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).

Flying the Findependence Flag: My appearance on Patrick Francey’s The Everyday Millionaire podcast

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The Everyday Millionaire podcast starring REIN’s Patrick Francey has just released its one-hour-plus interview with me. You can find it (audio) on the regular podcast channels by clicking this title: Flying the Findependence Flag.

The podcast has been going since 2017, and sports the slogan “Ordinary people doing extraordinary things.”

It was a wide-ranging and surprisingly personal interview. Most of Francey’s guests are real estate millionaires: given the bull market in Canadian residential real estate it’s not surprising that most of Francey’s guests are technically millionaires: even starter homes in Toronto are going for a million dollars.

REIN’s Patrick Francey

Patrick Francey is the CEO of REIN, the Real Estate Investment Network, with which I have long been familiar: my daughter Helen once worked there. Sadly, as you will discover on the podcast, I confess that our family never made the plunge into investment real estate beyond owning a principal residence in Toronto. We discuss the fact that while real estate is an excellent way to achieve Financial Independence, some of us are more comfortable with investing in financial assets like stocks and bonds: in so-called “clicks” rather than “bricks.”

The foundation of Financial Independence

As I say in the interview as well as the recently updated US edition of my financial novel, Findependence Day, job one is to purchase a principal residence and pay down the mortgage as soon as possible; hence the saying “The Foundation of Financial Independence is a paid-for home.” Continue Reading…

Tax Strategies to Boost your Financial Savings

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Lowrie Financial/Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Today’s Simple Investing Take-Away: Your tax planning strategy should take a holistic, tax-efficient investing stance in both tax-sheltered and taxable investment vehicles to optimize saving for the future.

Does it bug you to pay more taxes than you need to? I don’t think I’ve ever met anyone eager to shell out extra money, just in case the government could use more. But practically speaking, that’s exactly what you end up doing if you don’t build tax-efficient investing and other tailored tax strategies into your ongoing financial planning.

Are you:

  • A young professional, aggressively saving for a distant future?
  • A seasoned business owner, managing substantial financial savings
  • Starting to spend down your assets in retirement?
  • Planning for how to pass your wealth on to your heirs?

Regardless, there are many best practices for maximizing your after-tax returns—i.e., the ones you get to keep. Today, let’s cover what some of those sensible tax strategies look like.

Fill up your Tax-Sheltered Accounts

The government offers a number of “registered” investment accounts to provide various types of tax-efficient investing incentives. They want you to save for retirement and other life goals, so why not take them up on the offer? Two of the big ones are the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA).

Saving for Retirement with Your RRSP

As the name suggests, your RRSP is meant to provide tax-efficient investing for retirement. In the years you contribute to your RRSP, you receive a deduction on your tax return in equal measure. Then the proceeds grow tax-free. Once you withdraw RRSP assets in retirement, you pay income tax on them.

In theory, your tax rate is often lower once you retire, so you should ultimately pay fewer taxes on taxable income. Even if there are some retirement years when your tax rates are higher, you’ve still benefited from years of tax-free capital growth in an RRSP. And you still have more flexibility to plan your RRSP withdrawals to synchronize with the rest of your tax planning.

Bonus tips: If you’re a couple, you may also consider using a spousal RRSP to minimize your household’s overall tax burden. This works especially well if one of you generates a lot more income than the other. There also are specialized guidelines to be aware of if you’re a business owner considering how to most tax-efficiently draw a salary and participate in the Canada Pension Plan (CPP).

Saving for the Future with Your TFSA

TFSAs are meant to be used for tax-efficient investing toward any mid- to long-term financial goals. So, at any age, most taxpayers are well-advised to fill up their TFSA space to the extent permitted. You fund your TFSA with after-tax dollars, which means there’s no immediate “reward” or deduction on your tax return in the year you make a contribution. But after that, the assets grow tax-free while they’re in your TFSA, and you pay no additional taxes when you withdraw them, which you can do at any time.

Bonus tip: Too often, people leave their TFSA accounts sitting in cash, using it like an ATM machine. Unfortunately, this defeats the purpose, since you lose out on the tax-free gains you could expect to earn by investing that cash in the market. How much is tax-efficient investing worth? In “Cash is not king: A better investment strategy for your TFSA,” I offer some specific illustrations.

Manage your personal Tax Planning like a Boss

Once you’ve filled your tax-sheltered accounts, you can invest any additional assets in your taxable accounts.

Like hard-working “employees,” these assets can thrive or dive depending on their management. Think of it this way: As a business owner, you wouldn’t hire a promising team of talented individuals, only to assign them random roles and responsibilities. Likewise, your various investments and investment accounts have unique qualities worth tending to within your overall tax-efficient investing. Let’s cover a few of them here.

Capital Gains Reign

In your taxable accounts, your best source of tax-efficient investing income comes in the form of capital gains or even better, deferred/unrealized capital gains. This is super important, but often forgotten in the pursuit of sexier trading tactics, like chasing hot stocks or big dividends. (It’s popular to think of dividends as a great source of dependable income in retirement, but in “Building your financial stop list: Stop chasing dividends,” I explained why that’s mostly a myth.)

Don’t believe me? Consider these 2021 combined tax rates for Ontario on various sources of investment income:

Taxable Income Source

2021 Combined Tax Rate

Interest and other income

53.53%

Eligible dividends (mostly Cdn. companies)

39.34%

Capital gains

26.76%

Source: CI Global Asset Management
This illustration assumes a top marginal tax rate in Ontario, or taxable income greater than $220,000. But the point remains the same at other rates: You can usually lower your taxes by favouring capital gains over other sources of taxable income.

Also remember, you don’t pay taxes on a capital gain until you actually “realize” it, by selling an investment for more than you paid for it. Combine this point with the rates just presented, and your ideal investment strategy seems obvious: Tax-efficient investing translates to a low-cost, low turn-over, buy-and-hold approach.

Since minimizing the impact of taxes is a huge way to improve on your overall rate of returns, this happens to be exactly what I advise for any of your investments, whether you’re holding them in a taxable or tax-sheltered account.

Bonus tip: Once you’ve embraced low-cost, low-trade investing, be sure to also use funds from fund managers who are doing the same. It defeats the purpose if you are being disciplined about your tax-efficient investing, but the underlying funds in which you’re invested are not.

Asset Location Is where it’s at

As your wealth accumulates, you’re likely to end up with a mixture of registered and taxable accounts. You can reduce your overall tax burden by managing these accounts as a single, tax-efficient portfolio, instead of treating each as an investment “island.” Asset location means locating each kind of investment, or asset, in the right type of account, given its tax efficiency:

  1. Hold your relatively tax-inefficient assets in tax-favoured accounts, where the inefficiencies don’t matter as much. Examples include bonds, which generate interest and other non-capital-gain income; and investments that have higher than average yields such as REITs.
  2. Hold your relatively tax-efficient assets in taxable accounts; examples include broad domestic or global stock funds that generate most of their returns as capital gains.

An Easy Rebalancing Strategy

As I covered in “Rebalancing in Down Markets, Scary But Important,” it’s essential to periodically rebalance your investment portfolio. It’s like tending to your garden by thinning out (selling) some of the overgrowth, and planting (buying) where you need more. This keeps your productive portfolio growing as hoped for, with a buy low, sell high strategy.

But as usual, there’s a catch: When you “sell high” in a taxable account, you’ll realize taxable gains. So, whenever possible, try using cash you’d be investing anyway to do your rebalancing for you. Instead of just plopping any new investable cash into haphazard holdings, invest it wherever your portfolio is underweight relative to your goals. In so doing, you can improve on your tax-efficient investing. (PS: Here’s another post I’ve published, with additional ideas on “What to Do with Excess Cash.”)

Tax-Loss Harvesting

Again, one of the best ways for your assets to grow tax-efficiently is within your registered, tax-sheltered accounts. That said, tax-loss harvesting is one tax-efficient investing strategy you can only do in a taxable account. Without diving too deep, when one or more of your holdings is worth less than you paid for it — but over the long run you expect the position to grow — you can use tax-loss harvesting to:

  1. Sell the depreciated position to generate a capital loss, which you can then use to offset current or future taxable gains.
  2. Promptly buy a similar (but not identical!) position so you remain invested in the market as planned.
  3. Eventually (optionally), reinvest in the original position to restore your portfolio to its original mix.

Again, all this only works within a taxable account. Also, the CRA has strict rules on what qualifies as a true capital loss, and may disallow it if you violate those rules. This makes it one smart strategy best completed in alliance with your personal financial advisor.

Advanced Tax Strategies for Families and Business Owners

We’ve barely scratched the surface on the myriad tax-planning strategies you can deploy in your quest to pay no more than their fair share of income taxes. Depending on your particular circumstances, you can take advantage of some of these tax strategies: Continue Reading…

Two types of overconfident investors

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I started investing in individual stocks shortly after the Great Financial Crisis ended in 2009. I picked an investing strategy that closely resembled the Dogs of the TSX, buying the 10 highest yielding Canadian dividend stocks. As you can imagine, the share prices of these companies got hammered during the stock market crash so I was able to scoop up shares in banks, telecos, pipelines, and REITs on the cheap.

Stocks came roaring back right away and my portfolio gained 35% by the end of 2009. Investing is easy, right?

It took me a while to figure out that my portfolio returns had less to do with my stock picking prowess and more to do with market conditions, luck, and the timing of new contributions. The rising tide lifted all ships, including my handful of Canadian dividend stocks.

I started comparing my returns to an appropriate benchmark to see if my judgement was adding any value over simply buying a broad market index fund. My portfolio outperformed for a few years until it didn’t. In 2015, I had enough and switched to an index investing strategy. Now I invest in Vanguard’s All Equity ETF (VEQT) across all of my accounts.

Related: Exactly How I Invest My Money

New investors who started trading stocks in the past 18 months have likely had a similar experience. Stocks crashed hard in March 2020, falling 30%+ from the previous month’s all-time highs. Since then markets have been on an absolute tear. The S&P 500 is up 91% from the March 2020 lows. The S&P/TSX 60 is up 70%.

That’s just country specific market indexes, mind you. Since March 2020 individual stocks like Facebook and Apple are up 137% and 155% respectively. Tesla is up 700%. Meme stock darlings AMC and GameStop are up 1,045% and 3,621% respectively.

No doubt, unless they’ve done something disastrous, new investors participating in this market have seen incredible returns so far.

This can lead to overconfidence – when people’s subjective confidence in their own ability is greater than their objective (actual) performance.

Overconfident Investors

Larry Swedroe says the biggest risk confronting most investors is staring at them in the mirror. This is the first type of overconfident investor.

Overconfidence causes investors to trade more. It helps reinforce a belief that any investment wins are due to skill while any failures are simply bad luck. According to Swedroe, individual investors tend to trade more after they experience high stock returns.

Overconfident investors also take on more uncompensated risk by holding fewer stock positions.

Furthermore, overconfident investors tend to rely on past performance to justify their holdings and expectations for future returns. But just because stocks have soared over the past 18 months doesn’t mean that performance will continue over the next 18 months.

In fact, you should adjust your expectations for future returns – especially for individual stocks that have increased by 100% or more. No stock, sector, region, or investing style stays in favour forever. If you tilt your portfolio to yesterday’s winners (US large cap growth stocks) there’s a good chance your portfolio will underperform over the next decade.

The second type of overconfident investor is one who makes active investing decisions based on a strong conviction about how future events will unfold.

Related: Changing Investment Strategies After A Market Crash

Think back to the start of the pandemic. As businesses shut down around the world it seemed obvious that global economies would suffer and fall quickly into a massive recession. The stock market crash reinforced that idea. Investors hate uncertainty, but this time it seemed a near certainty that stock markets would continue to fall and remain in a prolonged bear market.

Markets quickly turned around as central banks and governments doled out massive stimulus to keep their economies afloat and their citizens safe at home. Now it became ‘obvious’ that investing in sectors like groceries, cleaning supplies, online commerce, and video technology would produce strong results. Continue Reading…

5 powerful long-term investment strategies for higher returns

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TSINetwork.ca

Here are five long-term investment strategies that we are certain will enhance your long-term investment results. They’ve long been part of the advice we give in our investment services and newsletters, including Canadian Wealth Advisor, our advisory for conservative investing.

1.) No stock can ever be so undervalued or desirable that it overcomes a lack of integrity on the part of company insiders

We’ve always believed that investors should sell a stock if they have any doubts about the integrity of the people who are in charge of the company. In other words, if you think a company is run by crooks, you should sell the stock right away, no matter how attractive it seems as an investment.

However, to enhance your long-term returns, not just avoid loss, you need to apply this tip in a moderate fashion. You need to distinguish between lack of integrity on the one hand, and naivete or poor judgment on the other. Many public companies unintentionally run afoul of tax rules or regulatory decisions, for instance. If you take that as a sign of low integrity, you can wind up selling sound investments at market lows.

2.) Compound interest — earning interest on interest — can have an enormous ballooning effect on the value of an investment over the long-term

Compound interest can be considered the mother of all long-term investment strategies. This tip is especially important for young investors to learn. This stock trading tip’s benefits apply to both stock and fixed-return, interest-paying investments like bonds. When you earn a return on past returns, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

To profit from this tip, you need to pay attention to steady drains on your capital, even seemingly small ones: like high brokerage commissions, say. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.

3.) As a group, investment long shots are overpriced

If you have nothing but long shots in your portfolio, you are likely to make meagre returns or lose money over long periods, rather than making the high returns you seek. That’s why you need to be particularly cautious and selective when adding anything to your portfolio that offers the potential of high returns. Continue Reading…

GICs with an equity twist: RBC’s latest solution for Canadians looking to grow their savings

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By Flora Do

Vice-President,

Term Investments & Savings, RBC                  

(Sponsor Content)

Remember piggy banks? I sure do. Piggy banks stuffed with loonies, quarters, dimes, nickels and pennies (remember pennies?) My piggy bank helped me save for so many precious purchases when I was growing up.

During those childhood years, my piggy bank was the equivalent of a low-risk savings vehicle (I’d say ‘no-risk’ but it did shatter if dropped).  I knew exactly where my money was and how much I had. The only thing the savings in my piggy bank could not do was grow on their own.

I wasn’t yet an investor; I was a saver. Today I lead a team which helps Canadians to be both, through a solution we’ve just reinvented: the humble GIC (Guaranteed Investment Certificate).

For decades, GICs have been the preferred choice for Canadians looking to invest savings, with the guarantee that their initial investment (principal) would be fully protected.

The market stepped things up by giving some GICs an equity twist – tying GIC returns to the equities markets – for Canadians seeking the security of GICs but looking for opportunities to increase their return potential. As with traditional GICs, an investor’s initial investment is 100% guaranteed. Unlike traditional GICs, equity-linked GICs are connected to stock market performance, linked either to various indexes or a basket of stocks, offering investors potential gains from market returns.

New GIC linked to ESG

Specifically at RBC, this summer we introduced our first GIC based on ESG (Environmental, Social and Governance) factors – the RBC ESG Market-Linked GIC – and our first GIC to track the performance of a customized basket of 20 North American companies – the RBC North American MarketSmart GIC.

Our ESG GIC is a direct response to the growing interest we’ve been seeing among Canadians in looking beyond a company’s balance sheet when making investment choices. If you’re an investor who wants to help make a difference in the world by including ESG considerations in your investment decisions, our ESG GIC is purpose-built for you. It’s linked to a global index of environmentally and socially responsible organizations, all of which must first pass a set of rigorous ESG standards. To be included in the index, each company must demonstrate positive ESG metrics, low carbon impact and strong financial health. Continue Reading…