Weekend Reading: Emergency Rate Cut Edition

By Robb Engen | March 7, 2020 |

The Bank of Canada cut its key interest rate by 0.50 percent on Wednesday in a response to a global economic threat caused by the COVID-19 outbreak. The decision followed the U.S. Federal Reserve’s emergency rate cut on Tuesday. It’s the first interest rate cut in four years. Here’s what it means for Canadians:

Interest rates on variable rate mortgages and lines of credit tied to the prime lending rate should also fall by 0.50 percent. I can confirm that the interest rate on my five-year variable rate mortgage fell from 2.95 percent to 2.45 percent, while the interest rate on my prime + 0.60 percent home equity line of credit fell from 4.55 percent to 4.05 percent.

That’s a mild surprise from the big banks, given that they did not pass on the full rate cut on previous occasions when the Bank of Canada lowered its key lending rate.

Related: What the Bank of Canada rate cut means for mortgages

Now for the bad news. Interest rate cuts hurt savers. Immediately following the Bank of Canada announcement, Wealthsimple said it would be lowering the interest rate on its new Wealthsimple Cash account from 2.4 percent to 1.9 percent.

As of this writing, LBC Digital still offers a 2.8 percent interest rate, EQ Bank still offers a 2.45 percent interest rate, and Motive Financial still offers a 2.4 percent interest rate on savings deposits.

Of bigger concern to the overall economy is Canada’s 10-year bond yields, which are in a free-fall. Canada’s five-year government bonds are also near record lows. Lower yields in the bond market can be a strong indicator of economic trouble ahead.

Canada 10-year bond yields

As for the stock market, the TSX had an up-and-down week but ended up slightly lower than where it started the week. The S&P 500 also had a roller-coaster of a week, but ended the five-day period flat.

I added $1,000 to VEQT inside my TFSA (regular monthly contributions) and that portfolio finished the week up by 0.19 percent. On the year it is down about 9.3 percent.

I haven’t made any changes to my RRSP (also invested in VEQT), and this all-equity portfolio is down 9.38 percent on the year.

As I’ve said before, this is well within the range of potential short-term outcomes. Nothing to get excited about. Stick to your plan, and this too shall pass.

This Week’s Recap:

A busy week of financial planning meant no new posts from me on Boomer & Echo last week. I did manage to recap our February vacation on Rewards Cards Canada and looked at how much it costs to go to Maui.

From the archives: Here’s a sensible RRSP vs TFSA comparison.

For Globe and Mail subscribers: Travel expert Barry Choi interviewed me for his latest piece on travelling to Italy.

I’m excited to announce a new partnership with Scotiabank where I will be using the Scotia Momentum Visa Infinite Card over the course of the year to earn cash back on my spending. This includes an incredible 10 percent cash back for the first three months:

Promo of the Week:

Travel might be the furthest thing from your mind these days with the coronavirus spreading around the world. Still, it might be a great time to catch some deals on trips for the summer or fall. 

We’re big fans of Airbnb when we travel with our family. We like having an entire place to ourselves, along with a kitchen to prepare our own meals.

When you sign up for Airbnb with a referral link, you’ll get up to $62 off your first trip. How it works is you’ll get $45 off your home booking, and then another $17 to use towards an Airbnb experience worth $63 or more. An “experience” is an activity hosted be a local expert.

Weekend Reading:

Our friends at Credit Card Genius share the latest TD credit card offers to earn Aeroplan miles, flexible travel points, and cash back.

Topical today – Money We Have blogger Barry Choi explains how trip cancellation insurance actually works.

Hannah Logan shares the best budget-friendly winter getaways for Canadians.

Here’s a truly ridiculous news segment that claims failed Democratic candidate Michael Bloomberg could have given every American $1M instead of spending $500M on his political campaign. Math is hard.

PWL Capital’s Ben Felix digs into the incredible story of Renaissance Technologies’ Medallion Fund, which has returned 66 percent per year for 30 years:

Morgan Housel says he doesn’t know anything about coronaviruses, but he does share some excellent thoughts about how people view risk.

Rob Carrick shares eight dos and don’ts to protect your finances in these uncertain times.

Fiscally fit at 40? Author Bryan Borzykowski shares what he’s learned about life and investing in the past decade.

Jason Pereira and Alexandra Macqueen explain a unique tax planning opportunity involving the use of a dead spouse’s unused TFSA room. Interesting.

Alexandra Macqueen again, this time on Morningstar, explaining why a life annuity could help close the retirement income gap.

Here’s an absolutely epic post on the Million Dollar Journey blog about withdrawing from your RRSP, TFSA, and non-registered accounts. Must read.

Jason Heath explains how to ensure your inheritance goes to your children and not the taxman.

Anxious about the markets? Robin Powell explains why worrying about the coronavirus is a waste of time and energy:

“You have no control over the coronavirus or the markets. Unless you’re a professor of epidemiology, don’t kid yourself that you have any unique insight into how the virus might develop. Moreover, from here, markets could go sharply up or down for reasons totally unrelated to COVID-19.”

Nick Maggiulli offers three compelling reasons why you should own bonds in your portfolio.

Another terrific story by Andrew Hallam, who wonders if these are the toughest conversations John Bogle’s son has?

Finally, the great Morgan Housel again on death, taxes, and three other inevitable things.

Have a great weekend, everyone!

Weekend Reading: Coronavirus, Markets, and Travel Edition

By Robb Engen | February 29, 2020 |
Weekend Reading: Coronavirus, Markets, and Travel Edition

Let’s talk about last week. Unless you were living under a rock, which in hindsight might not have been a bad idea, you couldn’t help but notice that North American stock markets suffered their worst week of losses since the financial crisis. Global economic fears triggered by the outbreak of coronavirus disease (COVID-19) caused the S&P 500 to fall 11.5 percent, while Canada’s TSX dropped 8.9 percent this week. 

My own RRSP shed $15,000 – or 8.18 percent. Fear and speculation was rampant in the media, with several pundits predicting further losses and that the worst is yet to come. On the other side we had the ‘buying opportunity’ crowd. You know, the ones who endlessly crow about stocks being on sale and going bargain hunting. So annoying.

Then there’s me, sitting here with no bonds to sell and no unused RRSP contribution room. Sad.

A market sell-off of this magnitude has a real psychological effect on investors, no matter their age and stage. Retirees, or soon-to-be retirees, are undoubtedly concerned when their nest-egg takes a 10 or 15 percent hit. Investors still in the accumulation stage might be re-thinking their investment strategy as they watch their portfolio decline in value.

Let me remind you that a 10-15 percent correction is well within the normal distribution of returns. It happened in late 2018, and in August 2015, and again in August 2011. This is not new, so ignore any headlines that claim to say ‘this time is different’. 

Coronavirus and the Markets

So what’s an investor to do? This is a good time to remind investors that the money invested in their portfolios should have a time horizon greater than 3-5 years (ideally 10+).

It’s a good time to remind investors that their asset allocation should reflect their actual risk tolerance, not just their perceived tolerance when markets are performing well.

Finally, it’s a good time to remind investors that timing the market is incredibly difficult and so the best course of action in these volatile times is to stay the course and stick to your plan.

What that means is tuning out both the bearish pundits and the annoying ‘stocks are on sale’ investors. I say that about the latter because normal investors can get a serious case of FOMO or just feel plain dumb if they don’t have a sensible way to add to their investments during this sell-off.

Let me be the first to tell you that it’s perfectly okay to stick to your regular contribution schedule, or to not contribute at all (just stay invested). All of the great buying opportunities in history come at times when few investors are truly in a place or frame of mind to double down on their stock investments. You’re not missing out.

Here’s some perspective to consider. North American markets have basically retreated to October 2019 valuations. Ask yourself how you felt about your portfolio in October of last year? Probably pretty darn good.

Now ask yourself if markets were completely flat for four months between October and February would you still feel this sense of fear and dread? Likely not. After all, investors have been fortunate to participate in 10+ years of nearly uninterrupted gains. You’d forgive the markets for going sideways for a few months.

Instead, we got a steady climb of investment gains for four months, followed by a fast and furious tumble in the past week or so. That’s just the markets doing what they do.

It’s also another good time for a reminder of an age-old fallacy: the idea that investors can get out of the market and wait for things to settle down. When exactly have markets been calm and consistent? How about never.

Now for some more advice and perspective on investing, market corrections, and avoiding emotional panic selling.

Coronavirus and Travel

Travel in Italy Coronavirus

A more pressing concern, at least for me and my family, is how the coronavirus affects travel plans. More specifically, we’ve planned a trip to Italy in April, a country that has reported the largest number of coronavirus cases and deaths in Europe.

While areas such as Rome and Florence, which are on our itinerary, have not been affected, we planned to stay in Venice for three nights to cap-off our trip. Areas and towns in Northern Italy have been placed under quarantine, which has caused heightened security alerts for anyone travelling to the region.

We’ve been closely following the Government of Canada’s official travel advisory notice board, which says to take normal security precautions when travelling to Italy. However, there is a heightened advisory (level 2) for northern Italy, which tells travellers to exercise a high degree of caution when travelling in northern Italy due to the spread of a novel coronavirus disease (COVID-19).

For now we have no plans to cancel or alter our trip. All indications on the ground in Italy is that it’s safe to travel and live in Italy, with just 0.05 percent of the country being affected by “extraordinary measures of temporary isolation of some Italian cities”.

To be clear, we’re not concerned about contracting the virus when we travel to Italy. Of greater concern is how airlines and other countries will react to passengers and tourists going to Italy and returning from Italy.

We have flights on United Airlines (Calgary to Rome via Newark), and returning flights on Lufthansa (Venice to Calgary via Frankfurt). That means closely monitoring not only Travel Canada advisories, but also U.S. advisories, German advisories, Italian advisories, as well as watching for news from United Airlines and Lufthansa.

A lot can change either way in six to eight weeks, so for now we’re planning to travel but we’ll wait and see what happens. 

This Week’s Recap:

Earlier this week I asked if you should pay off your partner’s debt, and shared my experience in doing so.

From the archives: Here’s a more realistic retirement income target.

On Rewards Cards Canada: Here are the best Aeroplan credit cards in Canada.

Promo of the Week:

I’ll admit that the price of admission is pretty steep ($699) for what’s widely considered to be the top travel rewards credit card in Canada. But the American Express Platinum card comes with a host of points and travel benefits that more than make up for the annual fee, at least in the first year of card ownership.

The incentive is even sweeter to sign up for the card right now because you can get 70,000 Membership Rewards points when you sign up with a referral link (it’s just 50,000 points on the Amex website). Check out this review by travel expert Barry Choi, who explains the new Amex promotion and its benefits.

Bottom line: You’ll get a minimum $950 worth of travel rewards with this card, which more than makes up for the annual fee. Couple that with a Priority Pass membership, which gives you and one guest unlimited airport lounge visits, plus automatic hotel status upgrades at Hilton, Marriott, and more, and you’ve got a fantastic travel rewards card.

Weekend Reading:

Our friends at Credit Card Genius have a terrific (and free) $100 Amazon gift card offer when you sign up for the Scotia Momentum Visa Infinite card – this card pays an incredible 10 percent cash back in the first three months!

There are changes coming to CDIC deposit insurance and Barry Choi has all the details, plus a chance to win a $500 Air Canada gift card.

An interesting post on the gambler’s fallacy and the simple math error that can lead to bankruptcy.

Pension expert Alexandra Macqueen on why bad pension planning advice could cost you your retirement. Watch for my own collaboration with Ms. Macqueen on my pension decision coming soon.

Here’s Michael James on Money explaining why behavioural biases are in all of us:

These rules of thumb have served us well throughout human evolution, but they sometimes give us the wrong answer to modern questions such as “should I save some of my windfall or just go blow it all on a wild trip to Las Vegas?”

Rob Carrick says, ‘this is a hell of a time to tell people they need to take more risk with their retirement investing’. But that’s exactly what long term investors should be doing – stocking up on more stocks if they want to retire earlier. Indeed, Canadians are notoriously conservative when it comes to investing.

I love this video by the Prince of Travel explaining some hard truths about credit cards and travel points:

What happens next in the stock market? Nick Maggiulli offers a historical examination of short-term market declines.

Mr. Maggiulli also takes a deep dive on when to invest your money with the definitive guide on dollar cost averaging vs. lump sum investing.

Financial advisor Jason Pereira looks at what the Globe and Mail missed in its assessment that Wealthsimple (and the robo advisor business) is a flop:

“Or consider what happens in the next market correction – when the parents’ old-school, stock-picking broker, who doesn’t implement Modern Portfolio Theory and thinks he can “time the market” – fails to deliver on downside protection?”

Finally, digital nomad and Canadian expat Andrew Hallam shares why adventurous, cost-conscious retirees should consider Costa Rica.

Have a great weekend, everyone!

Should You Pay Off Your Partner’s Debt?

By Robb Engen | February 26, 2020 |
Should You Pay Off Your Partner's Debt_

One of the first issues that couples face in a serious relationship is how to handle their finances. Dividing up the household bills is one thing, but what happens when one partner brings other financial baggage – such as credit card or student loan debt – into the equation?

In marriage, what’s yours is technically mine, and vice-versa. But how should couples treat debt that was incurred prior to marriage? And, more to the point: should you pay off your partner’s debt?

One philosophy is that “he who spent it pays it back’, an approach that might sound better in theory than in practice. It doesn’t make sense for one partner to struggle with credit card debt while the other earns 1 or 2 percent in a savings account.

In some cases the type of debt can make the difference as to whether one partner is willing to help out the other. Student loan debt, for example, is often seen as an ‘investment’ and doesn’t carry the stigma of consumer loans or credit card debt.

Should you pay off your partner’s debt?

My wife and I met when we were in post-secondary, and student loans were a fact of life for us both. When it was all said and done we owed a combined $60,000 in student loans, line of credit, and credit card debt.

I say “combined” because by the time we moved in together in 2003 our finances became a joint effort. We opened a joint account, pooled our income, and started paying off our debts.

It wasn’t a concern that, since I earned more money, I was paying proportionally more toward her debt than she was. As far as we were concerned we were in it together.

Automatic payments came out of our joint account and we tried to pay more than the minimum on our higher interest loans.

My wife left the workforce to stay home full-time after our first child was born in 2009. We decided to live on one income, which meant the remainder of our debt would become my responsibility to pay off.

We made our final student loan payment in 2011 – killing it off with a $2,000 lump sum transfer from our joint account.

I can’t recall if it was my loan or my wife’s, but that’s not the point. For eight years we treated that debt as “our debt”, just like the income we earned was “our income”, even though there was a clear disparity. 

Final thoughts

The decision to pay off a partner’s debt shouldn’t be taken lightly, as it can lead to resentment or even divorce if the couple is truly financially incompatible. That’s certainly true if one partner brings significant savings into a relationship while the other is a spendaholic with heaps of credit card debt.

For us, we met in our early twenties and made all of our money mistakes together – figuring out how best to manage our money along the way. We got into debt together and paid it off together – and even though it was technically “my income” that paid off most of the debt, I never resented that decision. I embraced it.

How did you decide whose responsibility it was to pay off the debts in your relationship?

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