Posted by The first few years in 2020 were a roller coaster ride of high high’s and low low’s. Despite the economic naysayers and the tepid macro data, I’m approaching 2024 with cautious optimism. Yes, it’s an oxymoron, but I think the macro environment will level out and be more moderate compared to the past few years. As such, I am optimistic on both macro and personal outlooks.
Macro Outlook: cautious optimism with interest rate decreases
In Canada, the interest rate hikes stopped in summer 2023. But the central bank has yet to decrease rates. The Bank of Canada continues to be stern in its remarks that it will raise interest rates if needed.
Inflation has decreased to a more normal ~3%. If we exclude shelter and/or mortgage costs, inflation is already at or below the Bank’s 2% target. I suspect the Bank is saying it could raise rates to manage expectations. Back in 2021, we all saw what an optimistic statement of holding rates caused in the housing and stock markets. I doubt the Bank wants runaway optimism to happen again.
Aside from interest rates, the underlying macro data isn’t fabulous. While Canadian GDP growth per capita is negative. We are shrinking as a country, and that is not good news compared to the rest of the world.
So I expect the Bank will moderate interest rate decreases in 2024, likely in the 25-50bps range.
This is also why I’m cautiously optimistic about the year: if the Bank does nothing, it will be a rough roller coaster ride down. And I don’t think the Bank would allow that to happen. So they will be forced to lower rates to help moderate the economy.
Personal Outlook: continue saving during paternity leave
As I return back to full-time work in February, Mr. LJ will be taking a 6 month paternity leave. It is much longer than expected, because daycare spots are unavailable any time earlier.
After becoming a parent, I can see all the hurdles that working parents have. Even if you had money, you couldn’t buy your way into an earlier daycare spot. We were on dozens of daycare waitlists and only received 2 callbacks: one from an unlicensed home daycare and another from our current daycare.
For reference, Baby LJ was born February 2023. We registered with the daycare March 2023. The earliest spot they could give us was July 2024. So that’s why Mr. LJ needs to take an extended paternity leave.
The good thing is that Mr. LJ’s employer offers 3 month full salary paternity leave benefit! So he’ll only have to be on employment insurance for 3 months. Not as bad as my maternity leave that had us on EI for 9 months!
So we should be able to save more money in 2024 compared to 2023.
Asset Allocation
We will continue maintaining our asset allocation at 100% equities. We haven’t deviated from this target in many years, as we are still decades away from retirement.
From a country allocation, we will be making slight adjustments. The adjustment isn’t due to any change in our risk profile or investment objective. But rather it’s due to the all-in-one diversified ETFs that we invest in.
We primarily invest in VEQT and XEQT, the 100% equities globally diversified ETF product from Vanguard and iShares. As more of our portfolio are in these two products, it naturally changes our target allocation towards the underlying allocations of these ETFs.
My portfolio has some legacy single company stocks, which I will continue to hold. Mr. LJ’s portfolio only comprises of VEQT and XEQT. As such, we will update the target allocation to closer reflect these two ETFs.
| Allocation | VEQT | XEQT | 2023 Target | 2024 Target |
|---|---|---|---|---|
| Cash | 0% | 0% | 0% | 0% |
| Bonds | 0% | 0% | 0% | 0% |
| Canadian Equities | 30% | 24% | 26% | 27% |
| US Equities | 44% | 45% | 42% | 44% |
| International Equities | 26% | 31% | 32% | 29% |
| Total | 100% | 100% | 100% | 100% |
The 2024 targets are reflective of an average of VEQT and XEQT. Despite the fact that they are very similar, we invest in both. The reason is due to the non-ETF investments we hold: legacy investments, both of our company share programs and limited investment choice in our pension plans. These other investments skew heavily towards Canada and US equities. So we invest in VEQT and XEQT in different proportions to get our total portfolio to the target country allocation.
2024 Financial Goals
Our 2024 goals looks a lot like our 2022 goals. It isn’t surprising, as our income levels will return closer to that of 2022. This is allowing us to save money again, instead of just spending down our savings during maternity leave in 2023.
Our 2024 goals in priority sequence:
- Max contributions on company plan top-ups: such as pension plan matching and employee stock purchase plans.
- Max out Ms. LJ RRSP: by returning to work full-time, it makes sense to max out the RRSP contribution room that has accumulated from 2023.
- Max out both TFSA: both accounts now have the 2024 limit of $7,000 so we will max out both accounts’ new room. Mr. LJ’s TFSA is holding a significant portion of our emergency fund in a cash ETF. I want to save enough in a HISA to “release” all of the TFSA cash to be invested in VEQT/XEQT. I think we can aim to save 50% of that amount in an HISA.
- Adjust payments on our variable mortgage to maintain <20 year amortization: given I don’t expect any additional rate increases, we might be able to make additional payments against the principal as interest rates drop. Since we’re already used to making such high mortgage payments, why not continue? But if rates increase further, we will add additional payments to keep to our target amortization.
- Contribute $2,500 to Baby LJ RESP to maximize CESG matching: as we receive cash gifts from friends and family for the baby, we will continue contributing to Baby LJ’s RESP.
We are back on a savings path. Macro economic climate seems to be moderating, with some bumpy signals. That is why I am approaching 2024 with cautious optimism.