Planejamento Financeiro e Alocação de Herança - RRSP, RESP, TFSA e Investimentos

1 Assignment 2 Sample Answer The inheritance of 150000 presents some excellent opportunities to help Mackenzie With an outstanding mortgage of 110000 she could pay off all the mortgage but this would be a mistake Instead the recommendation is for a more balanced approach that would allow contributions to various savings accounts with the remainder being used to save for important goals the two largest and most important being retirement and postsecondary education for the two children Briefly it involves the following financial decisions 1 Contribute 25000 to the RRSP 2 Set up and contribute 10000 to the childrens RESP 3 Set up and contribute 20000 to the TFSA 4 Set up and contribute 25000 to a cashnonregistered account 5 Pay off 70000 of the mortgage Contributions to the RRSP and the childrens RESP come first because both cover huge future expenses If they are not planned for appropriately they could really hamper the wellbeing of the family Next is the contribution to a TFSA because its a place where savings can grow taxfree And finally the contribution to the cashnonregistered account is essentially there for a rainy day or an emergency fund Investment Plan Paying off part of the mortgage doesnt require any more explanation the interest rate is 25 but the decisions around investments do The following is devoted to those decisions Overall View and Risk Analysis Currently August 25 2022 the markets are experiencing a bear market rally This occurs when stock prices go up in a bear market but there is no support for the rally Bear market rallies often reflect the wishes of the market participants and they ultimately collapse The Globe and Mail has two articles Barlow 2022 Rosenberg 2022 that both argue that we havent reached the bottom of the bear market A bear market is one where the prices of most or all stocks decline A bull market is the reverse A while ago Gordon Pape wrote an article for The Globe and Mail that described four guidelines for choosing investments for retirement savings 2020 The guidelines were longterm performance consistency fees and risk And while the guidelines were for Assignment 2 Sample Answer Page 2 of 10 retirement savings the view is that they are applicable for all longterm investments For shortterm investments the decision would be to choose debt securities Pape starts by pointing out that past results are no guarantee for future returns However past results are a guide For all investments he writes that investors should look at the past eight to ten years Mackenzie should look at a tenyear time frame Pape goes on to suggest that equities should have an annualized return of 10 percent or more balanced mutual funds or ETFs should return six percent and fixed income or debt securities should return four to five percent Because debt securities now have such low returns a balanced fund might do well at five or even four percent and debt securities would be in the two to three percent range Consistency refers to the degree of predictability for the stock price Typically Mackenzie should look to stocks that generally match the main stock market index in which the stock trades For the TSX it would be the SPTSX Composite and for the NYSE it would be the SP 500 To ensure low volatility thus consistency the beta should be 12 or less although nearer 1 or even below would be better Halverson Duncan 2020 Fees deal with how much it costs to buy or hold an investment Pape cites Questrade that claims that a 1 difference in fees will result in a 27 to 29 percent change in returns over the life of the portfolio But Pape goes onto give an example of a mutual fund that returned 10 annually over ten years but with an MER of 116 compared to an ETF that was in the same index The ETF returned 677 annually with an MER of 006 So it is important to look at the returns after MER not just the MER Finally there is risk Pape writes that retirement savings are not a place for risky investments For Mackenzie that should be the rule for all investments although there is a limited exception in the next paragraph Beyond Papes recommendations Mackenzie should choose stocks that have a PE ratio of 15 or less For equities the most conservative stock is Canadian or American bluechip stock If the right purchase is made then one can get a reasonable rate of return with an investment that is relatively safe However there could be purchases of more aggressive stocks such as Apple and Alphabet the parent company of Google The risk with purchases of commodities including gold eliminate investments in this area The amount of debt securities would depend upon the purpose of the investment Assignment 2 Sample Answer Page 3 of 10 RRSP Account RRSPs are longterm investments Mackenzie will not be retiring for 32 years assuming a retirement age of 65 Therefore the 25000 that is added will be with the purchase of The TorontoDominion Bank ticker TD shares This stock was chosen because it is a bluechip stock The TorontoDominion Bank The TorontoDominion Bank is one of the six large banks in Canada It is headquartered in Toronto It provides financial services to consumers and businesses It also provides services for wealth management and insurance For the fiscal year ending October 2021 it had a revenue of 42266 billion and a profit of 14298billion The revenue is down 235 compared to the previous year but the profit is up 2020 over the previous year The share price trends are shown in Figure 1 Figure 1 Share Price for The TorontoDominion Bank TSX Inc 2022b The figure shows an increasing share price except for the period of early 2020 The share price on September 2 2002 20 years ago was 8212 The current price is 8451 This is an 1236 increase annually assuming annual compounding Using the RATE function in Excel The current dividend yield is 4213 This provides an overall return of 1657 assuming the current dividend yield has been constant for the past 20 years Further the PE ratio is 1070 and the beta is 0903 The data for which Mackenzie Assignment 2 Sample Answer Page 4 of 10 should guide investment decisions is met return is greater than 10 beta is less than 12 and PE is less than 15 Mackenzie would buy enough shares for a total value of or just under 25000 when the stock market starts to increase TaxFree Savings Account The TFSA will have holdings that are to be used over a moderate period There is no real goal in savings other than to build up equity to cover expenses such as expensive vacations or house renovations neither of which are currently considered For this investment the choice is Microsoft Corporation ticker MSFT Microsoft Corporation Microsoft makes software that is used by both consumers and businesses While its best know product are the Windows operating system and Office productivity software it also produces important business products like Azure Exchange SharePoint and LinkedIn For the fiscal year ending June 2022 it had a revenue of 198270 billion and a profit of 72738 billion The share price trends are shown in Figure 2 Figure 2 Share Price for Microsoft Corporation TSX Inc 2022a The share price took a drop at the beginning of 2020 but recovered very quickly The share price for September 3 2002 was US2351 and is currently US26040 Assuming Assignment 2 Sample Answer Page 5 of 10 annual compounding the average annual return is 1278 over 20 years The dividend yield is 0952 giving an overall return of 1373 The PE ratio is 2710 and the beta is 0943 Two of the criteria for Mackenzie are met but the PE ratio is much higher than 15 However because it has steady growth in share price it is reasonable to pay this premium for the stock Mackenzie will buy CAN15000 worth of shares again when the stock market starts to recover Registered Educational Savings Plan The RESP is a longrange investment Like the RRSP the investment will be in equities An ETF Vanguard Growth ETF Portfolio ticker VGRO is the investment This ETF provides diversification for the small amount of investment of 10000 When the 2000 Canada Education Savings Grant is received this amount will also be used to purchase more of the same ETF Vanguard Growth ETF Portfolio The Vanguard Growth ETF Portfolio is designed to be a oneinall ETF It is made up of seven Vanguard ETFs The allocation is 80 equities and 20 debt The intention is that after the purchase of the investment the investor does not have to do anything Vanguard will rebalance the EFT so that the 8020 ratio between equities and debt is maintained There are many securities that make up this ETF and 85 of the investments are from the United States Canada Japan China and the United Kingdom The growth of VGRO is shown in Figure 3 Assignment 2 Sample Answer Page 6 of 10 Figure 3 Share Price for Vanguard Growth ETF Portfolio Morningstar Inc 2022b The figure shows that VGRO keeps pace with the indices to which it is attached The figure looks more positive than it actually is because the xaxis is not zero but 9100 Some other concerns include its short life as it was created on January 25 2018 so there is of course no tenyear history that will show how it performs Morningstar also provides additional data that supports the idea that it may be a suitable investment The data are shown in Table 1 Table 1 Vanguard Growth ETF Portfolio Returns Morningstar Inc 2022b There are two important items from this table The first is that the return over a three year period is 545 which falls below the acceptable range for balanced investments Assignment 2 Sample Answer Page 7 of 10 The stock declines over the past 12 months depressed this return and the anticipation is that it should return when the stock market recovers And the second is the quartile rank For the 3year category the fund is in the top quartile The ranking for the YTD and 1year category are not particularly meaningful given the volatility of the stock market Dividends are paid quarterly however they are called distributions The distribution yield is 210 And the MER is 024 Vanguard Investments Canada Inc 2022 Mackenzie will buy about 10000 of VGRO again when the stock market stabilizes NonRegisteredCash Investment Account The nonregisteredcash investment account is for saving money that is needed in short notice Part of this will be set aside as emergency funds And part of it will be to cover discretional purchases such as items that go on sale for which there is little advanced notice The funds need to be readily available with little fluctuation in their valuation The investment choice is the RBC 15 Year Laddered Canadian Bond ETF RLB It is provided by the Royal Bank of Canada RBC 15 Year Laddered Canadian Bond ETF The prices of the ETF RLB are shown in Figure 4 Figure 4 Share Price for RBC 15 Year Laddered Canadian Bond ETF Morningstar Inc 2022a The figure shows that RLB also keeps pace with the indices to which it is attached Like the other ETF the figure looks more positive than it is because the xaxis is 9600 Some Assignment 2 Sample Answer Page 8 of 10 other concerns include its short life as it was created in January 2016 so there is also no tenyear history that will show how it performs Morningstar also provides additional data that supports the idea that it may be a suitable investment The data are shown in Table 2 Table 3 shows the returns for this ETF Table 2 RBC 15 Year Laddered Canadian Bond ETF Morningstar Inc 2022a The returns are low but the share prices are not volatile The returns are acceptable falling in the criteria falling between two and three percent Also the 3 and 5year quartile rank puts it in the two top quartiles This year the ranking has not been as good but this is probably due to market volatility This ETF is virtually riskfree The holdings are in 120 different bonds Mackenzie will buy about 15000 when the market becomes more stable Conclusions Write your ideas about investing Items you should consider are How easy or hard was it to determine investment choices How would people without any education in investing be able to make investment choices How could people save enough money to start investing Should there be a way in which people can learn about investing so that they will be successful The Canadian pension system relies on people to save enough and make proper investment decisions If people save but make poor investment decisions they will be poor in retirement What should be done to avoid that Assignment 2 Sample Answer Page 9 of 10 Bibliography Barlow S 2022 August 24 Rule of 20 says market bottom much lower Plus Canadian energy stocks that bigtime investors are buying The Globe and Mail httpswwwtheglobeandmailcominvestinginvestmentideasarticleruleof 20saysmarketbottommuchlowerpluscanadianenergystocks HalversonDuncan E 2020 June 19 Quant Concepts Using Beta to Build Low Volatility Morningstar CA httpswwwmorningstarcacanews203337quant conceptsusingbetatobuildlowvolatilityaspx Morningstar Inc 2022a RBC 15 Year Laddered Canadian Bond ETF TSX ETF performance Morningstar httpswwwmorningstarcacareportetfperformanceaspxt0P00017C16 langenCA Morningstar Inc 2022b Vanguard Growth ETF Portfolio TSX ETF performance Morningstar httpswwwmorningstarcacareportetfperformanceaspxt0P0001CLVS langenCA Pape G 2020 February 23 There is no ideal registered retirement savings plan investment The Globe and Mail httpswwwtheglobeandmailcominvestingmarketsinsidethe marketarticlethereisnoidealregisteredretirementsavingsplaninvestment Rosenberg D 2022 August 25 The bear market rally is unravelling Heres why it may be two years until stocks truly bottom The Globe and Mail Assignment 2 Sample Answer Page 10 of 10 httpswwwtheglobeandmailcominvestingmarketsinsidethe marketarticledavidrosenbergthebearmarketrallyisunravellinghereswhy itmay TSX Inc 2022a Microsoft Corporation MSFTUS NGS Stock Price TMX Money httpsmoneytmxcomenquoteMSFTUS TSX Inc 2022b TorontoDominion Bank The TD TSX Stock Price TMX Money httpsmoneytmxcomenquoteTD Vanguard Investments Canada Inc 2022 Growth ETF Portfolio VGRO httpswwwvanguardcaeninvestorproductsproductsgroupetfsVGRO