Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Are Financial Advisors really ready for a serious downturn?

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https://advisor.wellington-altus.ca/standupadvisors

By John De Goey, CIM, CFP

Special to the Financial Independence Hub

Clients facing a big, sustained drop in the markets might not listen to advice that worked last time

I recently listened to an excellent podcast hosted by my friend Preet Banerjee, who had my acquaintance Dan Bortolotti as his guest. Much of the conversation was about Dan’s fantastic new book, Reboot Your Portfolio, but the topics bounced around a bit, and I was left with a sense of dread about the overall mood.

Listeners got a glimpse into what it is like to give advice to retail clients, and some of the anecdotes about the life of an advisor I thought were particularly telling. Discussion around the fear felt by investors and advisors in the five or six weeks when COVID-19 first hit was harrowing, but I couldn’t help but think that advisors listening in might be misled.

In the past decade or so, a narrative about the role and value of professional advice has included behavioural coaching. The term can include such value-added activities as topping up RRSPs, getting wills written, naming proper beneficiaries, integrating taxes and other valuable things. But the one thing that always seems to top the list is the notion that advisors add value by encouraging clients to remove the emotion from decision-making. This helps clients take a long-term view focused on personal life goals.

While I agreed with almost everything said in the podcast, I was concerned by what wasn’t said. There was a lot of self-congratulation about advisors navigating their clients through the major market drawdown in early 2020, as if it were a given that this would always be the case.

In truth, that drawdown was the shortest bear market in history. As bear markets go, a walk in the park. Mr. Bean could have provided enough comfort and counsel to keep clients invested in that market. While there is nothing wrong with giving credit where credit is due, I think the podcasters were too congratulatory to mainstream advisors. There was also a reference to the global financial crisis of 2007-2009, and both podcasters agreed that it was far harsher than the 2020 experience. Again, the story was that good advisors can help emotionally driven clients stay on course when things get choppy. They can – but that’s not necessarily the same as they will.

Comparing downturns

That attitude I heard is likely based on what they’ve seen and done in their careers – and those careers embody a time of relative stability. Few advisors today were working in finance during the bear market of 1974 when the OPEC oil embargo crashed markets. In addition, the one-day drop of more than 20 per cent in 1987 was a blip of sorts, but markets were still up that calendar year.

So, the only significant bear markets most people reading this have lived through were: 1) at the turn of the millennium (aka the dot.com bubble), and 2) the global financial crisis. Both were medium-sized drawdowns. But what if we experience something earth-shattering? How will we react? Nobody knows.

If you claim to play a role in modifying behaviour constructively, you will also be prepared to stand up and take your lumps should that behaviour not be what you wanted nor expected.

Here is what I mean by “medium sized.” In the first one, it took about seven years for the S&P 500 to return to its previous level; the index stood at around 1,500 in April 2000 and didn’t return to that level until October 2007. While the previous high was technically reached, it was only a few weeks before the trend reversed and markets began to fall back again. The S&P 500 didn’t get back to the 1,500 range again until February 2013. There was a dip and return, closely followed by a second dip and return, and the net effect was the entire market went sideways for more than 13 years.

Most people refer to the early 2000s as two distinct drawdowns experienced back-to-back, but I would describe both as medium-sized drops. Either way, the net effect, excluding dividends, was no market growth for more than 13 years. Continue Reading…

Should you invest in Canadian Depositary Receipts (CDRs)?

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www.investorsedge.cibc.com/

By Bob Lai, Tawcan

Special to the Financial Independence Hub

It is always great to see innovation and new products in the banking and investing industry. A few months ago, CIBC introduced the Canadian Depositary Receipts (CDRs) on the NEO Exchange as a way to provide Canadian investors with yet another option for investing in non-Canadian companies.

Canadian Depositary Receipts, or CDRs, may not be a familiar name for many readers. However, some readers may be aware of American Depositary Receipts, or ADRs. ADRs have been trading in the US for many years as a way for investors to buy shares of companies that are listed outside of the US. For example, we own Unilever PLC via the Unilever ADR listed on NYSE. In case you’re wondering, there are many ADRs available on the NYSE.

With CDRs becoming increasingly more popular, a few readers have emailed me about whether it makes sense to invest in CDRs instead of directly trading US stocks.

What are Canadian Depositary Receipts (CDRs) and what are the benefits? 

Canadian Depositary Receipts are created to allow Canadian investors to buy US stocks in Canadian dollars. For now, CDRs represent shares of US companies but are traded on the NEO Exchange. Since CDRs are traded on a stock exchange, you can view them like traditional stocks. Owning CDRs means you would receive dividends (if the company pays dividends) and have voting rights to the underlying company you’re holding.

What makes CDRs very attractive is the fact that you can buy them in Canadian dollars. You no longer need to convert CAD to USD and pay the extra currency conversion costs or perform Norbert’s Gambit. By buying CDRs in Canadian dollars, it is more cost effective. In addition, there are no management fees associated with CDRs.

There is a built-in currency hedge in CDRs which eliminates the impact of exchange rate fluctuations over time. Therefore, in theory, the returns of the CDRs are tied directly to the performance of the underlying stocks and you do not have to worry about currency fluctuations.

Since the initial price for each CDR is around $20, CDRs allow Canadian investors to own fractional shares of the underlying stocks at a much lower cost. Essentially, CDRs utilize a ratio called the CDR ratio to represent the number of shares of the underlying stock. The CDR ratio is adjusted automatically daily to account for the currency hedge. If the Canadian dollar increases in value compared to the US dollar, the CDR ratio is adjusted to represent a larger number of underlying shares. The reverse is done when the Canadian dollar weakens.

In other words, rather than buying one share of Amazon at around $3,500 USD or $4,500 CAD, you can hold a few shares of Amazon CDR at around $20 per share at a much lower overall cost. You would still get all the equivalent benefits as a regular Amazon shareholder.

What stocks are available as Canadian Depositary Receipts?

When CDRs were launched in July 2021, CIBC had only a handful of CDR stocks available to trade. Since then, CIBC has added more and more CDR stocks. At the time of writing, there are 18 CDRs available on NEO Exchange:

Symbol Name Price Trades Volume
AMZN AMAZON.COM CDR 21.5 352 53,220
GOOG ALPHABET INC. CDR 25.05 382 73,588
TSLA TESLA, INC. CDR 32.66 1,779 207,169
AAPL APPLE CDR 25.34 342 56,092
NFLX NETFLIX CDR 25.11 125 10,358
MVRS META CDR 18.68 181 8,509
MSFT MICROSOFT CDR 24.94 437 64,181
PYPL PAYPAL CDR 14.6 348 44,410
VISA VISA CDR 20.13 292 33,288
DIS WALT DISNEY CDR 18.32 339 24,460
AMD ADVANCED MICRO DEVICES CDR 28.21 197 9,498
BRK BERKSHIRE HATHAWAY CDR 22.1 147 25,926
COST COSTCO CDR 25.67 155 8,254
IBM IBM CDR 19.24 31 4,391
JPM JPMORGAN CDR 22.48 25 1,143
MA MASTERCARD CDR 21.97 111 14,719
PFE PFIZER CDR 24.79 147 6,796
CRM SALESFORCE.COM CDR

As you can see, there are some really big name, very popular stocks like Apple, Tesla, Alphabet, Netflix, Meta, and Berkshire Hathaway available as CDRs. I am virtually certain that CIBC will add more CDRs on NEO Exchange going forward.

Where can I buy Canadian Depositary Receipts?

Since CDRs are traded like normal stocks on the Canadian stock exchange, you can purchase these CDRs through any online discount broker, such as TD Direct Investing, Questrade, and National Bank Direct Brokerage. You can also trade CDRs on WealthSimple Trade.

Because these CDRs have the same symbols as the US equivalent, you need to pay extra attention to make sure you select the correct stock symbol when purchasing. For example, when you search Apple on WealthSimple Trade, Apple listed on NASDAQ and Apple CDR listed to NEO Exchange both will show up. If you do not pay attention, it is easy to select the Apple listed on NASDAQ and put in a buy order.

It would be a shame to end up buying US listed shares and incur currency exchange fees when that was the very opposite of what you intended to do.

Should you invest in CDRs? 

It is always positive to have options, so I think overall CDRs are great for Canadian investors. Should you invest in CDRs? Well, that depends on your situation and preference. Continue Reading…

Here’s to 2022: Surely it will be better than 2021?

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A quick note to say Happy 2022 to all the Hub’s readers and supporters. We’ll be back to our regular blog-a-day rotation on Tuesday.

In the meantime, I’ll point readers to Dale Roberts’ excellent year-end market wrap for MoneySense, which was published Friday.

Click on the highlighted headline to access, but settle down with a coffee before you do: it’s quite a long read: Making Sense of the Markets: 2021.

It’s a thorough long read that looks at all the major market developments each month in 2021 and you’ll also see a number of prescient market calls made by Dale over the last few years, including an early call on Covid-19 itself, an early call on the Energy and Commodities recovery, and several others.

I’ve followed Dale for some years now: he famously tweets as @67Dodge and I now help edit his weekly MoneySense market wrap, seeing as I became MoneySense’s Investing Editor at Large a few months ago.

Don’t forget to contribute to your TFSA ASAP

Oh, while on the subject of MoneySense New Year’s content, I may as well point those to my own column that ran a few days ago: Why contributing to a TFSA is a good (New Year’s) resolution.

In normal years, I would move new money into the TFSA on January 1st but there’s probably no rush this year until Tuesday, Jan. 4, seeing as the Canadian market is closed Monday. (The US will be open that day though).

I’ve not decided exactly what to invest in but it will likely be inflation-related. Going back to Dale Roberts, you can glean a few ideas from his 2021 market wrap: things like short-term TIPS ETFs, or the Purpose Real Assets ETF, or energy/commodity plays.

Personally, I’ve been researching Ray Dalio’s All-Weather portfolio (google it for videos and articles, or try this Seeking Alpha link on it). I’ve concluded that our own family has sufficient US equity exposure but not enough in commodities or TIPS [Treasury Inflation Protected Securities] plays.

Dalio is a bit heavier on fixed-income than most, with a mix of long-term and short-term bonds. His recommended equity exposure is a bit lower, and he suggests 7.5% commodities and 7.5% in gold. Readers may therefore find Friday’s Hub article on gold of interest: A perfect storm for gold.

Every case is different of course. IF I were looking to boost US equity exposure, I’d certainly be considering the new Canadian Depositary Receipts (CDRs), more on which you can read on the Hub early in the new year. If we didn’t already own Berkshire Hathaway, I’d be tempted to add to it with the CDR version of Berkshire, seeing as it pays no dividends and would be a good value counterbalance to high-priced US tech stocks.

So by all means get your $6,000 (if available) into your TFSA early in 2022 but take a few days to figure out how to invest it.

The wild card is certainly Omicron. If you’ve not yet gotten your booster, I highly recommend it.

So again, have a happy, healthy and profitable 2022!

The Perfect Storm for Gold

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Image courtesy BMG Group

By Nick Barisheff

Special to the Financial Independence Hub

In December 1997, The Financial Times ran an article entitled “The Death of Gold.” Since then, the gold price in US dollars has increased 519% from $288 to $1,780. Today, after many political events and crises we have evidence of the continuous and in many ways spectacular growth of the gold price. This confluence of many current events is creating a perfect storm for gold to increase dramatically more than we imagined.

Currency Devaluation

Typically, currency devaluation is always at the heart of a rising gold price. This has been taking place in all of the major fiat currencies, resulting in an average annual price increase in gold of over 10% since 2000.

“For the naïve there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared with that of the government’s Treasury Department.” — Ludwig von Mises

Since 1900, all major fiat currencies have been devalued by over 90%.

To understand currency devaluation, it is necessary to understand that all currency is created by governments issuing debt and then the central bank monetizing that debt by printing the currency. In 1960, the U.S. federal debt to GDP stood at 52.2%, whereas today it has grown to 125.9%. The Federal Reserve has increased its balance sheet by a historically unprecedented amount of over $7.5 trillion since 2008.

Because of this central bank policy, all western currencies are being devalued and this in turn leads to inflation.

“Nations are not ruined by one act of violence, but gradually and in an almost imperceptible manner by the depreciation of their circulating currency, through excessive quantity.”

— Nicholas Copernicus – 1525

 “Fed Chairman Powell has pumped trillions of newly printed dollars into the system in order to prop up the financial markets, but in the process has unleashed a tsunami of inflation that is unlike anything we have seen since the 1970s.” — Michael Snyder

“For the first time in history, ALL the major central banks are printing money. One of two things will occur. If they continue to print, their respective currencies will lose their purchasing power, and we’ll have inflation or even hyper-inflation.”

As Currencies are Devalued, Price Inflation will inevitably follow

Inflation, as this term was always used everywhere and especially in North America, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term ‘inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, and that is the tendency of all prices and wages to rise.

In October 2021, consumer inflation jumped to a four-decade high, the highest since the days of runaway inflation in the early 1980s. Headline year-to-year GDP inflation hit a 38-year-plus high of 4.53%.

According to John Williams of Shadowstats.com, if inflation was calculated using 1980s methodology, the CPI would be nearly 15%. Since treasury yields are about 2%, the true inflation-adjusted treasury yield would be about -13%.

Gold Rises Fastest When Real Yields Go Negative

 

Inflation is destined to go even higher in 2022. Many of the biggest corporations have already announced price increases that will take effect in 2022.

Declining GDP — Stagflation

“The…economy is facing a period of stagflation in which both growth and inflation disappoint.” — David Walton, Goldman Sachs

Stagflation is worse than a recession. It’s because stagflation combines the bad economic effects of a recession (stock declines, unemployment increases, housing market dips) with inflated prices. When this is dragged out over the long term, it becomes a problem that can have a big impact on societal habits.

To make matters worse, we are already experiencing declining GDP together with increasing inflation. This is due to an unusual combination of supply chain disruptions and labour shortages due to COVID-19 policies that have been implemented in most western countries.

Supply Chain Disruptions

The COVID-19 pandemic impact and the disruptive government responses continue to have enormous negative impact on global supply chains. Beyond COVID-19, compounding profound governance incompetence, media bias, political conflicts, disintegration of society split by “Covid politics,” natural disasters, cybersecurity breaches, international trade disputes have negatively impacted supply chains leading to product shortages, distribution delays, and manufacturing disruptions. The lockdowns imposed in many countries have led to revenue declines and many bankruptcies, with many more to come. Making matters even worse is the implementation of vaccine mandates, causing over 4 million people to leave the workforce in the U.S. This will lead to other societal problems due to lack of first responders, nurses, firefighters, and police.

Some analysts expect that it will take years for the capacity constraints and backlogs to ease. Continue Reading…

How to crush your RRSP contributions next year

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Many high-income earners struggle to max out their RRSP deduction limit each year and as a result have loads of unused RRSP contribution room from prior years.

While we can debate about whether it’s appropriate for middle and low income earners to contribute to an RRSP or a TFSA, the reality for high-earning T4 employees is that an RRSP contribution is the best way to reduce their tax burden each year.

The RRSP deduction limit is 18% of your earned income from the prior year, up to a maximum of $29,210 in 2022, plus any unused RRSP room from previous years. An employee earning $125,000 per year could contribute $22,500 annually to their RRSP. While that’s straightforward enough, coming up with $1,875 per month to max out your RRSP can be a challenge. An even greater challenge is catching up on unused RRSP room from prior years.

Related: So you’ve made your RRSP contribution. Now what?

Let’s say you live in Ontario, earn a salary of $125,000 per year, and you want to start catching up on your unused RRSP contribution room. Your gross salary is $10,416.67 per month and you have $2,858.92 deducted from your paycheque each month for taxes, leaving you with $7,557.75 in net after-tax monthly income.

Your goal is to contribute $2,000 per month to your RRSP, or $24,000 for the year. This maxes out your annual RRSP deduction limit ($22,500), plus catches up on $1,500 of your unused RRSP contribution room from prior years. Stick to that schedule and you’ll slowly whittle away at that unused contribution room until you’ve fully maxed out your RRSP. Easy, right?

Unfortunately, you don’t have $2,000 per month in extra cash flow to contribute to your RRSP. After housing, transportation, and daily living expenses you only have about $1,200 per month available to save for retirement.

No problem.

That’s right, no problem. Here’s what you can do:

T1213 – Request To Reduce Tax Deductions at Source

Simply fill out a T1213 form (Request to Reduce Tax Deductions at Source) and indicate how much you plan to contribute to your RRSP next year. Submit it to the CRA along with proof –  such as a print out showing confirmation of your automatic monthly deposits. The CRA will assess the form and send you back a letter to submit to your human resources / payroll department explaining how they should calculate the amount of tax they withhold for the year.

Note that you’ll need to fill out and submit the form every year. It’s best to do so in early November for the next calendar year so you have time for the form to be assessed and then you can begin the new year with the correct (and reduced) taxes withheld. That said, the CRA will approve letters sent throughout the year – it just makes more sense to line this up with the start of the next calendar year.

T1213 Form

Reducing taxes withheld from your paycheque frees up more cash flow to make your RRSP contributions. It’s like getting your tax refund ahead of time instead of waiting until after you file. Let’s see how that would work using our example from Ontario.

You’ve signalled to CRA that you plan to contribute $24,000 to your RRSP next year. In CRA’s eyes, that brings your taxable income down from $125,000 to $101,000. This will make a significant difference to your monthly cash flow.

Recall that you previously had $2,858.92 in taxes deducted from your monthly paycheque. After your T1213 form was assessed and approved, the taxes withheld from your paycheque each month goes down to $1,990.67 – freeing up an extra $868.25 in monthly cash flow that was previously being withheld for taxes. That’s an extra $10,419 that you can use to crush your RRSP contributions next year. Continue Reading…