Karin Mizgala, CEO of Money Coaches Canada, and Daniel Evans, Advice-Only Financial Planner and Investment Coach, sat down recently to talk about choosing between the various investment options, investing strategies for retirement, and the impact from COVID-19.
In addition to how we live and work, the pandemic has had profound implications on how we manage our money and the financial decisions we make today. Karin and Daniel discuss the most common questions and concerns they hear from clients about investing right now. This is an excerpt from their conversation.
Current State of the Markets
Karin: In spite of the many challenges that we’re experiencing with COVID-19, the markets seem to have fared incredibly well in 2020, the U.S. market in particular. The S&P 500 was up almost 16% in Canadian dollars. The Canadian market was also up over 5%, a little more modest than the U.S. market but still higher than most of us expected. Daniel, how are your clients feeling about the investment markets today? And what are you telling them?
Daniel: Well, right now, no matter where you look, it seems like everything is at an all-time high. The U.S. stock market in particular. This leads to some resistance to putting cash towards investments in equities. Bonds, given the low-interest rate environment, look unattractive for people wanting income or yield from their portfolio.
Residential real estate is seeing an increase in value. There are multiple offer scenarios and homes going for well over asking in many cities. Some of the reasons for these gains are government stimulus, low-interest rates and with all the time spent at home, the desire to upgrade or move to a new location.
So, the conversation I’m having with clients always starts with their goals and what they want to accomplish. We need to find out and lay out all expected draws on their capital in the short term, the medium term, and the long term. Once we get that picture, we then need to understand where the current capital is, their net worth, and we need to understand the amount the clients are willing to contribute to these goals from the available cash flow. We need to talk about the priorities and expected timeframes for accomplishing these goals.
Once we have all of that context, we get to work discussing relevant investing options, suitable investment accounts, and the optimal asset allocation to help you achieve your goals and do so as efficiently as possible.
What to Do with Extra Savings and Cash
Karin: Makes sense. We’re also seeing that some of our clients are accumulating extra cash from not spending as much during the pandemic. What are you advising them to do with this extra cash?
Daniel: Looking at the short term, I’m sure there’s going to be some pent-up demand to go traveling, to go out for dinners, basically do more of what we were doing before COVID-19. So you really want to have some cash set aside for those purchases. Then, you won’t feel guilty because you have already accounted for these expenses and they are part of your plan.
Once you have accounted for all the catch-up spending you may do post-COVID, the next area to consider contributing to would be your medium to long-term goals. This could be maxing out your TFSAs so you can get to your house down payment goal in four years rather than five. It could be an additional RSP contribution, which may result in retiring one year earlier. Or paying an additional amount to your car loan or mortgage, so you shorten the time until you are debt-free.
Suppose you’re already set and on track with your plan. In that case, you could contribute to savings for a recreational property or put it towards that boat you always wanted to buy. Again, this is where prioritization comes into play. Would you rather retire one year earlier or buy a boat? I find answering these questions helps clients decide where to allocate additional capital.
Karin: It sounds like there could be some allocation for enjoying life today, some for something like debt repayment, and some for retirement or any combination based on your priority goals.
Daniel: Debt and mortgages right now have ultra-low interest rates. The decision to pay down the mortgage or not is two-sided. We need to look at the numbers, but we also need to weigh the emotional aspect of paying down your debt.
If you are someone who does not like debt, and that debt keeps you up at night even if interest rates are low, you should pay off that debt so you can sleep at night. That will reduce your stress, reduce your anxiety, and give you a better quality of life. We need to balance what is right for each individual client.
Is DIY Investing Right for You
Karin: That’s great. And I guess partly because the markets have been so strong and perhaps because people have more time on their hands during the pandemic, there seems to be a growing interest in do-it-yourself investing, DIY investing. Is this something more clients should be considering these days?
Daniel: Do-it-yourself investing comes with a whole range of items you need to consider as an investor. When clients considering do-it-yourself investing come to us, we help them through the pros and cons of that decision.
DIY investing does come with a time commitment and the need for an increased level of financial knowledge. As a DIY investor, the responsibility is on you. You need to figure out which stock, which exchange traded fund (ETF), which bond, and then figure out the appropriate amounts for each investment type. You need to learn when you should buy, when you should sell.
All these decisions, for some people, may add to their stress. In addition, you must be in control of your emotions to avoid making rash or reactive decisions. An investing plan for DIY investors is a must. The plan provides the structure that is needed to effectively manage investments and something that can be referred back to in times of uncertainty,
For some people, DIY is an option but it’s for a small percentage of the people I talk to. People are generally too busy to manage their own money, nor do they care to do so. As a DIY investor, you may pay a smaller amount in fees, anywhere from a 0% management fee to a 0.15% management fee for an ETF. Still, you’re on your own to make all the investment decisions.
A potentially more viable alternative for DIY or ETFs is the robo-advisor option. The robo-advisors take the decision of where to invest off your plate. They make it easy to set up an account, and they make it easy to contribute. They charge a bit more than a do-it-yourself investor account but provide a valuable alternative for investors who want an ETF portfolio.
Most of our clients want to deal with an investment advisor who provides more personalized and attentive service and who can talk them off the ledge when the market is going down.
We saw that in March of 2020. Some of my clients who have online brokerages and robo-advisors were waiting on hold for 60 to 90 minutes for someone to talk to regarding their account. More traditional investment advisory options may have higher fees, but you will likely get faster and better service.
The last option, which is the most expensive, is the full-service investment advisor. Clients have all their financial planning and all their investment needs provide by one advisor. This service is offered by banks and full-service brokers and fees are usually charged as a percentage of their investments.
Is that the right way to do things? For some, perhaps, but I think clients should be separating financial planning advice and investment advice and the costs associated.
Second Opinion on Investment Portfolio
Karin: So lots of different options, which just begs the question how do you make the decision on what investment approach to choose? I know that in addition to working with clients and doing full financial plans for clients, Daniel, you also offer the Investment Report Card through Money Coaches Canada. Would this be an appropriate service to help clients decide which approach to investing is going to work for them?
Daniel: Yes, absolutely. And it’s not uncommon for our Investment Report Card clients to use multiple strategies.
Some clients want to invest on their own and we help them create a tax-efficient asset allocation plan. Others want a second opinion on their current investment strategy and better options for them. It really depends on what the client wants to achieve and how involved they want to be in managing their own portfolios.
We educate the clients on all the options they have available and recommend the optimal solution that works the best with their life.
Our plans are completely independent of product and company. We don’t receive any commissions or referral fees, so the advice is free of bias.
Advice for Soon To Be and Those Already Retired
Karin: That’s great. Now, one of the things you mentioned is that there was a big drop in the markets in March of last year, and we’ve seen a pretty amazing recovery, as we also discussed. But a lot of our clients are either at or approaching retirement and they’re pretty worried that the fallout from the pandemic could hit the markets again. And they don’t necessarily have the time horizon to address the ups and downs that can happen, the volatility. So, what should they be doing with their investments if they’re about to draw an income or they’re already drawing income from their investments?
Daniel: Going back to the short-, medium- and long-term goals, we have to look at the income sources clients have available. So for clients who are approaching retirement, we need to consider where the income will come from to sustain and support their lifestyle.
We first need to identify all the income sources for that transition. Now we’re talking about CPP, we’re talking about when to collect CPP, OAS. If they have a company, we are talking about how and when to draw that money out of the company in tandem with those CPP and OAS decisions. We’re looking at RSPs. We’re looking at how to top up income using those RSPs, when to convert to a RIF. If you have a defined benefit pension, that’s additional guaranteed income we can rely on, so the decisions surrounding RSPs, CPP and OAS may change.
The advice I would give to people approaching retirement is to take a good look at their income sources and expected expenses. If there are any gaps, then, unfortunately, you may need to spend less, make more, or retire later. I sometimes advise clients to hold a higher allocation to cash, especially if they rely on the market-bearing investments to fund their lifestyle, typically two to three years of cash to cover expenses. The investment decisions and recommendations will be different for someone who has a guaranteed pension income vs. someone who is relying on their RSPs for income.
Karin: So you’re saying that investment decisions need to be made in the fuller context of your life. How much you need from the portfolio to live the life you want and when you need to draw from your investments. It’s a fuller financial review that’s required. It’s not all on the investments here.
Daniel: Exactly, but the investments are important. They’re the things that are going to grow, or hopefully grow, during your retirement. And we can’t forget, retirement is a long, long time. Making decisions for the first two, three, four years, that’s not the way to go. We need to look at 30, 40 years of retirement and make decisions accordingly.
Karin: Those are great insights. And any final tips for our readers today?
Daniel: The most important thing you can do, revisit your goals, and no surprise here, get some advice. What the pandemic has shown us, or at least it’s shown me, is that anything can happen. And you know, we always need to be prepared for the worst-case scenario, so it’s not too much of a shock when it happens. At the end of the day, if we’re ready for that worst-case scenario, then anything above that worst-case scenario looks pretty good, right?
Then you can go on and live the life you want without having to worry so much about the markets, about the investments, about your job, about something external happening. You can really focus on what you want to focus on and live a fulfilling and enjoyable life.