Of all the registered accounts, the still relatively new FHSA might be the trickiest to manage.
First-home savings accounts are an excellent way to save a down payment for a first home because they offer a tax deduction for contributions and tax-free compounding and withdrawals. The catch with FHSAs is that they can stay open for 15 years at the most, which is less time than you’ll likely spend with tax-free savings accounts, registered retirement plans and registered education savings plans.
Someone who expects to need 10 to 15 years to get into the housing market can take an aggressive investing approach with FHSAs using mostly stocks. But as expensive as homes are today, there’s sometimes a momentum to the buying process where people end up making a purchase sooner than they expected. Now you see why FHSAs are tricky - your buying timeline is the key to setting up the investments in your account, yet it’s not always possible to foresee when you’ll be ready to plunge into the housing market.
A recent question from a reader highlights the difficulty of making smart FHSA investing choices. His 26-year-old grandson is looking to invest in a FHSA using a guaranteed investment certificate or a secure bond. Did I have any thoughts on that?
My first thought is a question: What’s the grandson’s timeline for buying? GICs can be bought with terms of one through five years for the most part, but you get the best rates when you lock in your money. If there’s a chance of buying a home before a GIC matures, use something else..
Bonds are more liquid than GICs in that you can sell at any time. But while a GIC cannot fall in price, a bond can. We saw that in 2022, when rates were rising. Rates are now falling in a way that should help push bonds higher in price, but there’s no getting around the idea that bonds are not as safe as GICs.
A compromise between GICs and bonds for people who think they might tap their FHSA within five years is an investment savings account, which is a savings product for investors that is bought and sold like a mutual fund. Returns for these accounts will decline each time the Bank of Canada lowers its overnight rate, but for now you can get 4.25 to 4.5 per cent.
Other conservative investments for an FHSA include high interest savings account exchange-traded funds, which keep money in big bank savings accounts, and T-bill or money market ETFs. These latter two types of ETFs hold assets in short-term government and corporate borrowings, which offers a high degree of safety. Yields are in the 4.6 to 4.8 per cent range now, with declines expected as the Bank of Canada lowers the overnight rate.
A home buying timeline of five to 10 years opens the door to a mix of exposures to stocks and bonds or GICs and savings products. Consider the classic balanced approach of 60 per cent stocks and 40 per cent bonds. A to 10- to 15-year timeline justifies a 70 or 80 per cent weighting in stocks, or even more for a while.
As you get within a year or two of homebuying, consider de-risking an FHSA by cranking its stock market exposure down to zero. Avoid any possibility of your home purchase coinciding with a stock market correction that slashes the value of your FHSA.
-- Rob Carrick, personal finance columnist
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The Rundown
Short sales on the TSX: What bearish investors are betting against
Larry MacDonald is back with his monthly update. This time around, he looks at the most shorted stocks, most shorted ETFs, short squeeze candidates, short selling activity by the Canada Pension Plan, sell recommendations from an independent investment-research firm, recent academic research, and stocks targeted by activist short sellers.
Office REITs are in a world of pain. But this one is worth a look
The investment case for beaten-up office real estate investment trusts took another hit this week after Slate Office REIT acknowledged that it might not make interest payments on some of its debt. For anyone already worried about the dismal environment for office real estate, Slate offered an example of just how bad things can get. But is it typical of other office REITs? David Berman says the answer is no – for now – which is why office REITs remain an alluring prospect for anyone with a steel-lined stomach. He has one recommendation in particular.
Wealthsimple is killing it as a company, but the performance of its robo-adviser portfolios does not impress
Wealthsimple is killing it lately. Money has been pouring into a growing line of financial services that includes stock trading for DIY investors, banking and, recently, mortgages. But Wealthsimple’s original robo-advice business, which it calls managed portfolios, does not impress with its investment results, reports Rob Carrick.
Canadian government policies are at least partly to blame for TSX underperformance
Many agree that the Canadian economy is being hamstrung by regulations and government red tape, as well as high taxation. Former fund manager Tom Czitron argues this has trickled down to the performance of the Canadian stock benchmark.
Wall Street seems calm. A closer look shows something else
The U.S. stock market has been remarkably steady this year, with the index only once rising or falling more than 2 per cent in a single day. A widely tracked measure of bets on more volatility to come is close to its lowest-ever level. But as The New York Times reports, a look beneath the surface reveals much greater turbulence.
Political risk aversion rubs its eyes
If greater political uncertainty necessarily begets higher financial volatility, world markets are still half asleep - but the alarm clock may be set nonetheless, says Mike Dolan of Reuters.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
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Friday’s analyst upgrades and downgrades for June 28, 2024
Thursday’s analyst upgrades and downgrades for June 27, 2024
Friday’s Insider Report: CEO invests nearly $4-million in this high-yielding REIT as it nears a 52-week low
Thursday’s Insider Report: Director invests nearly $500,000 in this Trust yielding over 10%
Monica Rizk: Bullish on Valero Energy
Bill Ackman’s Pershing Square USA to offer shares at US$50 in IPO
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Ask Globe Investor
Question: I have some cash that I want to park in a high-interest savings account with my discount broker, BMO InvestorLine. I see that there are three different Canadian dollar HISA options, with the fund codes BMT104, BMT109 and BMT114, but I don’t know what the difference is. Can you explain?
Answer: All three HISAs pay the same interest rate, which is currently 4.5 per cent. The only difference is that BMT104 is issued by Bank of Montreal, BMT109 by Bank of Montreal Mortgage Corp. and BMT114 by BMO Trust Company The advantage of having three choices is that, if you have more than $100,000 to deposit, you can spread your money across two or more HISAs so that each account remains under the $100,000 limit for coverage by the Canada Deposit Insurance Corp. That way all of your money will be insured in the unlikely event that Bank of Montreal becomes insolvent.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
The Canada Day weekend feels like a good time to address a never-ending investment question: What is the right balance in your portfolio between Canadian and foreign stocks? Tom Bradley this weekend will share his insight.
Election nerves reach fever pitch: World market themes for the week ahead
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Compiled by Globe Investor Staff
Rob Carrick