The U.S. benchmark S&P 500 index is up 25% in 2023, and the world’s major stock markets are feeling the love, including Canada’s TSX Composite Index.
Corporate earnings are expected to grow by double digits in 2024, with guaranteed investment securities yielding more than 5%.
There are many positives for Canadians who invest for their retirement. The future is always uncertain, but with a bright start to the new year, he shares four risk-free ways to boost your portfolio’s returns in 2024.
1. Crackdown on debt
Retirement investing and household debt are often treated separately, but in reality, compound interest on debt can eat up investment returns and inhibit future compound growth.
A dramatic hike in the Bank of Canada’s benchmark interest rate of 5% in less than two years has more than doubled monthly debt payments for some Canadian households.
For many people, the best investment in 2024 is to pay off debt, starting with the highest interest rate. For example, your credit card balance may be over 25 percent. There is no comparable investment that can generate a risk-free return of 25%.
Similarly, no investment can match the interest rates on consumer or student loans. Interest rates are rising into his mid-teens.
Because only mortgage interest and other secured debt match investment returns, homeowners have the opportunity to consolidate high-interest debt into one low-interest loan.
2. Build a bond portfolio
The big silver lining from rising borrowing rates is the rise in lending rates.
After three decades of low yields, bond options such as guaranteed investment certificates (GICs) have returned more than 5% annually.
Rising bond yields present an opportunity for investors to lower overall portfolio risk without sacrificing returns by moving assets away from equity volatility.
A good strategy to get the most out of your bond portfolio is to stagger maturities over multiple terms to get the best interest rates. Having a steady income is especially reassuring for people nearing retirement who need cash for daily living expenses.
3. Take advantage of tax benefits
Some experts say a good investment tax strategy can boost returns by 25% over an investor’s lifetime. For most Canadians, this requires taking advantage of registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), and other available tax benefits.
On January 1, Canadians will be allowed to contribute an additional $7,000 to a tax-free savings account (TFSA). As it stands, the current limit for someone who was 18 years of age or older when the TFSA was launched in 2009 is $88,000, but this may vary from person to person depending on the amount withdrawn over the years. .
Gains from investing in a TFSA are never taxed when you withdraw your funds, making them a complement to your fully taxed RRSP savings. A retiree can keep taxes low by withdrawing RRSP savings at the lowest marginal interest rate and utilizing her TFSA for other needed cash.
Unlike a TFSA, RRSP contributions are income tax deductible. That means if contributions are made before the Feb. 29 deadline, you could end up with a large refund in the spring that could be contributed to your TFSA.
4. Review of investment fees
Like debt and taxes, fees also weigh on your investment portfolio. These are hard to avoid if you’re looking for professional management and diversification, but it’s always good to review your rates to ensure you’re getting the best bang for your buck.
Most Canadians invest for their retirement through mutual funds, which can charge annual fees of 2.5% or more. That means a fund would need to generate a return of more than 7.5% to give investors a 5% return.
While many mutual funds outperform the overall market after fees, most do not. Consider cheaper alternatives, such as basic market-weighted exchange-traded funds (ETFs), which have much lower fees.
At the very least, talk to your advisor about how much you’re willing to pay for what you’re getting.
