFSA – they’re unrecoverable because the TFSA is not recognized as a retirement account by the U.S.

Since the exchange rate is quite favourable right now (1 USD = 1.41 CAD) why not convert that money to CAD and then just buy one or more of the Canadian-listed ETFs that Justin Bender outlined for TFSAs in his ridiculous model portfolio?

Finally, if you’re still new to this I’d highly recommend keeping things extremely simple with the one-ETF asset allocation ETF like I’ve outlined in my top ETFs and model portfolios.

I’ve seen a number of investors struggle with more complicated portfolios that look great on a spreadsheet but once put into practice become unwieldy to manage on their own. Heck, I consider myself an expert and I just invest in one ETF – VEQT.

Active Management in a Market Crash

Jason wants to know if there’s any merit to the argument that active management can perform better during a bear market:

Hi Robb,

I am a DIY ETF investor and recently had an investment advisor contact me about the value of professional advice. He said in markets like this, where there is a dichotomy between those companies / sectors doing well and those doing poorly, index ETF investors are missing out on active management. How do you respond to that argument? 

Hi Jason, thanks for your email. If the advisor is talking about adding value through active management and market timing then you should run the other way.

No one could have predicted with any degree of certainty which stocks would fall and which stocks would perform well. Anyone who claims they can is doing so with extreme hindsight bias (of course Clorox would be up 25%, who didn’t see that coming?)

As far as I’m concerned, investing has been solved. Low cost, broadly diversified index ETFs are the best choice for long-term investors. Gone are the days when advisors can claim to add value by picking winning stocks and timing the market.

Where an advisor can add value is in financial planning, tax management, estate and legacy planning, psychology, accountability, prioritizing short-and-long-term goals, etc. 

The bottom line is that investors shouldn’t change strategies based on market conditions. Period.

Have You Changed Your Approach To Credit Card Rewards?

Finally, Amit wants to know if I’ve changed my approach to credit card rewards during these stay-at-home times:

Hi Robb, you’ve written a lot about credit card rewards and travel rewards in particular. Now that we can’t travel for the foreseeable future are you doing anything different with your current credit cards and rewards points?

Hi Amit, it’s a tough time for credit card rewards junkies like myself. For one, we planned to do a heck of a lot of travel this year and take advantage of programs like Aeroplan, Marriott Bonvoy, American Express Membership Rewards, and WestJet Dollars. Not to mention all the perks that come with those programs, like free hotel nights and upgrades, airport lounge passes, and companion travel vouchers.

With our trip to Italy cancelled and our trip to the U.K. likely to cancel next, we’ve got an abundance of travel rewards points and nowhere to use them. 

• Aeroplan – 560,000 miles
• Marriott Bonvoy – 136,000 points + 3 free nights
• American Express Membership Rewards – 220,000 points
• WestJet Dollars – $637 + 2 companion travel vouchers

My typical advice is to use your points fairly quickly and not hoard them. Loyalty programs often get devalued and expiry policies can also change at any time. However, in These Times, I believe the major credit card rewards programs and loyalty programs will want to hold onto their members for when we can return to travelling again. Marriott, for example, extended its free night certificates to no longer expire within a year. 

Besides hanging onto my travel rewards points, I’ve made the switch to a cash back credit card and have been using the Scotia Momentum Visa Infinite card for everyday purchases like groceries (and MORE groceries). I figured cash back would be more useful in the short-term, and this card had a 10% cash back bonus for spending in the first 3 months. Not bad!

I also use instant-reward programs like PC Optimum and Air Miles Cash to get a quick $10 off a grocery purchase – which comes in handy during a pandemic.

Do you have a money-related question for me? Hit me up in the comments below or send me an email. 

The 4% rule is a framework to think about how to safely draw down your retirement savings without fear of outliving your money. It was developed in 1994 by financial advisor William Bengen, who concluded that retirees could safely withdraw 4% annually from their portfolio over a 30 year period without running out of money.

Critics of the 4% rule argue that it doesn’t hold up in today’s environment because, one, bond yields are so low, and two, because it fails to account for rising expenses (inflation) and investment fees (costs matter). We’re also living longer, and there’s a movement to want to retire earlier. So shouldn’t that mean a safe withdrawal rate of much less than 4%?

Financial planning expert Michael Kitces takes the opposite view. He says there’s a highly probable chance that retirees using the 4% rule will come to the end of 30 years with even more money than they started with, and an extremely low chance they’ll spend their entire nest egg.

The problem lies in the data and testing for the absolute worst case scenarios, which in Bengen’s research included the Great Depression. Bengen looked at rolling 30-year periods to test the safe withdrawal rate and found the worst case scenario was retiring right before the Great Depression in 1929. Even with that terrible timing, a retiree could safely withdraw 4.15% of his or her portfolio.

Kitces broadened the data set and found two more ‘worst case scenarios’ which included 1907 and 1966. But what was interesting is the average safe withdrawal rate throughout every available period in the data set was 6% to 6.5%.

Even more remarkable, when starting with a $1M portfolio and using the 4 percent rule, retirees finished with the original million 96% of the time.

“Historical safe withdrawal rates aren’t based on historical averages. They’re based on historical worst case scenarios.” – Michael Kitces

If you’re interested in hearing more from Michael Kitces debunking the 4% rule then I highly recommend watching this in-depth interview Michael did on the Bigger Pockets Money podcast. It’s long (80 minutes) but well worth your time:

This Week’s Recap:

On Wednesday I offered some tips for those who are renewing your mortgage this year. 

Many thanks to Erica Alini of Global News for including that post in her latest Money123 newsletter.

On Friday I looked at tax loss harvesting both for the do-it-yourself investor and with a robo advisor.

I’ve had an incredibly frustrating experience with TD Direct Investing this week. I’ve been patiently waiting for my LIRA to be set up, and saw the funds had finally arrived on Monday. However, I could only see the funds on the EasyWeb banking side. When I clicked over to WebBroker there was no LIRA account to be found. 

I called TD Direct and got through to a representative after 90 minutes on hold. He could see the funds, but couldn’t understand why it wasn’t showing up for me in WebBroker and transferred me to technical support. More time on hold, and the technician was of no help. I requested a call back and finally received one on Friday. Again, no help. 

The good news is that while on the phone I managed to place a trade and buy $134,000 worth of VEQT. The rep was even ‘kind’ enough to waive the $43 fee for placing a trade over the phone. Yeesh.

Promo of the Week:

As most of you know, the deadline to file your 2019 taxes has been extended to June 1st, and the payment date for any taxes owing has been extended to September 1st.

I filed my taxes a few weeks ago and was happy to see a substantial refund of around $1,800. A large portion of that refund – $888 to be exact – was thanks to the new Climate Action Incentive tax credit.

With many Canadians struggling with their finances due to the COVID-19 pandemic, I’m highlighting the carbon rebate as a way for Canadians to receive a significant chunk of change back when they file their taxes.

Residents of Alberta, Saskatchewan, Manitoba, and Ontario can claim the carbon rebate when filing their 2019 tax return. If you’ve already filed your taxes, don’t worry – you can still apply retroactively. It may result in a few hundred extra dollars in your pocket.

For example, an Ontario family of 4 would receive $448 this year and $2,061 by 2022. Someone in Saskatchewan would get even more. A family of 4 receives $809 this year and $4,066 by 2022.

The climate action incentive is a tax on consumption, so the more you conserve, the more you’ll get back in rebates. To see how much you’ll get, use this handy rebate calculator.

Here are some key facts about the carbon tax and rebate:

• Eight out of 10 families get more money back than they pay in tax.
• As the carbon tax rises, the amount rebated to families grows. Next year, you’ll get even more money back.
• It’s the lowest-cost way to reduce our emissions.
• Carbon pollution shouldn’t be free. A carbon tax makes polluters pay, while giving money back to families.
• It gives people the freedom to choose whether to change their behaviour.

Weekend Reading:

Our friends at Credit Card Genius share a helpful story on getting a credit card insurance refund.

Female-dominated service-sector jobs were among the first to disappear due to the COVID-19 pandemic and stay-at-home orders. One expert calls the downturn our first ever “she-session”.

I enjoyed this conversation between My Own Advisor’s Mark Seed and fee-only planner Steve Bridge about getting through financial emergencies.

Wise words from Jonathan Clements (as usual). He says it’s a scary time to own stocks, but for long-term investors who want their portfolio to clock significant gains, there’s simply no alternative.

The Financial Post’s Ted Rechtshaffen wonders why employers make pension plans such a mystery for their employees:

“The largest frustration came from employees who asked their HR department for a pension analysis that includes information about the value of their pension, and options for how to draw on the pension. In many cases, companies have changed their policy to only allow one request a year or in some cases even less than that.”

The always thoughtful Morgan Housel shares some lessons learned over the past few months, including how some of the lowest paid workers are the most essential.

What happens when distressed markets don’t give you distressed prices? Ben Carlson offers his thoughts on why Warren Buffett didn’t make a big purchase during the stock market crash.

Speaking of Buffett, downtown Josh Brown said a different version of the Oracle of Omaha delivered the annual shareholders address – a 4.5 hour live-streamed event”

“Watching a man who’s already given the world so much literally will himself through hours and hours of this at almost 90 years old was pretty tough.”

Of Dollars and Data blogger Nick Maggiulli shares a different framework for thinking about equity investing.

Michael Batnick and Josh Brown talk through whether there is any limit to how much money the Fed and Treasury can throw at the economy, and if we even have a choice:

Universal Basic Income was an idea that lived on the political margins for years. Then the pandemic changed everything. Here’s how a Universal Basic Income can save the economy.

Michael James on Money calculates his retirement glidepath, or his plan for investing and spending in retirement.

Finally, Wealthsimple made some changes to its portfolios last year to better weather a downturn. Here’s what they did and why it worked.

Have a great weekend, everyone!

Tax loss harvesting sounds like a magical strategy that is only available to the wealthy. But in reality, it’s a simple tax saving concept that involves selling a security or investment that has experienced a loss, and using that ‘capital loss’ to offset a capital gain in the past, present, or future.

Investors should know that tax loss harvesting is only relevant when it comes to investments held in their taxable or non-registered accounts. You can use a capital loss to reduce a taxable capital gain this year, in any of the three preceding years, or in any future year. That’s a powerful tool that savvy investors and investment advisors can take advantage of to reduce tax exposure.

Also, know that a capital loss is not realized until the asset (be it an investment, or a property) is sold for a price that is lower than its original purchase price. 

Tax Loss Harvesting for DIY Investors

DIY investors can create their own strategy for tax loss selling. Let’s say at the beginning of the year you purchased $100,000 worth of VCN – Vanguard’s Canada All Cap Index ETF. Today, VCN is down 12.9 percent. You sell your shares of VCN and realize a loss of $12,900.

But you’re not done yet. After selling VCN you immediately buy a comparable ETF such as iShares Core S&P/TSX Capped Composite (XIC). You’re still fully invested, but you’ve “harvested” a $12,900 capital loss to hopefully offset a capital gain at some point, and now you get your Canadian equity exposure from XIC instead of VCN.

Buying a comparable fund gets around CRA’s ‘superficial loss’ rule, which states that investors can’t repurchase the same property or security for 30 days. A lot can happen in one month, as we’ve seen recently, and so we don’t want our money sitting on the sidelines.

The other concept for investors with taxable accounts to understand is their adjusted cost base (ACB). More than just the original price you paid for an investment, adjusted cost base also factors in any new purchases, plus any reinvested dividends or capital gains distributions, minus any sells or return of capital distributions.

Simply put, it’s a pain for self-directed investors to keep tabs on their adjusted cost base, plus come up with their own approach to tax loss selling that’s timely, profitable, and onside with CRA.

So, what’s an investor to do if he or she wants to take advantage of tax loss harvesting without the pain of managing it on their own?

Tax Loss Harvesting with Wealthsimple

The remainder of this article will look at how the robo advisor Wealthsimple handles tax loss harvesting for its clients. It’s a feature that’s widely promoted as a benefit to investors, but as you’ll see it only makes sense in a few circumstances.

Related: Using a robo-advisor in retirement

I spoke with Michael Tempelmeyer, a senior investment and retirement specialist at Wealthsimple, to better understand how the robo advisor uses tax loss harvesting for its clients.

He says tax loss harvesting is available to clients who qualify for the Wealthsimple Black or Wealthsimple Generation premium service levels by having net deposits of $100,000+ and $500,000+ in their Wealthsimple account, respectively.

Tax loss harvesting can be activated for these clients and applies to personal investment accounts and corporate investment accounts, both of which are taxable account types.

“Our approach to tax loss harvesting is simple. Any time one of the eligible ETF positions in a client account falls 7 percent below the amount that was paid for it, we will sell the position to realize the capital loss for tax purposes,” said Tempelmeyer.

They take the proceeds of this sale and invest the money in another similar, but not identical ETF, so the client maintains their desired market exposure.

For the majority of the individual ETF positions used in Wealthsimple’s 11 standard risk level portfolios there is a backup ETF on standby for this purpose.

However, there are a few ETF positions used in their standard portfolios that don’t have a viable backup position. In these cases, as well as in their Socially Responsible Investment (SRI) portfolios and their Halal portfolios, they are not able to do any tax loss harvest selling.

Tax Loss Selling in Action

Tempelmeyer said that during the recent decline in markets, as a result of the COVID-19 pandemic, there were a number of tax loss sales in client accounts where XEF (BlackRock iShares Core MSCI EAFE IMI Index ETF) was sold.

“We use VIU (Vanguard FTSE Developed All Cap ex North America Index ETF) as a backup position in this case. VIU tracks a different index but has very similar geographic exposure to XEF,” said Tempelmeyer.

There were two particular cases where this decline in the unit price of XEF created a good tax loss harvesting opportunity for two different clients in very different situations.

1) Linda who is a 35-year-old technology company employee has $1.5 million in a personal investment account with us. The account is invested in our risk level 10 portfolio which has 90 percent exposure to stock markets and 10 percent exposure to bond markets. The tax loss sale of XEF realized a total capital loss for her of approximately $30,000.

2) Ray who is a 47-year-old business owner has $2.9 million in a corporate investment account with us. The account is invested in our risk level 6 portfolio which has 65 percent exposure to stock markets and 35 percent exposure to bond markets. His business realized a capital loss of approximately $40,000 as a result of the sale.

What this means is that the next $30,000 of capital gains realized personally for Linda and the next $40,000 of capital gains realized by Ray’s business will be tax-free. If there are no capital gains this year or in the three prior years to be offset, then the capital losses that were realized can be carried forward to be used against capital gains in any future year.

“The benefits of tax loss harvesting make sense for the vast majority of people with taxable accounts and I generally recommend taking advantage of this strategy, but it is always a good idea to talk through the specifics of an individual situation with a financial planner who understands the potential implications,” said Tempelmeyer.

Changing Your Asset Mix

A market downturn can also provide an opportunity for investors to make a shift in how their portfolio is structured at a reduced tax cost.

Many investors can feel trapped in a particular strategy due to the unrealized capital gains that they would be taxed on when selling.

Related: Changing investment strategies after a market crash

While Mr. Tempelmeyer thinks it makes sense to move away from a high cost or inappropriate asset mix portfolio essentially any time, a downturn provides the opportunity to do this more efficiently from a tax cost perspective.

Investors who should review their options include those who hold high cost mutual funds or other costly advised portfolios as well as investors who continue to hold concentrated positions in individual stocks for the sole purpose of avoiding the tax hit associated with selling.

Final Thoughts

Individual investors can use tax loss harvesting or selling to save taxes on past, present, or future capital gains. In fact, the recent market crash due to the coronavirus pandemic likely highlights a terrific opportunity to take advantage of tax loss selling.

But beware.

Managing your own non-registered portfolio and creating your own tax loss selling strategy means diligent and tedious tracking of your adjusted cost base, ensuring your selling and re-purchasing is onside with CRA’s superficial loss rules, avoiding market timing, and identifying the appropriate time to crystallize a loss that best benefits your tax situation. Whew.

This is where a robo-advisor can come in handy. At Wealthsimple, once you’ve turned on the tax loss harvesting feature then it is happening automatically behind the scenes whenever one of a client’s ETF positions falls 7 percent below its original purchase price.

Related: How to transfer your RRSP to Wealthsimple

It can also work for clients with specific tax loss harvesting opportunities, like when they’ve transferred over a non-registered portfolio in-kind from another institution and need to carefully and methodically sell off the portfolio over time. 

Did you know Boomer & Echo readers get a $50 cash bonus when they open up a new Wealthsimple account and fund it with $500 within 45 days? Transfer your account to Wealthsimple and they will cover the transfer fee.

Readers: Are you looking at tax loss harvesting opportunities due to the recent market downturn? How comfortable do you feel managing it on your own versus using a robo advisor?