Inflation

Inflation

Investing: An amazing concept that deserves more love

By Scott Ronalds

Special to the Financial Independence Hub

I love Google. Want to know how many grapes are in a bottle of wine? Google it. Need directions from Granville Island to Gastown? Google Map it. Want to watch James Corden’s latest carpool karaoke? YouTube it (Google’s parent company owns YouTube). A world of information is at your fingertips.

A friend of mine adores Nike. He can’t get enough of their shoes, loves their style and innovation, and thinks their marketing is brilliant. He may even have a swoosh tattooed on him somewhere.

Whether it’s Google, Nike, Starbucks, Apple or others, there are a lot of impressive companies out there doing remarkable things. And the really cool thing is that we can own a small piece of many of them. Think about this for a minute. Any individual can buy shares in a publicly-traded company and participate in its growth and success (or failure, as it may be). Investing is an amazing thing. So why do so many people ignore, fear, or just put off investing? (Reports suggest people are sitting on huge amounts of cash.) It’s a question I ask myself all the time.

Investing is simply about owning pieces of companies

I think I know some of the reasons. Investing is risky. But it’s also become confusing and scary: which makes it prime fodder for the media. Corporate and economic figures are dissected with minutiae. Stock prices are updated every millisecond. The lexicon can be baffling (the Steadyhand Dictionary can help you make sense of it). Complex algorithms and trading strategies have emerged. The use of derivatives and leverage have amplified the risks. Unethical practices have been exposed. The whole system has been called rigged. Continue Reading…

Thinking about taking a flyer on cannabis stocks or blockchain? Follow these guidelines.

By Scott Ronalds

Special to the Financial Independence Hub

 
“I’m thinking of taking some money out of my portfolio with you guys to buy some shares in a blockchain-related start-up. Am I crazy?”

 

We were asked a question along these lines recently, and I suspect we’ll hear it again, whether it’s blockchain, bitcoin, cannabis, space tourism or whatever new investment opportunity seems exciting. Our answer might surprise you.

No, you’re not crazy. We don’t necessarily think it’s a bad thing to invest a portion of your portfolio in an unconventional, illiquid, or even highly speculative investment. You can learn a lot from it. We do have a few caveats, however. Most importantly, you need to have a high tolerance for risk and should be mentally prepared to lose everything you invest, because you just might. Below are a few other things to consider.

Limit it to 5% of your portfolio

Five per cent isn’t a magic number, but curbing a risky investment to 5% or less of your total portfolio will limit the damage if things go south. True, it will also limit your potential upside, but it’s a prudent trade-off. You don’t want to put your retirement plans and future standard of living at risk by investing too much of your portfolio in an adventure.

Have a plan

This seems obvious, but we find it’s often overlooked. Let’s use bitcoin as an example. Say you invest in the cryptocurrency when its value is $16,000. What will you do if it falls to $8,000? Or if it rises to $24,000? Do you have a floor and ceiling in mind for how much you’d be willing to lose or gain before making a difficult decision with your investment? Bitcoin is a great example of the hyper volatility that comes with speculative investments. You need to be prepared for it, and you need to have a plan.

Consider how it will change the risk profile of your portfolio

If your target breakdown between stocks and bonds is 60/40 and you want to carve off 5% to invest in a start-up, for example, you should be taking the money from the stock portion of your portfolio so that you don’t inadvertently increase your overall level of risk. If you’re venturing into investments that are higher up the risk spectrum, you shouldn’t fund them by cashing in your safer stuff (e.g. cash and bonds).

Further, if you hit the jackpot on a speculative investment, it will comprise a larger portion of your portfolio, which means you should think about reducing the level of risk in the rest of your accounts to keep your overall balance between growth and safety in check. On the other hand, if your investment tanks, your overall portfolio may have less exposure to growth assets than your plan calls for. In this case, it would be appropriate to increase your exposure to stocks. After a bad experience with a high-risk investment, this can be hard to do.

Read the fine print on fees and redemption clauses

If it’s a product or offering that you’re considering, rather than an individual security, be sure to do your homework on fees. Continue Reading…

Subsidizing China’s Superpower aspirations

By Jeff Weniger, WisdomTree Investments
Special to the Financial Independence Hub
 
Christine Lagarde, head of the International Monetary Fund (IMF), has warned that China’s Belt and Road Initiative, the potentially multitrillion-dollar network of roads, rails, pipelines and other infrastructure across Eurasia, risks saddling unstable governments with unpayable debt. Because of the IMF’s concerns, it plans to fund the China-IMF Capacity Development Center (CICDC) to train the Chinese to minimize the headaches in this century’s Marshall Plan. If all goes according to plan, the Belt and Road Initiative will connect land- and sea-based trading routes to cement China as the center of global commerce in a decade or two.

While China appears to be ascending into world superpower status sometime in the coming decades, a $100 investment in “global” equities allocates just $3.51 to the country if we track an index like the MSCI All Country World Index (ACWI).1 That’s not far from Canada’s weight, and it seems remarkably low for a country that is going head-to-head with the U.S. on the global stage.

It was only last year that MSCI added Chinese A-shares, companies listed in Shanghai and Shenzhen, to its MSCI Emerging Markets Index. That is late for an economy whose size surpassed the U.S. in 2014, at least on a purchasing power parity (PPP) basis (see figure 1).

Figure 1: China & U.S. Share of Global GDP

China and U.S. Share of Global GDP

Covering China, wherever the listing

While some Chinese companies are available only in Shanghai or Shenzhen, others are listed solely in Hong Kong. Still others have American depositary receipts (ADRs) or are traded in Singapore.

Our TSX-listed exchange-traded fund, WisdomTree ICBCCS S&P China 500 Index ETF (CHNA.B), tracks the ICBCCS S&P China 500 Index, covering stocks in all those bourses. Its index is currently over 50% in local A-shares. MSCI, by contrast, is only starting to add A-shares securities up to a 5% inclusion factor in 2018, a small starting point. It’s high time China has its own S&P 500, especially if President Xi Jinping has anything to say about it.

Going Out

Deng Xiaoping, ruler of China from 1978 to 1989, famously advised his country to “hide your strength, bide your time.” China’s great goal for the last four decades — development, development, development — was to happen quietly, with fingers crossed that the U.S., Japan and Western Europe wouldn’t get too frightened. Continue Reading…

Thinking about retirement? Here are 2 two key income sources to expect

By Scott Ronalds

Special to the Financial Independence Hub

If you’re at the point where you’re starting to think seriously about retirement, you’re probably wondering how much money you’re going to need to enjoy life after work, and where it’s going to come from.

Everybody’s wants and needs are different, so there’s no magic number as to how much you should have saved by a certain age. Plus, the face of retirement has changed significantly, with many people working part-time into their seventies and eighties, and others hanging it up in their fifties.

That said, by making a few assumptions, we can give you a rough estimate of what you can expect from government sources and your portfolio when you decide to retire.

The basics

To keep it simple, we’ll use a scenario which assumes you’re 65 and plan to fully retire from your job this year. A few other assumptions:

  • You don’t have a pension plan with your employer.
  • You’re eligible for full Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.
  • You have an RSP that you plan to convert to a RIF this year, and you plan to take the minimum required payments (which will start next year) from your account. (Note: you aren’t required to convert your RSP to a RIF until the calendar year you turn 71, but you can convert at any age before 71 if you choose).
  • You don’t have any other investments or sources of income.

First off, let’s look at what you’ll get from the government. You can expect monthly CPP payments of roughly $1,114 ($13,370/year) and OAS payments of about $578 ($6,936/year). In total, you can plan on collecting about $1,690 a month, or just over $20,000 a year. These amounts are indexed to inflation. You can decide to defer taking CPP benefits until you’re older, or take them earlier, in which case your benefits will be increased or decreased, respectively. You can also defer taking OAS to receive a larger monthly benefit.

More than likely, this isn’t going to cover your living expenses or fund the lifestyle you want in retirement. So you’re going to need to rely on your portfolio to cover the shortfall.

RIFing it

Converting your RSP to a RIF means your minimum withdrawal next year will be equivalent to 4.0% of your portfolio’s year-end market value. This figure is based on your age, 65, at the end of the current calendar year. Continue Reading…

Forget the Trade War, already: China is cutting Taxes

By Jeff Weniger, WisdomTree Investments

Special to the Financial Independence Hub

The market’s obsession with trade wars may finally be exhausted and priced in. Move on to the next market mover: massive Chinese tax cuts, which should aid the WisdomTree ICBCCS S&P China 500 Index ETF (CHNA.B), our tracker exchange-traded fund for the country.

Sure, China exported US$457 billion (C$597 billion) of goods and services to the U.S. in the year through June, and some fraction of those exports is at risk from a deterioration in Sino-U.S. relations. But engage a drastic scenario: lop off US$200 billion or US$300 billion from that figure. Even if that happened, most of that sum wouldn’t even disappear; it would be sold elsewhere, maybe inside China, at concessionary prices. But even suspending logic and having it all vanish, is it really doomsday for China’s US$14.1 trillion economy (US$25.2 trillion at purchasing power parity)? We don’t want to minimize the importance of trade conflicts, but the airtime given this topic is hysterical.

When Obama was in office, many conservatives and free market acolytes convinced themselves he would destroy the U.S. economy, so they ignored massive fiscal and monetary stimulus — the data — and missed the equity bull market. Emotions ruled; logic lost.

Now it’s happening with Trump. Among some investors, emotions are defeating data. The recent Bank of America Merrill Lynch fund manager survey pointed to a trade war as the market’s biggest risk. Some investors so badly wish Trump to fail that, like conservatives during the Obama years, positive news is simply ignored. Forget Japan’s major trade deal with the EU, ink still wet. Forget Trump’s meeting with Jean-Claude Juncker, European Commission president, where they agreed to work toward zero tariffs. The end is near!

Astute investors need a sober, facts-based thesis.

A Thesis without Emotion

A more realistic take on matters is that China finds itself isolated, unable to pair with Moscow in a two-country geostrategic counterbalance to the West. This forces Beijing to backtrack on intellectual property theft, inordinately high tariff levels, state subsidies and dumping because of its weak bargaining hand.

The pain must be offset, so Beijing gives the market that for which it aches: trillions of dollars in tax cuts at the business, product and personal income tax levels. Yes, Trump’s ability to stir the pot is important, but mathematics matters.

Chinese equities are the play here.

Bold actions

We calculate that many Chinese will see their personal income tax liability fall by half or more, effective January 1, 2019. Add to this our estimate of nearly US$500 billion in value-added tax cuts over the next decade, with still-in-the-works business tax relief on top, which would be another US$132 billion to $138 billion if activity grows at a pace of 6% to 7%. For perspective, Beijing’s Lehman-era US$586 billion spending package, hypothesized by some to be the reason the Global Financial Crisis ended, is smaller than 2018’s total announced tax cuts, if we calculate them over several years. This is this year’s big story.

Income Tax Scenarios: Implications for everyday Chinese

The proposed personal income tax code changes are staggering (figure 1). Exemptions and the minimum bounds for the 10%, 20% and 25% brackets are set to gap higher, while tuition, medical and mortgage deductions add to the savings.

Figure 1: China Personal Income Tax Code 

If these become law in October and are implemented in January, someone making CNY15,000 per month (C$2,906), a wage that is common in a city like Shanghai, where 2017 median monthly income is $2,048, would see their monthly taxes cut by CNY1,080 (C$209).1The person making half that amount, or CNY7,500 per month, which is short of the metropolitan median, would save about C$500 per year on an income of C$17,437. This is serious.

Chinese Equity Valuations

With many Chinese equity markets hammered this year, the S&P China 500 Index’s forward P/E multiple has fallen to 11.7, a sharp discount to the S&P/TSX Composite Index of Canadian equities (P/E of 15.8).Continue Reading…

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