Monthly Archives: September 2017

The hardest thing about being a stock investor

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Stock market investors face a difficult challenge. While long-term stock market returns are quite attractive, in the short-term returns can be quite volatile.

This volatility can be difficult to stomach at times, especially when accompanied by worrying news flow.

Adding to the angst for Canadian investors can be the volatility of the Canadian dollar, yet it makes sense for Canadians to diversify globally.  It is important from time to time to review the historical evidence to help us manage our behaviour and stick with our investment plans.  Let’s review some of the long-term evidence:

Evidence*

“Long-term stock markets returns are quite attractive”

  • The average annual return of the S&P/TSX Composite index of Canadian stocks over the 60 years between 1957 and 2016 is 9.1%
  • The average annual return of the S&P500 index of large cap US stocks over the 91 years between 1926 and 2016 is 10%
  • The average annual return of the MSCI EAFE index of developed market stocks outside North America over the 47 years between 1970 and 2016 is 9.1%
  • Exposure to small-company stocks and low-valuation stocks has led to higher performance levels than that of market capitalization weighted indices over long periods of time

“In the short-term returns can be quite volatile”

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Liberal tax policy: a question for Canadian voters

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The second PM Trudeau

By Trevor Parry

Special to the Financial Independence Hub

Prime Minister Justin Trudeau, in his dogged defense of what are the most fundamental tax proposals made since the report of the Carter Commission (which gave us our modern Income Tax system) claimed last Thursday that it is wrong that someone earning $50,000 a year as salary pays more in tax than someone earning $300,000 in their corporation.

Many tax professionals have dissected this ridiculous statement and could in considerable detail discuss where Mr. Trudeau was in error.  In simple terms Mr. Trudeau would have you believe that the corporate shareholder lives in a different world where they are not affected by personal taxation.

According to the Ernst & Young tax Calculator an Ontario resident earning $50,000 would pay just under 30% on their income or $8,311 in taxation. The Ernst & Young Tax Calculator can’t factor in the value of a company or government funded health benefits program or pension plan.

If we turn to the corporate tax result, an active business earning $300,000 of profit in Ontario would be subject to taxation at 15%.  We don’t need a sophisticated tax calculator to determine that this equates to $45,000.  One should be baffled.

Corporate income also attracts personal taxation

Mr. Trudeau also is comparing apples and oranges.  Does the entrepreneur who owns the business pay themselves anything? Regardless of whether they take income as salary or dividends it will attract personal taxation.   Let’s say that they took a salary of $50,000, the same as Mr. Trudeau’s downtrodden employee.  They would also have paid $8,311 in tax.

They might have had to pay themselves considerably more in order to afford an RRSP contribution, as it is highly unlikely they have a pension plan in place.  If they decided to invest that $300,000 in their corporation any income or growth on that asset would be taxed almost at the same rate as an individual and when they withdraw the money as a dividend they would pay tax at the rate of 45.3%.

Perhaps the shareholder is as malevolent as Mr. Trudeau and “Red” Billy Morneau believe and they are deducting all of their lifestyle costs, including mortgage, food, transportation, vacations, toothpaste, etc. as a corporate expense.  They would be guilty of tax evasion and the Criminal Code has provisions for dealing with that.

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Two notable books to guide your ‘Retirement’ journey

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“Books are the bees which carry the quickening pollen from one to another mind.” — James Russell Lowell, poet and author

This week I highlight one of my best recommendations for Retirement. Invest in self-education with some quality reading. The critical factor is how to select just a couple of books.

Investors have a thirst for knowledge about their precious retirement journey. They seek detailed information to assist in navigating the capital accumulation process to achieve retirement. Then comes the desire of making that capital outlast the spending phase.

Walk into any well-stocked bookstore and the retirement section will seem like a maze. There are plenty of titles competing to become permanent occupants of your precious bookshelf space.

My two book selections provide insight and understanding into the design and management of the retirement nest egg. The authors are well known. The books complement one another.

The emphasis is understanding long-term principles, policies and best practices that steer the family’s retirement goals from dreams to realities. Getting fully acquainted with these two books helps craft better decisions about retirement. Something for everyone’s retirement toolbox.

Photo: Kia Meiklejohn

Falling Short: The Coming Retirement Crisis and What To Do About It, by Charles D. Ellis, Alicia H. Munnel, and Andrew D. Eschtruth

This century has clearly shown that we are living longer, health costs are rising and employer pensions are diminishing. That is the big picture applicable to retirees in the USA. However, similar arguments also exist for the Canadian retirement landscape.

The good news is that what is seemingly a dire retirement situation can be easily rectified by implementing a few coordinated steps. This book makes you appreciate the scope of that big picture. Working a little longer, saving a bit more, judicious use of government benefits and being smart about portfolio draws are some of the key answers that deliver.

The message for every retiree is that a successful retirement is about being empowered to look after the personal situation. At age 60, it is not unusual for retirement to last into the 90’s for at least one spouse.

Yes, long term retirement that spans decades is expensive. Sensible and methodical decision making is sound advice for all ages. It renders the scope of the big picture into realistic solutions.

Retired Money: Cashing RRSP to pay off debt is a poor strategy

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Should you cash in your RRSP to pay off debt? While some prospective retirees may be tempted to do so, this is one of a score of damaging financial myths, according to insolvency trustee and author Doug Hoyes.

I mention this in my latest MoneySense Retired Money column, which has just been published. You can retrieve it by clicking on the highlighted headline here: The wrong way to pay off Debt.

As I say in the article, Cashing in your RRSP to pay off debt is Myth #9 of 22 common financial misconceptions outlined in Hoyes’ new book, Straight Talk on Your Money (cover shown adjacent: we share a common publisher.)

Hoyes is particularly concerned about senior debt in Canada and how these myths can affect their retirement. Myth #10 often afflicts retired seniors: that Payday Loans are a Short-term Fix for a Temporary Problem.

Seniors racking up debt faster than other age groups

Earlier this week in the Financial Post, columnist Garry Marr reported that Seniors in Canada are racking up debt faster than the rest of the population. Over the past year, senior debt grew by 4.3%, according to a survey published Tuesday by Atlanta-based Equifax Inc. Continue Reading…

Debt Ceiling to rise: “Clark … Could you maybe spare a little extra cash?”

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By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

I’ve written a couple of posts about the debt ceiling debate over the last few weeks, but let’s move past that topic and assume the U.S. government will be able to resume its borrowing needs in full, come the fourth quarter. (Editor’s Note: On Thursday, President Trump struck a deal with Democrat leaders to raise the debt limit and finance the Government until mid-December.)

What will investors find when Treasury has the ability to come to market with its full arsenal of t-bill and coupon issuances? The latest press briefing from the nation’s debt managers reminded me of the scene from the movie National Lampoon’s Vacation when Cousin Eddie asks Clark, “Could you maybe spare a little extra cash?”

The Details

For the period of July through September, Treasury estimates it will borrow $96 billion in net marketable debt, but its financing requirement will then ramp up to a hefty $501 billion in the fourth quarter. Remember, the calendar’s fourth quarter is actually the first quarter of fiscal year (FY) 2018. To put the fourth quarter number into perspective, the figure would be more than the projected $426 billion for all of FY 2017 combined, underscoring the added burden for the upcoming quarter.

The “Whys”

What’s causing such a huge increase in the government’s borrowing needs? First, the underlying budget deficit will need to be addressed. For the record, thus far in FY 2017, the red ink total has come in at -$523 billion through June, leaving one-quarter of the current fiscal year still remaining. For FY 2018, the Office of Management and Budget is projecting the deficit to come in at -$589 billion, up $149 billion from the prior estimate. Second on the list is Treasury’s goal to lift its quarter-end cash balance back to a more “normal” level of $360 billion for the end of December.

The debt managers foresee their September quarter-end balance dropping down to a low of $60 billion, compared to $353 billion a year ago. This drawdown reflects outlays that will be needed as a result of the stagnant debt ceiling. Along those lines, Treasury stated that it “expects to be able to fund the government through the end of September.”

The Final Piece

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