Your questions have been piling up so let’s see what’s on your minds.
Banks too big to fail
Q – I think any of the big five banks are too big to go bankrupt or even stop paying dividends, yet you recommend GICs and bonds to people who want little risk. Why? – Peter W.
A – I agree with the first part of your comment – Canadian banks are probably too big to fail.
But that doesn’t mean they’re immune from a stock market collapse. Look what happened in 2007-09. Shares in the major banks lost about half their value.
For example, shares of Bank of Montreal went from the $70 range in February 2007 to below $30 two years later. The yield on the stock rose to over 11 per cent as investors were convinced a dividend cut was coming. That didn’t happen, but it wasn’t until October 2013 that the stock return to the early 2007 level.
Some investors panicked and sold their bank stocks at big losses. For older people in retirement, that was a disaster.
The bottom line is that, no matter how safe a company may appear, stock market risk always has to be considered. GICs eliminate that risk. You sacrifice return but gain safety. As for bonds, with interest rates falling they are performing well right now. They are higher risk than GICs, but not by a lot, especially if you stick to short- and mid-term issues. – G.P.
Alternatives to Mawer
Q - You recently recommended the Mawer Balanced Fund. I like the fund and own a lot of it. Do you have a couple of other balanced funds that you like and recommend that I could invest in along with the Mawer fund? Do you endorse this approach, or should an investor simply put all their funds in the one company’s balanced fund? – John L.
A - The only reason to own two funds in the same category (in this case Global Neutral Balanced) is if they use a different investment approach to achieve superior results.
The best fund I can find that would complement the Mawer fund in that way is Dynamic Power Global Balanced Class Series A, managed by Noah Blackstein.
As of June 30, it showed a 10-year average annual compound rate of return of 10.1 per cent.
The asset allocation is about the same as the Mawer fund (60 per cent equities, 40 per cent bonds and cash). But the geographic and sector allocations are very different.
For example, the Dynamic fund has more than a third of its portfolio (36.6 per cent) invested in information technology stocks. The Mawer Balanced Fund has an IT weighting of 13.7 per cent according to the company website. The Dynamic fund has 57.4 per cent of the portfolio invested in U.S. and international stocks, compared to 37.8 per cent for Mawer. Canadian stocks make up only 2.7 per cent of the Dynamic portfolio.
The Dynamic fund is more aggressively managed, and the result is larger performance swings then you’ll see with Mawer. For example, in 2016 the Dynamic fund lost 8.1 per cent. It then turned around and gained 32.5 per cent in 2017 before losing 9.4 per cent in 2018. The comparable numbers for Mawer were up 3.2 per cent, up 10 per cent, and down 0.3 per cent, respectively. Clearly, the Dynamic fund is higher risk but when it does well it can shoot out the lights.
Over the past decade, however, there is not much daylight between the funds in total returns. So, if you’re looking to spread your money around, this is an option to consider. – G.P.
Investment dilemma
Q - My husband and I would like your advice. We invested in the stock market in 2008 when we were in our late 20s and make a little money. Then, about four years ago, we rolled some of that money into buying a small four-unit apartment building that has been working out well for us. The apartment building covers its costs and is starting to make a small income.
Our five-year mortgage term is up next year on it and our financial planner has suggested we take out our initial investment ($30, 000) and put it towards something else. We are wondering what our smartest course is:
1. Leave it in the building and try and pay down the mortgage faster so we can have more income.
2. Take out the $30,000 and put on our home mortgage (we have about $120,000 left on our mortgage – currently making regular small extra payments on principal).
3. Take the $30,000 and look to invest it in something else that would generate a passive income.
We are in our late 30s with two young children. We have no debt beside mortgages, have built up RRSPs, will have two defined benefit pensions and have relatively healthy RESPs set up for our girls. We have worked hard to get to this position and don’t want to miss an opportunity but also don’t want to make a misstep! Any advice would be appreciated! – Allison M.
A - For starters, make sure the financial planner does not have a vested interest in your decision. If he’s a fee-for-service advisor, no problem. But if he sells products, like stocks and mutual funds, he may be looking to add to his commissions. Ask the question.
The safest route is paying down the mortgage. Whether it’s on your home or the apartment building depends in part on the rate you are being charged for each. But you should keep in mind that interest on the rental loan is tax deductible whereas interest on your residence is not. All things being more-or-less equal, I would pay down the home mortgage first.
Investing the money may earn you a better return but it raises your risk exposure considerably. Only you can decide if that’s a gamble worth taking.
Bottom line, I’d opt for a mortgage paydown. But then I’m a very conservative person. – G.P.
TFSA withdrawals
Q – I have a question regarding the withdrawal and transfer of dividends from a TFSA into a bank account we use for living expenses. My understanding is the TFSA income that is withdrawn can be replaced into the plan the following calendar year. If so, are there CRA reporting obligations or forms to fill out and submit, documenting the dividends withdrawn and then replenished? – John P.
A – First, a clarification. Money taken out of a TFSA can be replaced any time, starting in the calendar year following the withdrawal. There is no time limitation.
There are no special forms to be filled out. Your financial institution will keep track of the information and file a report with the Canada Revenue Agency. If you have set up My Account with the CRA, you can review your contribution status at any time. – G.P.
If you have a money question you’d like answered, send it to me at gpape@rogers.com and write Globe Question in the subject line. I can’t guarantee a personal response but I’ll deal with the most interesting questions periodically in this space.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
Gordon Pape