Monthly Archives: December 2015

Peer Pressure Investing

Aman Raina

By Aman Raina, Sage Investors

Special to the Financial Independence Hub

When I first started learning about investing in university, my training revolved solely around the mechanical side, specifically learning and understanding formulas and financial ratios like Return on Invested Capital, Cost of Capital, and Economic Profit.

I learned to leverage theories like Discounted Cash Flow Analysis and learned to interpret financial statements.  In most of my career, I have continued to lean on these theories and concepts to frame and make investment decisions. I paid very little attention to the behaviorial side of investing which I’ve learned over the years can be just as important.


In Richard Thaler’s book, Misbehaving: The Making of Behaviorial Economics, Thaler discusses this whole notion of how investment decisions are driven more so by peer pressure than by analysis of technical indicators.

Thaler’s anchor point is economist John Maynard Keynes. Thaler felt that Keynes was particularly insightful on this front. He thought emotions or what he called “animal spirits” played an important role in individual decision making including investment decisions

Keynes likened picking stocks to a picking out the prettiest faces from a set of photographs. Keynes observed that the winning photo was the photo that most nearly corresponded with the average preferences of the competitors as a whole. Thus people did not just pick the prettiest face they thought but also the face people thinks other people will think is pretty. It really isn’t a decision about picking the prettiest face then. Keynes believed that people try to anticipate what average opinion thinks the average opinion to be.

Bringing this back to investing, investors — whether value oriented or growth oriented — are trying to buy stocks that will go up in value. The processes may be different but at its purest form investors of all stripes will try to buy stocks they think other investors will later decide should be worth more. And these other investors will make their own investment decisions based on other‘s future valuations.

This is fine … as long as the other people eventually come around to your thinking and bid up your stocks or in the Keynes analogy, pick your photo. The big challenge for investors is then how long are you willing to wait for that to happen because according to Keynes, “in the long run we are all dead.”

When we make an investment decision we are ultimately trying to make an educated guess. To frame that educated guess we rely on measurement and analysis. If we leverage Keynes’ thinking, we also need to get a sense of the mindset or psychology of other investors (i.e. the market) and try to rationally evaluate what they are thinking and how we expect them to behave.

In other words, we need to also understand the mood and behaviour of other investors can help us determine when and if they make will make certain decisions that will ultimately feed into our investment decisions. Keynes’ analogy of picking the prettiest face has tinges of populism and peer pressure. It also complements one of the core cognitive biases that challenge us every day which is Groupthink and Herd Behaviour Biases. In my next post, I will dig deeper into Thaler’s take on herd behaviour and how it plays into the concept of mean reversion.

Aman Raina, MBA is an Investment Coach and founder of Sage Investors, an independent practice specializing in investment coaching and portfolio analysis services. This blog was originally published on his web site and is reproduced  here with permission. 

Are you ready for tax season?

Caroline head shot
Caroline Battista

By Caroline Battista, H&R Block

Special to the Financial Independence Hub

With the start of the New Year, it’s good to take a few moments to prepare for tax season and ensure you are not leaving money on the table. It doesn’t need to be as stressful as many may think – planning goes a long way. Ask yourself a few simple questions that will help you get ready and ensure that 2016 is your best tax season yet:

Are you organized?

Keep all potential tax paperwork in one place so you can easily find it. If you are missing a receipt, request a duplicate now:  don’t wait until April to start finding things. If you moved this year, then now is a good time to notify your bank and past employers so tax documents arrive at the right address. Continue Reading…

Sensible Investing TV Video: How to win the Loser’s Game, Part 4

Fama 2The fourth video instalment of  How to Win the Loser’s Game has been posted at SensibleInvesting.TV and is now housed at Findependence.TV.

This series is essentially a primer on Efficient Market Theory and passive “indexing” investing, whether implemented through index mutual funds or exchange-traded funds (ETFs). The title of the series is derived from Charles Ellis’s classic book on indexing: Winning the Loser’s Game.

The gist of this fourth video is that In order for a transaction to occur, a buyer and seller must agree on a price.   The transaction will be completed if the buyer and the seller reach an equilibrium, that is to say that they both perceive that they are getting value from the deal. Continue Reading…

The new rules on trusts in 2016

Ermos Erotocritou

By Ermos Erotocritou

Special to the Financial Independence Hub 


Legislation has recently been passed that will eliminate the graduated tax rates currently available for testamentary trusts as of January 1, 2016. No grandfathering for existing structures is proposed.

Therefore, for the most part, the income taxed within a testamentary trust will all be taxed at the highest marginal rate. There will be two exceptions to this:

  • First, graduated rates will apply for the first 36 months of an estate, where the estate is a Graduated Rate Estate (“GRE”).
  • Second, graduated rates will continue to be available in respect of Qualified Disability Trusts (“QDTs”).

Consider Triggering Capital Gains in 2015 to take advantage of Graduated Rates

Where the testator is deceased and the trust is already in existence, consider triggering capital gains in 2015 while the graduated rates are still in effect. Testamentary trusts that do not already have a calendar year taxation year will have a deemed taxation year-end on December 31, 2015. If the trust has an off-calendar year-end, then it is possible that it may have two year-ends in 2015.

For example, an existing testamentary trust could have a regular year-end on October 31, 2015 and a deemed year-end at December 31, 2015. This means that two trust returns will be filed in short succession. The trust will not have the ability to use graduated rates commencing with the year that ends on December 31, 2016. It may be worthwhile for the client to trigger unrealized capital gains at various times during the year in order to take advantage of the graduated rates of tax, in some cases in two different tax periods.

What About 2016?

If the sole reason for the trust was tax-motivated, then it may be worthwhile to wind up the trust after 2015, if the terms of the trust allow for that (the trust should be reviewed by a legal advisor to confirm whether or not it is possible to wind up the trust). However, in many cases there will be other reasons to keep the trust. For example:

  • Trust is being used for control – Was the trust established to maintain control? (e.g. young or financially irresponsible beneficiaries, second marriage, etc.);
  • Trust allows for distributions to lower income beneficiaries – Do the terms of the trust allow the funds to be paid out to lower income beneficiaries to access their lower tax rates? If so, consider keeping the trust in place. It is possible that testamentary trusts may still provide tax benefits where the beneficiaries are in lower tax brackets, as in many cases the income may be paid out to or used to assist the beneficiaries and therefore taxed on their individual tax return.


Assume a client’s adult daughter is incurring ongoing expenses for her own children. If a discretionary trust has been established for the benefit of the daughter and her children, it can still create a significant tax savings opportunity for the daughter. The trustee or trustees can direct that the income from the trust be used to pay for a wide range of expenses that benefit the daughter’s children (private school tuition, music lessons, sports registration fees, post-secondary education, etc.), allowing the trust income to be taxed in the hands of the beneficiaries. It is only where all the potential beneficiaries are in high tax brackets themselves that the income splitting advantages may no longer be available.

  • Trust is necessary to protect the beneficiary from creditors or preserve social assistance – in some cases parents will establish a trust for a disabled person in order to maintain their eligibility for social assistance, or will be established for a child with creditor issues in order to avoid having the assets being seized.
  • Trust will be used to reduce probate on the death of a beneficiary in common-law jurisdictions – When the testator of the existing trust died, probate fees applied on the assets that flowed into the trust. If and when any of the beneficiaries of the trust die, then unless the terms of the trust specify that the trust assets are paid to the dead beneficiary’s estate, the trust assets will avoid probate upon that beneficiary’s death. Whereas if the trust is wound up and assets distributed to each beneficiary, when each beneficiary dies, probate will likely be payable. This may be of particular interest with respect to trusts where the life interest beneficiary is elderly.

Review Trust Terms to see if they should be Re-drafted

Where the trust is not yet established (the client is still alive), your legal advisor should review your will to make sure it is flexible enough to allow any testamentary trusts to be wound up at a reasonable time (i.e. perhaps not when beneficiaries are minors). Once clients lose capacity, it will be too late to change the terms of the trust.

Changes for certain “Life interest trusts”

The legislation also impacts the taxation of spousal or common-law partner trusts, alter ego trusts, and joint spousal or common-law partner trusts.

On the death of the life interest beneficiary (or on the second death in the case of a joint spousal or common-law partner trust), the trust will have a deemed year end at the end of the day of death and all income incurred in the trust for the shortened year (including any capital gains realized on the deemed disposition) is deemed payable in the year to the deceased life interest beneficiary. The result is that the capital gains on the deemed disposition is included in the deceased life interest beneficiary’s terminal year return, not the trust’s return. This may cause unintended consequences.


Mike and Carol are in a second marriage. Mike has established a spousal trust, with his spouse Carol being the primary beneficiary, and Mike’s children from his previous relationship being the contingent beneficiaries. Carol has children of her own who will inherit her estate. Upon Mike’s death, the spousal trust is established. Upon Carol’s death, any unrealized capital gains in the trust are triggered, but instead of the tax liability being assessed to the trust, it is assessed to the estate of Carol.

Mike may want to include a clause in his trust indicating that it will be the trust that is liable for the tax liability, not the estate of Carol. Mike and Carol should speak with their advisors about the implications of doing this, as it may result in Carol’s estate no longer being a graduated rate estate.

Anyone who still has the capacity to change their documents should be urged to review their documentation with a legal advisor to confirm whether or not any changes should be made in light of the new legislation.

Ermos Erotocritou is a Regional Director with Investors Group Financial Services Inc.

 Disclaimer: This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Ermos Erotocritou is solely responsible for its content.   For more information, please contact an Investors Group Consultant. Insurance products and services distributed through I.G. Insurance Services Inc.


Mission 2016: Discover your Retirement number

Adrian Mastracci

By Adrian Mastracci, KCM Wealth Management

Special to the Financial Independence Hub

“My 2016 leadoff sage advice to investors.”

I recommend turning over a new money leaf for 2016, the earlier the better.

If you have but one mission on your plate, make it the discovery of your “retirement number.”

That retirement number is the estimate of how much capital is required to realize your retirement goals: no doubt, the most important calculation for the vast majority of investors.

However, very few investors have anything that resembles it.
Occasionally, I see one that is woefully out of date.

Put aside your preoccupations with performance and picking best investments.
Rather, focus on what you have to do to achieve your goals.

Three major phases of life

Say your life span is near 100 years.
Now loosely divide up your century this way:

  • Up to age 30 – pursue your education.
  • Age 30 to 65 – accumulate your retirement nest egg.
  • Age 65 to 100 – spend it, enjoy it and, perhaps, pass it on.

2016 presents an opportune time to zoom in on your retirement’s big picture.
The critical key is to ballpark the family’s retirement needs. Continue Reading…