Today’s headline is borrowed from a Tweet that you’ll find later in this post. That notion is so bang on and perhaps summarizes what has been going on for a year or three, and well, forever.
The investors and portfolio managers that have been scared off by the risks have been treated to some level of underperformance, or what we’d call opportunity costs. Greater returns were available for those who stayed invested and stuck to their investment plan. The economy and stock markets have been fooling most everyone. Bears sound smart. Bulls make money.
In a Tweet (below) you’ll find the recent and very generous returns for U.S. and Canadian stocks.
Awareness is preparedness
In this blog I often shine a light on risk. Awareness is preparedness. The idea is to reinforce the basic investment truth that we have to invest within our risk tolerance level. And the fact is, most investors take on too much risk. Studies show that when we enter recessions and severe stock market corrections most investors (or too many) will end up buying high and selling low. Essentially doing the opposite of how we build investment wealth over time.
Use the awareness of risk to embrace a portfolio that aligns with your risk tolerance level so that you can stay fully invested. We don’t use risk and the discussion of risk to time the markets. The last few years have offered a pronounced demonstration that guess work does not work.
Tax time can be overwhelming, but a financial advisor can help simplify the process and ensure you’re maximizing all the credits and deductions available to you and your family. While financial planning should take place year-round, there are important considerations, strategies and dates that should be top of mind at year-end to help reduce your taxes and keep more of your hard-earned money in your pocket.
Year-End Tax Planning Checklist for Individuals
• Saving for retirement with a Retirement Savings Plan (RSP)
Most of us know making an RSP contribution is generally a sound decision if you have unused room available. Once you’ve decided to contribute settled on how much, you should then determine whether it’s best to contribute to your own plan or a spousal RSP for your spouse or common-law partner. Making a spousal contribution before the end of the year rather than waiting until the first 60 days of next year could affect who pays tax on eventual withdrawals.
Planning your retirement income
Speak with a financial advisor to discuss retirement income options, including basing your Retirement Income Fund (RIF) withdrawals on the age of your younger spouse or common-law partner. Determine if you qualify for the pension income credit, which may allow you to significantly reduce federal taxes (provincial credit amounts vary) on the first $2,000 of your pension or RIF income. If you have or will reach age 71 this year and have unused RSP contribution room, you should make your RSP contribution by December 31 or you may lose that option.
Tax-Free Savings Accounts (TFSAs)
You should always consider contributing to a TFSA to take advantage of tax-sheltered savings. The contribution limit for 2023 is $6,500 and rising to $7,000 for next year, but don’t forget about any unused contribution room that is carried forward from year to year. Gifting money to your spouse or common-law partner to make their contribution can also provide additional tax advantages. The sooner you contribute to a TFSA, the faster your investments can grow tax-free. Meanwhile, if a TFSA withdrawal is in your plans, doing so before year-end rather than early in the new year gives you back your contribution room a lot sooner.
Registered Education Savings Plans (RESPs)
Contributions to an RESP entitle you to a Canada Education Savings Grant (CESG) of up to $500 per year, or $1,000 if there is unused grant room from previous years. If you’ve accumulated even more than $1,000 of room, making an RESP contribution prior to year-end will allow for more combined grants this year and next. Speak with a financial advisor to help you maximize your CESG.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows you to borrow funds from your RSP to purchase your first home, so long as you purchase the home before October 1 of the year following the withdrawal and all withdrawals are made in the same calendar year. Repayment of the withdrawals begins two years following the year of the withdrawal. Delaying your withdrawal to next year rather than late this year will allow more time to purchase a new home, make more withdrawals if necessary and delay the start of required repayments.
Considering taxes when realizing gains or losses on your investments
If you have or will realize capital gains in 2023, consider triggering capital losses prior to the end of the year. Losses can offset gains, reducing any taxes that could otherwise be associated with those gains. If your 2023 capital losses exceed your capital gains, they can be applied against gains in any of the previous three years to help you recover taxes paid on those gains. Speak to your financial advisor prior to repurchasing any investment you sold at a loss, as doing so too quickly puts the loss at risk of being denied.
Key Strategies to Enhance Charitable Giving
December is synonymous with the season of giving, but many Canadians miss out on giving in the most tax-efficient way. Whether it’s a continuation of donations made throughout the year or an initial donation, there are several strategies to consider when donating prior to year-end.
Maximize the value of donation tax credits
The first $200 of donations you claim on your tax return receive a lower donation tax credit rate than donations claimed above $200 (except in Alberta). To limit donations subject to the lower $200 credit rate outside Alberta, consider bringing forward donations planned early in the new year and make them prior to December 31st. Not only will the charity get the funds sooner, but you’ll get the tax benefit a full year earlier. Continue Reading…
The 60/40 portfolio has been long considered the prototypical balanced portfolio. This strategy consists of the portfolio investing 60% of its capital to equities and the remaining allocation of 40% in fixed income.
The two segments in the portfolio each have its unique purpose: equities have provided growth and fixed income has historically provided stability and income. When combined, it allowed a portfolio to have stable growth, while generating steady income.
In the last decade, however, the 60/40 portfolio has been challenged on two fronts. The first has been due to the lack of yield available in the bond market, as interest rates have grinded to all-time lows. As a result, many looked to the equity market to generate higher dividends in order to make up for the yield shortfall left by fixed income.
The second shortcoming of the 60/40 portfolio has been the higher correlation between bonds and equities experienced in recent years, which has limited the ability for balanced portfolios to minimize volatility.
However, the resurgence of bond yields in the recent central bank tightening cycle has breathed new life into the 60/40 portfolio. Suddenly, bonds are generating yields not seen since the pre-Great Financial Crisis era. A higher sustained interest rate environment also means a slower growth environment; that means equity risk premiums (the expected excess returns, needed to compensate investors to take on additional risk above risk-free assets) will be lower. This means fixed income may look more attractive than equities on a risk-adjusted basis, which may mean more investors may allocate to bonds in the coming years. Fixed income as a result, will play a crucial role in building portfolios going forward and its resurgence has revived the balanced portfolio.
Investors can efficiently access balanced portfolios through one-ticket asset allocation ETFs. These solutions are based on various risk profiles. In addition to the asset allocation ETFs, we also have various all-in-one ETFs that are built to generate additional distribution yield for income/dividend-oriented investors. Investors in these portfolios only pay the overall management fee and not the fees to the underlying ETFs.
How to use All-in-One ETFs
Standalone investment: All-in-one ETFs are designed by investment professionals and regularly rebalanced. Given these ETFs hold various underlying equity and fixed income ETFs, they are well diversified, and investors can regularly contribute to them over time. Continue Reading…
With people living longer than ever, retirement now makes up a significant portion of our lives. Could it be the perfect time to start a business? Here are the pros and cons of becoming an entrepreneur in your golden years.
Important Considerations
Entrepreneurship can enrich your life in immeasurable ways. However, before launching your own business, you should consider the following challenges.
Financial Risk
According to a 2018 study by Harvard Business Review, older entrepreneurs tend to run more successful companies. The businesses that financially thrive in their first five years are, on average, started by 45-year-old entrepreneurs, probably due to this cohort’s experience and willingness to take risks.
Although the odds may be in your favor, it’s still important to consider whether you have the capital to run a business — and to pick up the pieces if it doesn’t work out. Over 80% of small businesses fail because of cash flow problems. Decide how much money you’re willing to invest and potentially lose in your new venture.
Time Commitment
How do you envision retirement? If you’re considering entrepreneurship, you’re probably not the type of person who wants to lounge around sipping drinks on a beach.
If you do want a more relaxed retirement, however, you might find the time commitment required to run a business overwhelming. Entrepreneurs often put in long days to get their businesses up and running. Even after your company gets off the ground, you may find yourself having to work longer hours than you were expecting.
Of course, as a business owner, you also have a lot of sway over how big you want to let your venture get. If things start getting out of hand, you can always scale back.
Social Security Deductions
If you’re younger than full retirement age in the U.S. — which can range from 66-67, depending on when you were born — becoming an entrepreneur during retirement can affect your Social Security benefits.
Before you reach full retirement age, the IRS will deduct one dollar from your benefit payments for every two dollars you earn above $21,240. The year you reach full retirement age, the IRS will subtract one dollar from your Social Security benefits for every three dollars you earn above $56,520.
Consider whether these fees will impact your ability to retire comfortably. You might find you’re earning more money from your business than you would from Social Security anyway, so the deductions may be of little consequence.
Benefits of Entrepreneurship
Although it may be challenging, starting your own business will likely enrich your life. Here are some ways it could positively affect your retirement: Continue Reading…
Image Creator: Fortune Live Media Credit: Fortune The Most Powerful Women
By Noah Solomon
Special to Financial Independence Hub
Warren Buffett is widely regarded as one of the best stock-pickers in history. Among the Oracle of Omaha’s most famous pieces of investment advice is “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
It goes without saying that when it comes to investing, it is impossible never to lose money. Even the longtime Berkshire CEO has occasionally taken his lumps. This begs the question of what Buffett meant by his statement. To best interpret the Oracle’s words, I took an actions speak louder than words approach and analyzed his historical returns over the past 30 years ending December 2022.
Unsurprisingly, Buffett & Co. trounced the S&P 500 Index, delivering a 13.1% compound annual rate of return vs. 9.6% for the benchmark. Had you invested $1 million with the Oracle rather than in the Index, your investment would have grown to $39,883,361, exceeding the benchmark investment’s value of $15,843,412 by a whopping $24,039,949 (it’s with good reason that people call him the Oracle!).
Moving beyond the headline numbers, the specific pattern of Berkshire’s returns is highly anomalous. In years when the S&P 500 Index had a positive return, Buffett’s performance tended to be undifferentiated. On average, for every 1% the index rose, Buffett’s holdings gained almost exactly the same amount. Clearly, the Oracle’s massive outperformance doesn’t come from knocking the lights out in good times.
In stark contrast, in years when the S&P 500 Index fell, Buffett gained 4.2% on average (no, that’s not a mistake!). This does not mean that the Oracle never loses money. In 2008, Berkshire declined 31.78% vs. 36.0% for the S&P 500. However, in down markets he has either tended to lose far less than the Index or not suffer any losses. The latter occurred during 2000-2002, when the Oracle gained 29.7% vs. a decline of 37.6% for the Index.
John Kelly & Fortune’s Formula: An Unsung Hero of Investing
Very few business school graduates or investment professionals have heard of the Kelly Criterion, which was developed in 1956 by American scientist John Kelly. Despite its relative obscurity and lack of mainstream academic support, the Kelly Criterion has attracted some of the best-known investors on the planet, including “Bond King” Bill Gross, Renaissance Technologies’ James Simons, Warren Buffett, and Charlie Munger (may the great man rest in peace).
The first well-known user of the Kelly Criterion is legendary investor and grandfather of quantitative finance Edward O. Thorp, who referred to it as “fortune’s formula.” He used Kelly’s theory to develop a system for calculating the odds and altering one’s bets accordingly in blackjack, which forever changed the game. Thorp then launched investment firm Princeton Newport Partners (PNP), which produced an annualized return of 15.8%, as compared to 10.1% for the S&P 500 Index. PNP achieved this return with 75% less volatility than the market and lost money in only three of its 230 months in operation.
The Kelly Criterion seeks to maximize long-term wealth by optimally adjusting the amounts of capital to commit to investments as their expected returns and risks fluctuate. Importantly, the formula dictates that you should increase your allocation when the odds are more favorable and curtail your commitment as the odds deteriorate. The imperative of adjusting one’s stance in response to changing circumstances was also espoused by the father of modern macroeconomic theory John Maynard Keynes. When criticized for being inconsistent during a high-profile government hearing, Keynes responded “When the facts change, I change my mind. What do you do, sir?”
Interestingly, this premise stands in stark contrast to the traditional approach to money management, whereby client portfolios maintain a fixed allocation to stocks, bonds, etc., regardless of changes in the market environment or economic backdrop.
What Does John Kelly Have in Common with Warren Buffett?
Having stated that “Our favorite holding period is forever,” Buffett is well known for buying quality companies and holding them for the long term. However, there is another, lesser-known side to the Oracle’s approach which harbors a more than subtle resemblance to Kelly’s.
In her book, “The Snowball: Warren Buffett and the Business of Life,” author Alice Schroeder explains that Buffett’s best opportunities have always arisen during periods of crisis and uncertainty. In Buffett’s view, the opportunity cost of holding cash is low when compelling investment opportunities are few and upside is limited. Conversely, when downside is limited and compelling prospects are abundant (typically during the uncertainty that reigns during or after a market crash), the opportunity cost of holding cash becomes unjustifiably high. At such times, investors should aggressively deploy their cash holdings into assets that offer higher returns. This sentiment is well-summarized by Buffett’s assertion that “Cash and courage in a time of crisis is priceless.” Continue Reading…
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