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It’s been a while since we checked the inbox so let’s see what questions people are asking.
Q – My wife and I are both retired and lucky enough to have defined pensions with an annual cost of living index as an additional benefit. I therefore see this as reliable income and do not invest in bonds. Am I wrong to think in this way? – Joseph S.
A – I suggest you’re missing a key point. The bonds in a portfolio are not just for income. In fact, high-yield stocks offer better cash flow. Bonds provide portfolio diversification and reduce volatility. In normal times – 2022 was an exception – bonds provide a buffer if the stock market falters.
The volatility meter on the Steadyhand website (steadyhand.com) illustrates the effect of owning some bonds. In 2018, a 100% equities portfolio would have lost 4.7%. A traditional mix of 60% equities, 40% bonds would have reduced that loss to 2.3%. In 2011, a loss of 5.9% with an all-equity portfolio would have become a small gain of 0.1% with a 60-40 balance. The most dramatic impact would have been 2008, where an all-equity loss of 29.4% would have been reduced to 15.2%.
The meter also tells us that over the long term, an all-equity portfolio generates superior results. Each investor most decide if they can handle the increased volatility.
Q – I have been reading about debt and investments. I have been to the bank to try to consolidate bills and mortgage. Searching the internet was confusing as there are too many options. The increase in interest rate also messed me up. Can you give me some advice? Any thoughts on reverse mortgages? – Rita K.
A – It sounds like you have a complex financial situation. Here are a couple of thoughts.
If you’re seeking to consolidate debt, a conventional mortgage or a home equity line of credit are probably the cheapest ways in which to borrow at present. That said, the interest cost is much higher than it was before the Bank of Canada started to raise rates. Whatever you do, I suggest you do not lock in a long-term rate. It appears interest rates will begin to drop later this year, so choose a variable rate loan.
Reverse mortgages charge a higher rate than a conventional mortgage or a line of credit, so the value of your home is eroded more quickly. The offset is you don’t have to repay the loan unless you move or die – in the latter case, the estate must repay. Also, if the money from a reverse mortgage is invested, the interest on the loan may be tax deductible. Ask a tax professional for help if you go that route.
Q – I have a good portion of my portfolio in USD. I would like to invest in an ETF that is focused on Canadian banks/financials that is in USD. I do not want to convert USD to Canadian dollars currently. Are there any ETFs that you would recommend? – Frank S.
A – Take a look at the BMO Canadian Banks Covered Call Canadian Banks ETF (US dollar units). The trading symbol is ZWB.U on the TSX.
This ETF holds an equal-weighted portfolio of the Big Six Canadian banks, and the managers write covered call options to boost income. The performance history isn’t impressive, but keep in mind the U.S. dollar units were only launched in January 2022. That was hardly an auspicious time, with rising interest rates and recession fears battering the banking sector. As a result, the units show an average annual compound rate of return of -6.57% since inception (to Feb. 29). The Canadian dollar version of this fund (TSX: ZWB) has been around since 2011 and shows an average annual gain since inception of +7.72%.
I think banking stocks will make a strong recovery as recession fears recede and interest rates begin to decline later this year.
The fund currently pays a monthly distribution of US$0.14 per unit for a yield of 7.2%. The MER is high, at 0.72%.
A Google search will reveal other options if you want to make comparisons. As always, discuss any potential investments with your adviser before jumping in to make sure the security aligns with your risk tolerance and financial objectives.
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
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