Investments

A guaranteed return – and more

March 22, 2021 by Darcie Doell and Laurianne Osmak

Guaranteed interest accounts provide interest income, insurance benefits and flexibility.

There is almost always a place for secure, guaranteed investments in an investor’s portfolio. They can help reduce the volatility of a balanced mix of stocks and bonds, and they can deliver a steady stream of interest income to help support lifestyle goals.

A guaranteed interest account (GIA) offered by an insurance company has some interesting additional benefits that can help investors achieve other objectives.

What is a GIA?

A GIA is an insurance contract that pays interest at a guaranteed rate, like a bank-issued guaranteed investment certificate (GIC). A variety of terms are available ranging from short-term to long-term. Either way, at maturity, investors can choose to reinvest their original investment plus the interest they have earned.

Importantly, once purchased, the interest rate does not fluctuate with the markets. On top of that, a GIA offered by an insurance company offers extras like tax and estate planning benefits, as well as potential creditor protection.

Tax planning benefits

Every dollar saved in tax is an extra dollar available to save or invest – and a GIA can provide tax savings in two ways for non-registered accounts. First, investors can defer taxes on GIA interest for up to one year. Second, when investors are age 65 or older, GIA interest income may qualify for the pension income tax credit and for pension income splitting with a spouse or common-law partner.

Estate planning benefits

Most people want their assets to transfer quickly, cost-effectively and privately to their beneficiaries. Because a GIA is an insurance contract, it allows for the naming of a beneficiary. This means the proceeds can be paid directly to the beneficiary and avoid the estate, and therefore probate where applicable, and potential delays and associated costs, as well as public scrutiny in a probate court.

Potential creditor protection

Professionals and small business owners often worry about protecting their personal assets from creditors. If they’re sued or the business runs into financial difficulties, creditors may have the right to seize what they own personally.

GIAs have the potential to help with creditor protection during the investor’s lifetime, as well as after death when the death benefit passes directly to a named beneficiary outside the estate. It is very important to consult with a legal advisor to discuss the rules surrounding eligibility for creditor protection.

Why choose a GIA?

Many investors choose GIAs primarily to help protect part of their portfolio from market exposure and to guarantee a predictable return. Tax and estate planning benefits and potential creditor protection can be attractive extra features.

Depending on the structure of the GIA, investors may also benefit from flexibility to move in and out of the markets in response to volatility or changing financial needs. That’s because some GIAs are offered in contracts that also offer segregated funds. This means that it may be possible to transfer between the GIA and a segregated fund that provides access to market growth. This transfer would be subject to fees.

For investors looking for security and stability in an unpredictable world, GIAs can help safeguard capital and deliver guaranteed rates. Unlike some market-dependent investments, GIAs also qualify for deposit protection from Assuris on investments up to $100,000. Speak with your advisor about whether a GIA may be appropriate for your needs and goals.

GIA FAQ 1. Can a GIA provide a guaranteed interest rate? Yes. GIAs offer a guaranteed interest rate from the day money is invested until maturity. 2. Does a GIA qualify for deposit protection on investments up to $100,000? Yes. Assuris (which protects Canadian insurance policyholders) provides additional protection. 3. Is it possible to access money invested in a GIA before maturity? Yes. Fees may apply. 4. Are term choices available? Yes. 5. Is it possible to designate a beneficiary on a GIA? Yes. 6. Does a GIA offer the estate planning advantages that come with avoiding probate? Yes. 7. Is GIA interest income potentially eligible for the pension income tax credit and pension income splitting when the owner is age 65 or older? Yes. 8. Is it possible to hold a GIA in an RRSP, RRIF, TFSA or non-registered account? Yes. RRSPs, RRIFs and non-registered accounts can hold short-term or long-term GIAs. TFSAs can hold long-term GIAs. 9. How can I invest in a GIA? You have to get them via a life-licensed advisor, as they are issued by insurance companies.

All about bonds: Fixed income investments can help portfolios absorb market shocks.

January 25, 2021 by Darcie Doell and Laurianne Osmak

People invest their money for all sorts of reasons. Typically among them is the desire to preserve capital, avoid instability and, hopefully, generate some income. In normal times, these are achievable outcomes. But then along came 2020, which has proven to be particularly challenging for everyone, including investors.

As soon as the markets reacted to the financial effects of the COVID-19 pandemic, many investors were tempted to put their money into cash and wait out the situation on the sidelines. However, many experts agree that it’s more beneficial to stay invested, even during tough times. Thankfully, opportunities and strategies exist to help investors do so. One such strategy is to add fixed income investments, more specifically bonds, to their portfolio.

Knowing the basics about bonds can help you understand how they can be an integral component of any portfolio.

WATCH: What is a bond? — a video that explains what a bond is.

How bonds work

Buying a bond is much like loaning money to the issuer, which could be a government or a corporation. In return for the loan, the issuer pays the investor interest at a set rate until the bond matures. The amount of interest depends on the issuer’s financial strength, the time until the bond’s maturity date and interest rates.

In short, a bond is a type of investment that will pay the owner a fixed amount of money over a specific period of time. All bonds have fixed payment and maturity dates, but different types of bonds have different income potentials and levels of risk.

Investors are attracted to bonds for their perceived middle-of-the-road safety and stability. The lower risk profile of bonds usually comes with the expectation of lower returns than from risker investments. However, during times of market volatility, the stability of bonds is often enough to satisfy investors, especially when compared to the more unpredictable outlook for stocks.

Three reasons you might want to add bonds to your portfolio

Bonds add another level of diversity to your investments that can help absorb market volatility and reduce overall risk.
There is a wide variety of bonds available, to align with your investment goals.
Mutual funds and exchange-traded funds are convenient and affordable ways to invest in bonds.

What affects bond performance?

Market conditions. For example, when the stock market is rising (a bull market), investors typically move away from bonds and into stocks – often referred to as equities. In contrast, when the stock market is going through a correction or downturn (a bear market), investors may seek the perceived safety of bonds, and their prices rise.
Interest rates. When interest rates rise, bond prices typically fall – and accordingly, when interest rates fall, bond prices increase.
Credit quality and ratings. A bond’s credit rating is a lot like a person’s credit rating, which can rise and fall due to several factors. A credit rating provides information about an issuer’s ability to make interest payments and repay the principal on a bond. The higher the credit rating, the greater the likelihood that the issuer will meet its payment obligations – at least in the opinion of the rating agency. If the issuer’s credit rating goes up, so too will the price of its bonds. If the rating is downgraded, it will send their bond prices lower. Credit ratings are issued by agencies, such as Moody’s and Standard & Poor’s, that use letter grades (for example, S&P’s AAA to BBB–) to indicate the credit quality of bond issuers and specific bonds.
Duration. Duration measures how much a bond’s price will be affected by interest rates over the period before the maturity date. The longer the term to maturity, the more sensitive it is to interest rates, which can also present higher income potential. Bond duration falls into three general time frames: short term (1 to 3.5 years), intermediate term (3.5 to 6 years) and long term (longer than 6 years).

When equity stocks depreciated in the early months of 2020, bonds stood up to the test and gained value. Balanced portfolios containing a nearly equal amount of stocks and fixed income investments performed relatively well. The lesson learned is an oldie but a goodie: stay invested, monitor your asset allocation, and rebalance (and repeat) when necessary. Speak to an advisor about how you can make the most out of market volatility.

Different bond and bond fund categories

Government bonds are debt securities issued by federal, provincial and municipal governments, which are generally regarded as carrying less risk.

Investment-grade corporate bonds are debt securities issued by corporations with the potential to return higher yields than government bonds or cash. The bonds are assigned a credit rating to indicate how unlikely the issuer is to default on interest payments.

High-yield bonds pay higher interest because the issuer has a lower credit rating, which is regarded as running a higher risk of defaulting, or not being able to pay the interest to their bond holders.

Core bond funds offer broad exposure to several segments of the investment-grade area of the bond market in a single fund.

Emerging market bonds are issued by governments and corporations within countries with developing economies. Their higher yields often are understood to come with a higher level of risk than those from more established economies, such as the United States.

Bull markets and bear markets – what’s the difference? Investors and money managers often use the terms “bullish” and “bearish” to describe the state of the stock markets and related trends at any given time. Both terms capture investor sentiment to characterize how the markets are performing, as well as the overall health of the economy.

A bull market is one in which stock prices are rising or appreciating – moving forward like a charging bull. Typically, the economy is strong and employment levels are high.

A bear market is one in which stock prices are declining, like a lumbering or hibernating bear. A bear market is labelled as such if stock values have fallen 20 per cent or more from recent highs and stock prices continuously drop. Typically, the economy slows down and unemployment begins to rise.

Source: www.investopedia.com/insights/digging-deeper-bull-and-bear-markets

Get acquainted with segregated funds: An insurance-based investment that for some, is a perfect fit.

December 14, 2020 by Darcie Doell and Laurianne Osmak

The financial world uses a language that can be confusing for people who don’t have a deep understanding of investing. It can be more difficult when it comes to a particular product they may have heard of, but don’t have a firm grasp on its intent or how it works. Segregated funds are a unique kind of investment product and getting acquainted with a few key terms can help boost your knowledge.

Segregated fund contract: A pool of investments held by an insurance company and managed separately from its other investments. A segregated fund contract combines the growth potential offered by a broad range of investment funds with the unique wealth protection and estate planning features of an insurance contract. Segregated fund contracts can help transfer wealth to the next generation quickly, privately, and cost effectively. They can also minimize exposure to risk through various guarantees, such as death and maturity guarantees, and provide potential creditor protection – all from a single product or insurance contract. But what do each of these terms mean? Let’s break it down:

Estate planning benefits: Because segregated funds are technically insurance contracts, they let investors name a beneficiary to allow the investment to bypass probate and the estate at death. Probate is a legal process that certifies the validity of a will and the authority of the executor(s) to facilitate the transfers of assets to heirs. It can take time – months, or even years – and in many cases, there are fees. With segregated fund contracts, the money goes directly and quickly to the person who inherits the money (the beneficiary of the contract). While poor estate planning can erode your wealth for the next generation and cause distressing, potentially expensive delays, segregated fund contracts can help make sure your beneficiaries will receive their inheritance quickly and cost-effectively. They may also help to preserve confidentiality: wills can become public documents, and the information in them can be easily accessed. Segregated fund contracts are private.

Creditor protection: Segregated fund contracts have the potential to protect your assets from creditors. If a family class or irrevocable beneficiary to the contract is named, the segregated fund contract may be protected from the owner’s creditors during his/her lifetime. Also, the death benefit is excluded from the owner’s estate as it is paid directly to the beneficiary, usually placing it beyond the reach of estate creditors. You can read more about estate planning and creditor protection and about how the regulations particularly apply in Quebec. More insights on the creditor protection for business owners is available here.

Maturity guarantee: With a segregated fund contract, you’re guaranteed to receive at least 75 per cent of your deposits (or 100 per cent, depending on the contract), reduced for any withdrawals, when the contract matures. This is known as a maturity guarantee, and it applies at the maturity date (which occurs after a minimum number of years has elapsed or at a contract set date – for example, age 100 of the annuitant), even if markets decline during the contract period. And if markets rise, your savings grow. Some contracts even let you “reset” your maturity guarantee to lock in growth. This way, you get the opportunity to protect your capital along with growth potential.

Death benefit guarantee: Segregated fund contracts also include a death benefit guarantee. The guarantee can be up to 100 per cent of your deposit, again reduced for withdrawals, depending on the type of contract selected and the age of the annuitant when the product is purchased. Your named beneficiary, who can be anyone – a family member, friend or charity – receives the death benefit in the event of death. As with maturity guarantees, some contracts “reset” the death benefit guarantee to lock in growth.

Segregated fund fees: The guarantees and benefits of a segregated fund contract are a type of insurance, which you’re paying for. Segregated fund costs include management fees, insurance fees, operating costs and applicable sales tax. A contract might also include a charge for early withdrawal.

Segregated fund contract who’s who

Contract/policy owner: The person who enters into and owns a segregated fund contract.

Annuitant: In provinces other than Quebec, this is the person on whose life the maturity guarantee and death benefit guarantee are based. In Quebec this person is called the life insured (‘insured’) and the word ‘annuitant’ instead refers to the person who will receive the payments. For registered contracts, the contract owner and annuitant/insured must be the same person. For non-registered contracts, they can be the same, or the contract owner can decide to designate another person as the annuitant/insured. The contract owner is the person who will receive the funds at maturity of the segregated fund contract. The beneficiary is who will receive the funds when the annuitant/insured dies.

Beneficiary: The person(s) named on the segregated fund contract by the contract owner to receive the death benefit when the annuitant/insured passes away. Your beneficiary can be anyone – a family member, a friend, or a charity.

Insurance company: This is the company that you enter into a contract with and that backs the guarantees of the provisions in your contract.

Advisor: Your key contact! Advisors who are licensed to sell insurance (including segregated funds) can help you determine the segregated fund contract that’s suitable for your needs. An advisor can also help you decide on specific funds that are available in the contract.

The appeal of segregated fund contracts depends on a few key factors, such as time horizons, fees and estate benefits that differ from typical mutual funds or exchange traded funds. But what makes them unique could be what makes them the right type of investment for you. Speak with your advisor to see if a segregated fund contract is suitable for your investment strategy or needs.

Coronavirus and market uncertainty: What you should do

March 10, 2020 by Darcie Doell and Laurianne Osmak

Over the last week, the financial market has taken a downturn amidst fears over Coronavirus. The S&P 500 had its worst weekly drop since the financial crisis in 2008, after setting all-time highs the prior week. ¹

Understandably, investors are anxious about their money. If you are concerned with your portfolio, you’re not the only one, however, during times of market volatility, it’s important to stay level-headed to avoid making financial missteps.

Keep calm

In situations like these, it’s important to keep perspective. This is not the first time the market has taken a downturn. Market corrections are a natural part of the investment cycle and over the long term, individuals that remain invested and use the volatility as an opportunity to buy will be rewarded.

The media can make it seem like each market downturn is worse than before. In reality, though, volatility alone doesn’t hurt investors, but if selling in a downturn, it will lock in losses.

Keep up-to-date

Currently, there isn’t enough information to know how the Coronavirus will affect the market, over the short, medium and long term. However, it’s important to know that the financial market doesn’t like uncertainty. Therefore, as further developments come to light, there will likely be further corrections to the market.

How have markets reacted to virus outbreaks in the past?

The table and chart below, show how the S&P 500 has performed during similar virus outbreaks in the past. While the impact can be negative, the long-term impact has been limited. In all past scenarios, markets were higher 12 months after the virus was identified. ²

Source: Bloomberg Finance L.P., CitiResearch, FactSet. As at February 27, 2020. The starting date for the 12-month return is the month each virus was identified.

Keep in mind your portfolio is diversified

We know market downturns can be stressful and being bombarded by media reports doesn’t help but keep in mind your portfolio is diversified. It’s important to remember that your portfolio is tailored to your unique investment time horizon, personal situation and financial goals. If you do have questions about your portfolio, please don’t hesitate to contact us.

Review your investments

This is a good time to review all your investment accounts including your TFSA, RRSP or RRIF to ensure you are diversified. If you haven’t reviewed the accounts that we don’t manage, please reach out to our office and we can provide you with recommendations that align with your financial goals.

Keep in touch

We’re here for you and hope to serve you by helping you make objective and educated financial decisions. These decisions will help you stay the course so you can achieve your financial goals.

If you have friends or family that need help with their investments, we are happy to offer a complimentary review. We will discuss what their financial goals are and what makes the most sense for their situation. Often by working with a financial advisor, it can help them feel more confident about their finances.

At any time, should you wish to discuss or review your investments, please contact us. We’re here to support you.

1_Source:_{https://markets.businessinsider.com/news/stocks/stock-market-news-today-worst-week-}since-2008-coronavirus-economy-2020-2-1028951101

2_Source:_{https://www.ci.com/en/coronavirus-update}

Shoot to score: A goals-based approach targets financial planning to meet objectives throughout life

February 11, 2020 by Darcie Doell and Laurianne Osmak

How do you measure the success of your investment strategy? Most people look at their returns: five per cent is better than three per cent. But investment returns don’t tell the whole story. Whether or not an investment strategy is successful depends on whether it delivers the money the investor needs at the right time, allowing them to achieve specific goals.

That’s the aim of a goals-based approach to financial planning. Rather than chasing returns on investments, this approach identifies the amount of money required at different times throughout an investor’s life and structures separate investment portfolios, alongside debt management, insurance, tax and estate planning strategies, to help ensure the investor has that money available when it’s needed. Then, instead of checking returns against the markets, the investor evaluates success by measuring their progress towards each goal.

In addition to redefining success, a goals-based approach also redefines risk. After all, the true risk for an investor is not that an investment portfolio loses money this year; it’s that the investor falls short of their savings goals and can’t do what they had planned to do.

What are you saving for?

For most people, the answer is, “Lots of things!” But that’s a bit like setting a New Year’s resolution to “Do a bunch of stuff.” It’s not specific enough. And when goals are vague, it’s hard to know how much to save, which investments to choose and what level of market volatility you consider acceptable.

Well-defined goals, on the other hand, are more achievable. Knowing exactly what you’re working towards is a great motivator to keep saving. It also makes it possible to build a financial plan around specific milestones that help keep everything on track.

As a starting point for goal setting, consider goals many people share: a comfortable retirement, a new home, a cottage, a renovation, education (for children or for yourself) and travel. Keep in mind that some common goals stretch beyond a lifetime – for example, a desire to provide a legacy to loved ones or make a substantial donation to a favorite charity.

Let’s consider Maggie, age 40, who has three primary goals. She would like to take a year off work and go back to school full-time in three years, renovate her kitchen in six years, and retire in 20 years. Because the date she needs to access her money is different for each goal, so is her tolerance for market volatility. Maggie can’t afford for her savings to be worth less than they are now when she’s ready to hit the books. On the other hand, it’s okay if her savings for retirement are temporarily down three years from now, as long as they recover in time for her to have enough money to stop working when she plans.

Since Maggie’s goals have different time horizons and risk tolerances, it makes sense to create three investment portfolios – and that’s exactly what a goals-based approach does. Each portfolio will have a different balance of equities, fixed-income investments and cash: more fixed-income investments and cash for shorter-term goals, and more equities for longer-term goals. When Maggie reviews each portfolio, she can of course look at its rate of return, but the more important measure of success is whether she’s on track to achieve the goal that particular portfolio is designed to help her reach.

Of course, sometimes goals shift. Maggie may decide to keep working and take classes in the evenings. That may allow her to put a down payment on a larger home instead of renovating her kitchen. Maybe one of her teachers will connect her to a new job she loves and she’ll change her mind about retiring at age 60. A goals-based approach can generally accommodate new plans, as long as they’re not made at the last minute. Portfolios will simply be appropriately adjusted, and investors can start tracking their progress towards new goals.

Whether or not goals shift, all investment portfolios need fine-tuning as investors approach the date when they need to access their money. As each goal gets closer and the time horizon shrinks, the related portfolio allocation will have to reduce its exposure to market volatility to ensure it can deliver the right amount of income when that money is needed.

That said, a goals-based approach ensures that only the portion of money that’s required in the near future has its risk level (and therefore growth potential) scaled back. The rest of an investor’s money can continue to enjoy a greater opportunity for growth towards longer-term goals. The flexibility to precisely calibrate a portfolio to its goal, while leaving other investments to keep working towards other goals, is one reason a goals-based approach adds so much value.

Not only about investments

How do debt management, insurance, tax and estate planning fit into a goals-based approach? They’re other essential components of a complete financial plan and can contribute to the likelihood that an investor will achieve their goals.

Debt is a drag on any financial plan, slowing it down with every dollar in interest paid. Having clear goals in mind can be a powerful inspiration to pay down debt and get rid of that drag. Your advisor can recommend strategies to be debt-free faster, including targeting the highest-interest debt first and consolidating debt into a single account with a lower interest rate.

Unexpected events can derail the best-laid plans – and that’s where insurance comes in. Health and dental policies can help with the cost of medications, dental procedures and health-related services when needed. Disability and critical illness policies help protect the ability to meet goals by providing financial support in case an illness or injury prevents you from working. And life insurance policies can help ensure loved ones avoid financial hardship and can continue to make progress towards their goals after the insured person’s death.

Plan to reach your goals

With the right strategies in place, you’re much more likely to reach your goals. Here are steps you can take in the short term, medium term and long term to improve your financial well-being. Remember, every step you take gets you closer to your goals.

Short-term steps	Medium-term steps	Long-term steps
Create a budget	Arrange insurance protection	Save for retirement
Start an emergency fund	Save for larger purchases	Develop an estate plan
Pay off debts	Plan for children’s education	Save for “nice to haves”

Effective tax planning reduces the amount of money paid in taxes, providing more money to invest towards goals. Simple tax strategies include maximizing Registered Retirement Savings Plan contributions every year to get the biggest possible tax deduction and, where practical, earning the most highly taxed type of investment income – interest income – within a registered plan where money grows on a tax-deferred or tax-free basis.

For many people, the goals addressed by estate planning are among the most important. Estate planning can help make sure assets pass to beneficiaries efficiently and tax-effectively, establish strategies to meet the needs of a loved one with a disability and/or set up a generous gift to charity. It can both provide significant tax savings and ensure family members are well taken care of.

Speak with your advisor

Defining clear goals and aligning financial planning to meet them can help you make the most of your money and avoid common financial pitfalls. For example, knowing that overspending or paying too much in interest will jeopardize your ability to have the experiences you want in life may prompt you to redouble your efforts to trim your budget and eliminate debt. Meanwhile, knowing exactly how much income you need in retirement makes it less likely you’ll skip a few months of saving, because you know the precise amount of money you must set aside regularly to stay on target towards the future you want.

Furthermore, understanding what you need your money for and when you need it will help you avoid investments that are inappropriate for your situation and focus on the ones with the risk/return profile that suits you best. An added benefit is that when you know exactly why you’re invested in a specific way, you are less vulnerable to the distractions of market ups and downs and can stay invested towards your goals.

Overall, focusing on goals makes financial planning more concrete and less abstract, allowing you to mix and match strategies with a very clear idea of what they need to achieve. It can also clarify conversations with your advisor, giving them a well-defined job: to get you what you want when you want it.

We want to hear “Your Story” – Let’s talk about how a goals-based approach to financial planning can help you achieve your dreams.

Source: manulifesolutions.ca