58. Your Questions Answered - November 2022
Your Questions Answered - November 2022
Thank you for all of your questions! In this podcast I cover off a few recent ones:
1. Is now a good time to buy GICs?
2. Did I buy the wrong investments?
3. Should I sell and wait for the dust to settle?
4. What's happening with credit card fees?
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Transcript:
Hello and welcome back to the Canadian Money Roadmap Podcast. I'm your host Evan Neufeld.
Today we are doing a quick question and answer podcast. I get a number of questions by email and from my clients as well. So I'm going to cover off some things about GICs, this current market environment and what's going on with these credit card charges here in Canada.
Okay, let's get right into some of the questions here. A number of people have asked these things, so I don't always have a specific person to attribute them to. And if I'm not answering the question exactly how you asked, I apologize, but I'm trying to cover off the topic as in a relevant way as much as possible.
So let's take a look at the first question here regarding GICs. Is now a good time to buy GICs? Good question. Let's talk about GICs for a second. So what is a GIC? It's a guaranteed investment certificate. This is something that you typically buy through your bank or credit union and it provides a set amount of interest, again, interest is a specific payment. It's not investment growth, it is literally cash. So a GIC pays you interest and it's a set amount for a set period of time. So most GICs will be available in different time increments. So in some cases as short as a few months, and as long as many years, generally up to five years is pretty common. But just talking about a one year GIC, the way that it works is that you provide your money to the bank, credit union or the financial institution, for in this example, just one year. And in exchange for that, they will pay you a set amount of interest. And the reason that this question is coming up right now is that current rates, some of them are right around four and a half percent, which for a guaranteed rate of return is pretty good.
The reason we've never really talked about GICs in the past and why I've never really recommended them to clients is that they've never had a meaningful amount of interest to reasonably consider, especially for the cost of locking up your money for that period of time. But now if you look at a rate closer to 4.5%, That is pretty appealing, so I can understand why someone would be asking this question.
So, is now a good time to buy GICs? Well, of course the best answer is always, it's complicated and it depends. So let's think about it a certain way here. if a GIC, again, that's a guaranteed investment certificate. If a guarantee is something close to a risk free rate, meaning you don't have to take a lot of risk with it. There are certain types of risk and we're not going to get into that necessarily. The main one is that you can't get your money out until the end of the contract. But if it represents a risk free rate, we also have to assume that risk and expected returns are linked. That is just one of the fundamental ideas when it comes to investing. So again, if you're not taking any risk, the idea that this is going to be the best or the most optimal return option isn't likely in my mind. Okay, so assuming that the risk and expected returns are linked, and if you're not taking any risk with a GIC, is this really the best option for maximizing your returns. Maybe in the short term, but over the long term the answer is no. So if your goal is security instead of investment maximization, then yes, this is one of the best times in recent memory to have a GIC. However, if you're selling stocks or bonds at this point, it's probably not a great strategy because stocks and bonds both being down this year and both represent risk. Again, that's why they're down this year. If we look forward, expected returns are actually quite a bit higher for both stocks and bonds at this point. And so even though it's not a straight line and it's not guaranteed, we would expect the returns for both of those riskier assets to be better than a GIC.
If you have employment income and you're a really conservative investor and you won't be selling your stock and bond portfolio, GICs aren't the worst idea by any means. Getting a guarantee of four, four and a half percent, it's pretty good. But if you would be selling some of your stocks and bonds to do so, I cannot wholeheartedly recommend that at this point. That doesn't mean that I think that the market won't go down anymore, it's just that we have to base our decisions on expected returns going forward. Last thing with GICs is remember that they're typically locked in for that duration of the contract. And so liquidity or the ability to turn that money back into cash that you can spend, is one of the main risks with the GIC. So if you're buying a five year GIC, remember that money is stuck where it is for five years. Yes, it's earning a guaranteed return, however you can't access it to spend during that period of time.
Okay, let's talk about the market and jump to the next question here. “My portfolio was down, did I buy the wrong investments?”. This is always a loaded question, of course. I would lead off by saying perhaps you might have actually bought the wrong investments. If you're buying individual stocks based on what was interesting and fun and did really well during 2020 and 2021, think of tech stocks, Zoom, Peloton, Tesla. You bought those individual stocks based on that recent performance or crypto? I don't want to talk about crypto here. But the volatility that you've experienced is likely higher than the stock market in general, and you don't necessarily have an expected return that's higher than the market because it's very difficult to assign expected returns from individual stocks just because there are so many risks present for any one business. It could be anything from the CEO leaving or a scandal or supply chain issues affecting only that business, bad marketing campaign, PR issues, any of these number of things. So to say that expected returns for one company are going to be X, it just isn't a reliable metric to look at. However, once those individual risks are diversified away, meaning by owning a bunch of different companies, you can get rid of the risk associated with one company by owning many different stocks. Usually that's done through ETFs or mutual funds. That's the easiest way to do it. But at that point, it can be easier to address whether there's an expected future return or not.
So back to the original question here, did I buy the wrong investments? Well, the idea is that you need to address first is that you need to know what you own. Do you own a diversified portfolio and it's currently down? Well, unfortunately, you're among friends. This is one of the worst years ever for a typical 60/40, that's 60% stocks and 40% bonds balanced portfolio. Because both stocks and bonds are down this year, that doesn't happen very often. I have another podcast that has addressed the reasons why some of those things are happening. But if you're in this camp and you do have a diversified portfolio that matches your risk tolerance, I would say that no, you didn't buy the wrong investments. This has just been a really hard year to stomach for investors. But if you were buying individual stocks, you're trading, you're trying to learn options, you're buying crypto, all these different things. Yeah, I can sit here and say you might have bought the wrong investments and that might be a really difficult way to come back.
So, next question here, along the same lines. “Should I sell now and wait for the dust to settle before getting back into the market?” No, I don't recommend that because by selling when you're down, you're turning a hypothetical loss into a permanent one. So when you invest in stocks or ETFs or mutual funds, what you're really doing is you're buying a stake in a business or in the case of ETFs and mutual funds, hundreds or even thousands of businesses. The price of that ownership will change over time, but you still own the same units while you own them. Think of it like real estate for a second. So if you own 10 rental properties and the price of real estate went down, you wouldn't rush to sell them and then buy them back once the prices are higher. It's crazy when you think of it like properties, like that. No one would ever do that, it's irrational. However, for whatever reason, when it comes to investing in the stock market, lots of people think that way. And now let's go back to the question here for the idea of the dust settling. That concept is always interesting to me because for most people, what they would want to see in terms of the dust settling is the market turning positive for an extended period of time so they can feel good again. Markets goes in waves. Any given day could be up or down, but it does trend a little bit over time, and so buying into an uptrend feels really good. But what's really happening here is that you're missing out on the returns you invested for in the first place. Again, back to that first question. If risk and investment return are linked, just because something is down now, especially if your diversified portfolio is down and then you sell it while it's down, and then you wait for it to come back around, you are missing out on that gap, that bit of return, which is really, really important. And this is the return that you invested for in the first place. You cannot reliably avoid risk and only get high returns. I will say that again, you cannot reliably avoid risk and only get high returns. If you want high returns, these periods of decline are the risk part that come along with it. It's the price of admission. So when you invest in the market, the market turns very quickly and by missing even a few days, by waiting for the dust to settle, you'll miss out on critical returns that are associated with that investment. History has shown us that the people that sell near the bottom never get back in.
I don't care what subscription newsletters you follow or how much CNBC you watch, or the Globe and mail or anything like that. They are going to push out as many negative ideas as possible, and as many billionaires or hedge fund managers to say that this isn't the bottom, you got to get out. They will also never tell you when to get back in because no one knows. No one knows. No one knows when the bottom will be, and no one knows when the market will trend upwards again. Anyone that tries to tell you otherwise can be ignored. It's impossible. If there are people that could reliably predict the future, they would be far richer than you could possibly imagine, and they would have no need to go on these news shows and tell you about how great their ideas are.
So selling after risk has happened and buying again once the price has gone up. That is a fantastic way to lose money consistently. If that's your goal, great idea. But when things are down and again, you have a diversified portfolio that has a reasonable expected future rate of return. You have to hold on. Panicking at the bottom is the best way to lose money. So should you sell now and wait for the dust to settle before reinvesting again? No, you should not. You should hold on. It doesn't feel good and it feels foolish to just sit on your hands and wait, but it's probably the best thing that you could possibly do.
Okay. Let's go to the last question here. “What's the deal with credit card charges?” This one I can give credit to Jeremy B who sent me an email about this one. In his email he says, “Just thought I'd reach out to you for your thoughts on the new credit card use charge being implemented. I'm sure people are anxious about it and eager to understand how it will affect their personal finances.”
Yes. Okay, so if you haven't seen the news here recently, there's been a change here in Canada for businesses to have the ability to pass on credit card charges to their consumer. So let's backtrack here a little. When you use a credit card, it costs the merchant, so that's the store, the business, the service provider; it costs them money to process that transaction. That's called an interchange fee. And that gets paid to Visa, MasterCard, American Express. And so this change that happened recently as part of a class action lawsuit, and I'm not familiar with everything that was involved with that, but in the past, Companies weren't able to explicitly pass along that interchange fee, which is a percentage of the total transaction. They weren't able to explicitly pass that onto the consumer, and so they had to take that into account and it ate into their profits. So now what they can do is actually charge it explicitly to you. And add it to your total, kind of like an extra tax. So like when you see it on your receipt, there's a, GST or PST or HST depending on which province you live in after the fact, this could theoretically be added to your transaction.
So here are my thoughts. What is a business, a business exists to provide goods and services and to make a profit. Fair enough? And in most industries, businesses set their own prices based on the cost of inputs, cost of operations, and cost of delivery of the product. So they set their price a little bit higher than that so they can make a profit. Seems reasonable. Credit card interchange fees are not new. They are a feature of the industry and it's a way that credit card companies make profits, and it's a way to facilitate payments, and so there's a cost associated with that. Again, that is a feature, not something new or nefarious in my mind.
So if the average business has been impacted by these credit card charges negatively, Simple economics says that they have already adjusted their prices to account for this because it is a cost of doing business. So even though it isn't explicitly shown in your receipt, as a result, I do not believe that this will meaningfully impact consumers on aggregate because if you can adjust your prices based on whatever costs you have or whatever profit you want to make, credit card interchange fees are a cost that has already been considered for decades. So I don't necessarily anticipate the average business will start doing this because it'll create additional competition between those businesses, meaning between those that do charge the fee explicitly to the consumer and those that don't. Not charging the fee could be seen as a competitive advantage. But keep in mind, those that quote don't charge it, might have higher prices in the first place because again, another basic economic concept here is that there's no free lunch. The places where this fee is likely to show up. I'm going to speculate here a little bit likely in industries where there's little consumer choice in the first place and where prices are a little bit less competitive. So I think cell phone providers or internet providers or even highly regulated industries like alcohol.
You never know, it could come everywhere. But I don't anticipate that necessarily happening. However, if these charges become widespread, the best way to avoid it is by using your debit card. So using the money that you already have, will be able to avoid those because debit goes through a different system called Interact and does not have interchange fees. So because it's more affordable for the merchant, it'll be cheaper for you if this is the case. Now, another little wrinkle here that I'm not sure how the implementation is going to work for this, and I'm not sure anybody does, to be honest at this point. But interchange fees are different based on the card and the provider that you use. So think about this for a second. If you have a card that that provides a really high level of benefits and perks and travel insurance and all these different things, who do you think pays for that? Could be a number of things, but largely it's the interchange fees and the business that you're buying stuff from. They indirectly pay for that. So the fee that they pay to Visa, MasterCard, American Express, is going to be higher if you have a fancier card with more perks. So if you have a more basic card, your fee might actually be lower. Because the interchange fee for your card is lower. So I don't know if businesses will be able to determine that in real time or if they will just set an average or things like that. But anyways, that might be a wrinkle to take a look at. But as far as specifics go, I believe that the most that you can be charged for this will be 2.4%. So that doesn't sound like a lot, but that is pretty significant if you're making a large purchase and it is something to be aware of. So just keep an eye out on your receipts. When you go shopping, and especially when you make big purchases, you might start seeing this. If you do see it, I haven't seen it yet, but if you do start seeing it, let me know what your experience is and what type of business it is. I'm just curious to see how this will end up rolling out. In reality, if you like episodes like this or if you have questions, I'd like to do another Q and A type podcast. But thank you to Jeremy and for those of you who had asked some of those other questions as well. Feel free to send me an email at hello@evanneufeld.com and I'll be sure to get your questions onto another episode in the future. But thanks again for listening and if you enjoy this episode, feel free to hit follow or subscribe or whatever the language is on the podcast player of your choice. We'll see you again in a couple weeks.
Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal, and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and Registered Investment Fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.