Life happens in stages. This also applies to your financial life. To get the most out of your money, it’s important to understand the various stages of your financial life cycle and how to invest optimally in each. For early career earners, now is the time to set yourself up for lifelong success.
Unless you’ve consulted a wealth advisor, you probably haven’t been exposed to financial life cycle planning. This crucial aspect of financial literacy teaches that financial planning is an ongoing process that can be tweaked and optimized at various stages of your life. The three stages of your financial life can be broken down into the following:
- Stage One: Accumulation
- Stage Two: Growth and Preservation
- Stage Three: Distribution
In the first part of our three-part series on financial life cycle planning, we explore the investment potential for new investors in Stage One. Whether you’re a student, new professional or have been working for a few years, it’s never too early to start accumulating financial assets without taking on significant risk.
Stage One: Accumulation
- Financial focus: Savings
- Savings and investment focus: Home purchase, retirement savings, emergency fund
- Accounts: RRSP, TFSA
Stage One of your financial life cycle begins when you enter the working world. Although many people land their first job as a teenager or student, the opportunity for wealth accumulation often doesn’t begin until one graduates from college or university or begins full-time work. Your income is likely relatively lower during this stage, given your limited work experience. You’ve also likely accumulated student loan debt that needs to be paid off.
Despite these roadblocks, the accumulation phase is also the first time you’ll start to invest in financial assets. The best way to do so is through a tax-advantaged account like a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). These investment strategies give your money more time to grow in a tax-deferred way. Although there are many ways to structure an RRSP or TFSA, early investors are often heavily weighted in equities because they have a longer investment horizon and can weather any risk before retirement. Equities are higher risk but also carry a higher return potential, especially during bull (rising) markets. However, too much focus on risk-on assets can leave your portfolio vulnerable to market cycles. That’s why it’s advantageous to include a conservative, fixed-income investment strategy to counterbalance your risk exposure.
Stage One is the time to build your financial foundation and learn the core competencies and discipline needed to become a successful investor. This stage requires focusing on savings and foundational investments, such as a home purchase, retirement planning and fixed-income strategies that produce predictable income. This is the best time to start portfolio diversification, dollar cost averaging and tax-free growth where possible.
Mortgage Investing: Accumulation Without Excessive Risk
For most new investors, a diversified investment portfolio includes some combination of equities and government bonds — with a greater allocation to equities. Although this strategy worked well in the past, it’s no longer sufficient to deliver a well-balanced portfolio because it excludes important inflation-hedge assets and doesn’t account for market volatility that impacts both stocks and bonds. For these reasons, investors are turning to alternative assets to improve risk-adjusted returns. In Canada, income-generating opportunities like mortgage investing have grown in popularity.
Mortgage investing was once limited to high-net-worth investors and corporations who had access to vast sums of private capital to lend to borrowers. With Canada’s private mortgage market expanding rapidly over the past two decades, mortgage investing opportunities are now available to a much wider range of investors who are looking to accumulate financial assets.
Investing in a Mortgage Investment Corporation (MIC) is the easiest way to access Canada’s lucrative mortgage market as an investor. A MIC is a pooled investment fund that invests in private mortgages on behalf of investors. It operates very much like a mutual fund or exchange-traded fund, but instead of equities and bonds, a MIC is comprised of carefully selected mortgages that generate income from interest and fees collected from borrowers. When you invest in a MIC, you become a preferred shareholder entitled to regular dividend payments from the fund. MICs enjoy several tax advantages and can be incorporated into a RRSP or TFSA — making them ideal for new investors. MIC investing also has a low barrier to entry, with minimum investments starting as low as $5,000. By comparison, accredited investors typically need a minimum of $500,000 to invest in individual mortgages.
MICs also offer many of the same benefits of real estate investing but without the risk of homeownership, title transfer, negative cash flow and liquidity constraints. The leading MIC funds have historically generated between 6% and 11% annually while providing monthly cash flow that can be withdrawn tax-free in your TFSA or reinvested for compound returns. This is accomplished through a dividend reinvestment program, or DRIP, where available. Rather than paying out cash dividends, a DRIP automatically reinvests regular dividends in additional fund units.
Historically, MIC returns have exceeded government bonds and the most competitive Guaranteed Investment Certificates (GICs).
CMI MIC Prime Mortgage Fund: Defensive Fund Providing Compound Return Potential
Mortgage investments are ideal for defensive investors who are looking to preserve and grow their portfolios steadily over time. The sooner you start, the more time you have to grow your money significantly over the years and decades.
CMI Financial Group is one of Canada’s fastest-growing non-bank financial service providers, with more than $2 billion in lifetime mortgage placements. Our industry-leading CMI MIC Funds provide investors with seamless access to Canada’s diverse and competitive mortgage market. CMI’s Prime Mortgage Fund employs the most conservative approach to mortgage investing, focusing on short-term, primarily first mortgages in stable housing markets with an average weighted maximum loan-to-value ratio of 65%. All mortgages are backed by collateralized real estate, with minimum overhead and carrying costs to pass on higher returns to investors.
The Prime Mortgage Fund targets annual returns between 6% and 7% with the objective of paying monthly dividends to shareholders. The fund’s primary objective is capital preservation while offering an attractive long-term yield. By investing with CMI, investors can choose a dividend reinvestment program, allowing them to buy additional shares at a lower cost than outside investors – and without third-party commissions. This helps new investors maximize the power of compounding early in their investment career.
While lower investment minimums are a key benefit of MIC investing (compared with a whole mortgage investment), account fees are often seen as an obstacle for smaller investors when investing in MICs in registered accounts, like RRSPs and TFSAs. Investors can limit those fees by controlling the frequency of their contributions. For example, annual or semi-annual contributions carry much smaller fees than monthly contributions. The Prime Mortgage Fund is also eligible for a Dividend Reinvestment Plan (DRIP), which gives investors the ability to reinvest their regular – typically monthly – distributions into additional shares or fractional shares of the fund without transaction fees. In this way, investors can increase their investment in the fund without having to worry about additional fees.
If you’re new to investing, CMI’s Prime Mortgage Fund can help you stay on track. Unlike stocks, your mortgage investments are not correlated with market cycles, geopolitics or monetary policy. As a long-term strategy, the Prime Mortgage Fund enables you to dollar-cost average automatically.
To learn more about CMI MIC Funds and how our Prime Mortgage Fund can work for you, contact one of our investment advisors to set up a free consultation.