Saturday, April 19, 2014

Dollar cost averaging or investing a lump sum all at once: which performs better?



What is dollar-cost averaging?

Dollar-cost averaging (DCA) — buying a set dollar amount of a security at regular intervals — can help promote disciplined investing.  It is a form of paying yourself first.  While you’re building your wealth, the rate of saving is generally more important than the rate of return.
By committing yourself to invest a set amount regularly (say, $1,000 once a month), regardless of whether the market is up or down, you end up buying more when the market is down and an investment is cheaper, and less when it’s up and an investment is more expensive.
For Mal Spooner, corporate finance professor at Humber College in Toronto and author of A Maverick Investor’s Guidebook, dollar cost averaging is a hedge against the common tendency among investors to buy high and sell low, robbing themselves of profits. “Everybody wants to invest aggressively when markets are going up,” Spooner says. “DCA forces you to buy when markets are bad as well as good.”

So how does the performance of dollar cost averaging compare to lump-sum investing?  

Vanguard, the U.S. mutual fund company, published a study in July 2012 that highlighted an important flaw in the dollar-cost averaging strategy.
The study sought to answer a simple question: If you inherited $1 million, would you be better off investing it all at once or would your portfolio perform better if you were to invest the funds gradually over time (in other words, if you implemented a dollar-cost averaging strategy)?
Vanguard studied stock and bond returns in the U.S., U.K. and Australia. The research covered multiple stretches of time that featured widely varying market conditions, and investment holding periods ranging from one to 30 years. About two-thirds of the time, investors were better off with a lump-sum approach than they were a dollar-cost averaging strategy.

Does this mean dollar-cost averaging is a mistake?

It probably does, if you come into a large sum of money all at once, and you have a long enough time horizon before you need your money. This argument against dollar-cost averaging isn’t complicated. It merely (and correctly) identifies the likelihood that over time, your money will perform better if it is invested in the markets than it will if it is held in cash (either in a savings account or a low-interest earning cash instrument like a Guaranteed Investment Certificate). If someone hands you $1 million, it’s probably not in your best interest to invest $100,000 into a balanced portfolio and stuff the rest under your mattress to be invested piece by piece.

But for those not lucky enough to inherit a small fortune, dollar-cost averaging still makes sense. It helps make saving easier, and it prevents trying to time the market. Save the same amount every month, and the price of your selected securities will dictate whether you buy a lot (when prices are low) or a little (when prices are high).

Dollar-cost averaging is as much a saving strategy as it is an investment strategy.

For help building an investment plan that is tailored to your personal goals, risk tolerance and time horizon, email Tim Weichel at tim@retireonyourterms.ca or call 416-230-2703 or 705-798-0062

Saturday, April 12, 2014

Do you need mortgage insurance?



Your home is likely the biggest asset you’ll ever own. And if you’re one of the majority of Canadian homeowners who have a mortgage, you need to ensure your home is protected should something happen to you. The question is what’s the best way to do this?

Canadians held $855 billion in mortgages on their principal residences in 2011, according to the Canadian Association of Accredited Mortgage Professionals, and the Statistics Canada Survey of Household Spending reports 57% of Canadian homeowners have a mortgage.

To protect these mortgages, homeowners have options: mortgage insurance provided by a financial institution, or mortgage protection using life insurance and critical illness insurance provided by an insurance company.

Mortgage insurance: 

Works by paying off the outstanding principal balance of your mortgage should you die, have an accident or suffer a terminal illness, up to a specified maximum amount.

Mortgage protection:

Term life insurance: Covers you for a set period of time — such as five, 10, or 20 years — and can be suitable for homeowners looking for low-cost insurance.

Permanent life insurance: Can be more expensive initially, but provides coverage for life. Premiums can either be guaranteed or variable, depending on the type of plan you choose.

Critical illness insurance: Provides you with a lump-sum payment you can use for medical expenses or to pay off your mortgage should you be diagnosed with a serious illness that’s covered under the policy (and you meet the other policy conditions) — how you use the benefit is up to you.

Key differences between mortgage insurance and mortgage protection using life insurance and critical illness insurance

The main difference between mortgage insurance and mortgage protection using life insurance and critical illness insurance is that mortgage insurance pays the lender, and the coverage declines as your mortgage balance declines. 

On the other hand, critical illness insurance pays you a lump sum that can be used to pay your mortgage or other expenses as you choose. 

Life insurance pays a tax-free benefit to your chosen beneficiary when you die. The payment can cover more than just the mortgage, as the beneficiary may use the proceeds of the policy in any way you need to.

Beneficiary: In the case of mortgage insurance, the lender is the beneficiary. 

While with critical illness insurance, you’re the beneficiary and with life insurance, you can name the beneficiary.

Portability: If you change mortgage providers, your mortgage insurance doesn’t automatically move with you. If you move your mortgage to another lender, you will be required to submit evidence relating to your health, and will be subject to the current rate of the new mortgage provider. 

With life and critical illness insurance, you can take your policy with you if you transfer your mortgage to another company, with no need to re-apply or prove insurability.

Flexibility: With mortgage insurance through a lender, your needs may change over time, but you don’t have the flexibility to change your coverage. 

Term life insurance and term critical illness insurance plans can be converted into permanent plans at a later date.

Cost vs. coverage: With a lender-offered mortgage insurance plan, the benefit decreases as you pay down your mortgage, but the premiums remain the same. If you pay off your mortgage, you lose all your coverage. 

With life and critical illness insurance policies, the amount of coverage does not decrease over time (even if you repay your mortgage).

Call us for a comparison quote if you have, or are considering mortgage insurance.  Often individual term insurance is less costly than mortgage insurance for better coverage.  tim@retireonyourterms.ca 416-230-2703.  Visit us at www.retireonyourterms.ca  

Wednesday, April 2, 2014

Seven questions to ask yourself before you retire


Guess what new retirees say their biggest surprise is when they finally leave work? “Seven days of fishing or golf just isn’t as much fun as they thought it would be,” according to Eileen Chadnick, a certified life coach. She spoke about the value of a retirement plan that takes more than financial questions into consideration. 

“After the immediate [retirement] honeymoon, a life filled exclusively with leisure stops being leisurely,” Chadnick says. “All rest, no stress, no challenges becomes really very unbalanced. People need to find balance or they will get bored. People who don’t have a plan — who don’t have activities and ways to engage all aspects of their personality — don’t do well in retirement.”

She counsels her clients to begin thinking about that plan soon after their 40th birthday. If that’s already passed, start now. It’s especially important to begin early if you decide you’d like to do something in retirement that’s dramatically different from what you do now. Some see retirement as an opportunity to begin a new career, for example. If that requires training, work that into your plan.

Don’t wait to think about retirement

“How do you shift gears? You need to get your mind around that and prepare to think about other possibilities for yourself,” she said. “I think people make the mistake of waiting until it’s too late.”

What are you supposed to spend all that time thinking about? Chadnick prepared this checklist of seven questions:
  1. What will be most important to you in retirement? What will give you a sense of purpose? What will be your passion?
  2. What kind of work do you want to do, if any? Will it be strictly paid work or include unpaid, volunteer work?
  3. Do you want to remain in your existing career? Would you rather do something entirely different?
  4. Leave aside the financial importance of work for a moment. How important will work be to you in terms of intellectual and social fulfillment?
  5. In the absence of a work schedule, how much structure do you want in your day?
  6. How will you replace some of the good stuff of work: intellectual engagement, challenge and growth opportunities? If you’re not getting the social interaction you had in your workplace, how will you stay connected?
  7. What do you need to stay motivated, inspired and engaged? What do you need to stay healthy, vibrant and resilient?
Clearly, this is not your grandfather’s retirement. It may not look much like your mother’s, either. Chadnick attributes this shift to the baby boom generation and its dedication to active living.

“Boomers will not hang out on the porch,” she said. “Boomers have always been known to defy the rules. Retirement is no different. We get a lot of meaning through work. We want to be relevant in all our life stages.”

One of the key differences in our approach to financial planning is that it is holistic.  It is a thorough, in-depth process that takes into account all aspects of your life, health, and wealth.    

Call us for a free discovery meeting and find out how we might help you plan your retirement.  tim@retireonyourterms.ca  416-230-2703 or 705-798-0062.  Visit us at www.retireonyourterms.ca  416-230-2703705-798-0062