Join Fund Library now and get free access to personalized features to help you manage your investments.
It’s been a while since we checked the inbox so let’s see what questions are on readers’ minds.
Q – I am retired with a large cash cushion in ISA (individual savings account), GICs, and high interest savings accounts – enough to last us five years. The rest of our assets are 100% equities, and we earn a decent dividend income from these, not to mention capital appreciation as we are long-term holders and not prone to sell in a downturn.
My question: Our for-fee advisor (who does not manage our portfolio) wants us to shift from mostly U.S. and Canadian stocks to 45% international and emerging market stocks. We are not comfortable with that. Our current exposure is around 10% and seems more than sufficient.
We are not seeking stellar, swing-for-the-fences returns – just steady eddy returns. Our portfolio has done that.
The U.S. market has done much better on a compounded after inflation basis than EAFE or EM, so why shift to those markets for one of their possibly brief outperformance periods over the S&P 500 only to revert soon thereafter to returns that lag the TSX or S&P 500? Many thanks. – Peter H.
A – You answered your own question when you wrote: “We are not comfortable with that.” I would never advise anyone to do something they weren’t comfortable with, even if I thought it was a world-beating strategy. Being able to sleep well at night far outweighs the few extra dollars you might earn.
That said, your advisor isn’t talking complete nonsense when it comes to the markets he recommends. The iShares MSCI EAFE Index ETF (CAD-Hedged) (TSX: XIN), which trades under the symbol XIN, has gained 17.25% this year (as of Dec. 15). The 10-year average annual compound rate of return to Nov. 30 is 6.61%.
The iShares MSCI Emerging Markets Index ETF (TSX: XEM) is less impressive, with a gain of 5.7% year-to-date. The 10-year compouind average annual rate of return is only 3.55%.
There is speculation that both could do better in 2024. But that’s what it is – speculation.
Meantime, the U.S. market has done better, both short and long term. The iShares Core S&P 500 Index ETF (TSX: XSP) has gained 23.25% this year and shows a 10-year average annual compound rate of return of 10.45% to Nov. 30,
Canada hasn’t fared as well. The iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC) is ahead 10.55% this year and has gained 7.39% on average over the last decade. But it has done better than EAFE over the long haul.
You currently have 10% exposure to international stocks. If you are comfortable moving 5% of your Canadian holdings over to EAFE, your asset allocation would be better. But if even a small move like that makes you nervous, stay where you are.
Q – If a spouse is contributing a monthly sum to a TFSA and passes away, can the surviving spouse contribute to plan for the remainder of the year? What happens if the passing spouse has contributed the yearly maximum of $6,500 prior to their death? – Pete M.
A – If the surviving spouse has been designated as the “successor holder” of the TFSA, then the plan continues uninterrupted. All contributions to date stand, but any unused contribution room expires at the time of death. Profits continue to be tax-sheltered.
If the surviving spouse is designated as a beneficiary, instead of a successor holder, the plan is deemed to be terminated. The survivor will inherit the assets tax free, but any gains made after death will be subject to tax.
In neither situation can the survivor continue contributing to the plan.
Q – The banks are offering us high interest rates, 5%-plus in some cases. They obviously make more somewhere in the market.
What is it they know that we don’t? – Adam P.
A – I don’t think there are any secrets. Banks lend the money at a higher rate and profit from the spread. For example, Royal Bank recently posted a two-year fixed mortgage rate for 7.09%. At the same time, they offered a two-year non-redeemable GIC for 5.3%. That’s a spread of 1.79 percentage points. It’s not hard to make money with those numbers.
If you have a money question, send it to gordonpape@hotmail.com and write Fund Library Question in the subject line. Sorry, I can’t guarantee a personal response, but I’ll answer as many questions as possible here.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Image: iStock.com/anyaberkut
Join Fund Library now and get free access to personalized features to help you manage your investments.
Fund Library
