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).
If there is one thing COVID-19 has not impacted, it’s RRSP season. March 1, 2021 is the deadline for contributing to an RRSP for the 2020 tax year. The question is, should you?
The basics: Anyone who files an income tax return can contribute 18% of earned income to a maximum of $27,230 for the 2020 tax year. If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the Pension Adjustment (PA). Unused contribution room can be carried forward to use in the future.
Generally speaking, RRSPs make sense for anyone who wants and can afford to invest for the long term. Here’s why:
Pros
Contributions are tax deductible.
Earnings grow tax-sheltered within the plan.
You can defer tax on investment earnings and contributions to the future. This is particularly useful if you are a high-income earner and your marginal tax rate is likely to be lower in the coming years.
RRSPs can hold a wide range of qualified investments. For example, you can hold GICs, savings bonds, Treasury bills, bonds, mutual funds, Exchange Traded Funds (ETFs), equities (both Canadian and foreign), and income trusts in an RRSP.
Deciding what to hold in your RRSP really comes down to the same factors you have to consider when making any type of investment: your comfort level with risk, your investment objectives and your time horizon. For example, if your goal is to grow your wealth over time and market volatility doesn’t keep you up at night, then you may want to consider growth investments such ETFs, mutual funds and stocks. If you want income, then income-generating and interest-paying investments are worth looking into.
All of this said, RRSPs do have their drawbacks.
Cons
While you can withdraw funds from an RRSP before you retire, you will have to pay a withholding tax and you also have to report that money as taxable income to the Canada Revenue Agency.
The Government of Canada controls the amount of money that must be withdrawn annually once the RRSP matures. When you convert the RRSP to an Registered Retirement Income Fund, which must be done when you turn 71, you are required to withdraw a minimum amount each year starting at age 72 even if you don’t need the money.
RRSPs work best for people who can use a tax deduction and can afford to put money away for the future. Another consideration: Is your income in retirement (and therefore the marginal tax rate you’ll have to pay) going to be equal to or greater than it is during the years you can contribute to an RRSP? If this is the case, you won’t be achieving any tax savings by contributing to an RRSP. However, you could still benefit from deferring tax. The question then becomes, do you pay the income tax now or later? Continue Reading…
The other is from regular Hub contributor Dale Roberts of Cutthecrapinvesting. His MoneySense piece can be found here: Should you invest in Cryptocurrency?
My piece is the first time I’ve publicly written about crypto, although the Hub has long covered it, both positively and not so positively. Try, for example, this primer published here way back in July 2017.
The MoneySense piece recaps my personal experiments with Bitcoin and Bitcoin funds, as well as Ethereum and Ethereum Funds, going back to the fall of 2020. I sat out the original 2017 boom.
It seems to me that investors should regard this as a new asset class that should probably not exceed a few per cent of a diversified portfolio. Certainly, institutional acceptance of crypto and attention from hedge fund billionaires like Paul Tudor Jones seems to have ignited the new euphoria, buoyed in part over the frustration of minuscule interest rates and inflationary forces unleashed by endless money printing by central banks in the US and the rest of the world.
Based on the recommendation of Profit Unlimited’s Paul Mampilly, my first try was to put several thousand dollars into each of the Grayscale Bitcoin Trust [GBTC/OTC] and Grayscale Ethereum Trust [ETHE/OTC], which I currently hold in a non-registered account.
I soon realized I wanted to hold these experimental positions in registered portfolios (RRSPs and TFSAs) so that the next time I got a double or triple — if indeed they materialized rather than comparable losses — I could book the gains with no immediate tax consequences. I soon discovered the closed-end funds of Toronto-based 3iQ Digital Asset Management: first I tried The Bitcoin Fund [QBTC/TSX] andThe Ether Fund [QETH.U/TSX], can be held in registered accounts like RRSPs and TFSAs.
My third experiment was when Mampilly started to recommend his readers move from the Ethereum tracking ETHE to actual native ethereal or ETH (which some call Shitcoin, or poor man’s Bitcoin). He suggested buying actual “native” crypto from places like Coinbase and RobinHood, convenient for his mostly American subscribers but less so for Canadians. Continue Reading…
Words are important. Not only because of what they say, but also what they imply without saying. The finance business is full of such words and phrases.
Today, we’ll look at one of my (ahem) “favourites” – the word “correction.” Within the field of finance, a correction is when the stock market drops by 10% or more. A more precise term might be a drop of more than 10%, but less than 20%, because a drop exceeding 20% is no longer a correction, it is a bear market. Got that?
The finance industry presumes markets always rise
Here’s the thing about industry Bullshift. The presumed direction, when speaking about the future, is pretty much always up. Every prognostication from everyone who does a prognostication for every asset class under all circumstances is that ‘the market’ (whatever index or asset class is being discussed) will go up this year. I have literally never seen a major industry player predict a year-over-year drawdown in any asset class: ever.
As people must surely know, most financial predictions are made about the stock market. The data on the subject is quite clear: markets the world over go down about 3 times every 10 years. Many prognosticators hedge their predictions by allowing that, of course, a ‘healthy correction’ of about 10% could happen at any time and for almost any reason, including no discernable reason whatsoever.
An ‘Incorrection of Epic Proportions?’
My question to you is about symmetry and consistency. If a drop of 10% or more is a “correction, it must logically follow that a gain of 10% or more is an “incorrection.” Who decides what is correct or incorrect, anyway? Continue Reading…
Mark Seed’s MyOwnAdvisor website has just published a Q&A with Yours Truly. The Hub often republishes Mark’s blogs here (with his permission of course) and this Q&A covers topics like dividend investing, asset allocation ETFs, hybrid strategies using both and even crypocurrencies.
You can find the original blog by clicking here, or you can read the republished version below:
MyOwnAdvisor’s Mark Seed
Mark Seed: “Fun money” is an apt term for monies you can afford to lose. I mean, nobody wants to lose money on purpose of course but there is always an undeniable trade-off when it comes to investing.
Risk and return and related.
Higher risks can signal a higher potential return. Higher risks taken can also signal flat-out failure.
I was curious to hear about how some retirees or semi-retirees invest and keep speculation in their portfolio.
So, I reached out to author, blogger and columnist Jon Chevreau for his thoughts including how much he speculates in his own portfolio, at age 67.
Jon has already contributed to My Own Advisor a few times.
Jon, welcome back to the site to discuss this interesting topic!
Jon Chevreau: Glad to be back Mark.
Mark: In our last post Jon, we talked about low-cost ETF investing, investing in stocks and more in your Victory Lap Retirement book.
Jon: No, DIY investing is probably not for everyone: some need good advice and like most things in life, you get what you pay for.
If you need a full-service advisor or a fee-based advisor that can add value not just on investments but on tax strategies, estate planning, retirement income, insurance and the like, then paying on the order of 1% a year of assets is not unreasonable. On the other hand, with interest rates so low, the more you can save on the fixed-income portion of a portfolio the better. That applies doubly to retirees, who should have a good percentage of their investments in fixed-income (say 40 to 60% depending on objectives and risk tolerance.) I often tell retired readers that if all they use is a discount brokerage in order to hold a Vanguard or iShares asset allocation ETF, that can be a good compromise: you get the equivalent of near professional stock-picking prowess via indexing, asset allocation and rebalancing all for a very good price; and you could then hire a fee-only financial planner for specific guidance outside that pure investing realm.
So, given some aspiring retirees might not want to invest entirely alone, what good options might be available to help them out (beyond blogs like yours and mine of course)!? Ha!
Jon: I often direct new or aspiring retirees who are worried about the shift from wealth accumulation to generating regular retirement income to the books by good Canadian authors like Moshe Milevsky, Daryl Diamond and Fred Vettese. Sites like yours and mine probably have reviewed these. There are also several retirement planning software packages that are worth considering; ViviPlan, Cascades and Retirement Navigator, to name three I once reviewed in a Globe & Mail article.
(Mark: you can find many references to those authors and their books below.)
As someone who is in their semi-retirement years, is that being overly cautious? What are your personal thoughts/approaches on trying to mitigate poor sequence of returns risks?
Jon: Market timing is always fraught with uncertainty so I tend to suggest sticking to your asset allocation plan and adhering to a relatively cautious variant of the 4% Rule. I’m cautious so personally start with a 3% rule: that is, whatever amount you have invested I try to withdraw only about 3% of the value per year. Hopefully, some combination of interest, dividends and capital gains will generate most of that 3% and if sometimes it means breaking a bit into capital, then accept that. We don’t live forever and the occasional down year from a stocks bear market will soon enough be followed by some very good years, like 2020 largely turned out to be. In bad years, be frugal and eschew travel if necessary; in good years, live a little but at least keep investing in your TFSAs. Diversification and asset allocation are our friends but keep in mind the Asset Allocation ETFs are mostly focused on the big three asset classes of stocks, bonds and a bit of cash.
With all this money printing by central banks to cope with COVID-19, I like to include some inflation hedges and so keep maybe 10% in precious metals/gold/silver/platinum and real estate is a good asset class for 5 to 10%, through REIT ETFs that can currently be acquired at bargain prices.
Mark: I own a few REITs for that hedge myself: some REITs do seem very cheap now. Jon, I’ve long since argued that any path to financial wealth should be largely boring – save, invest, stay the course, focus on equities, diversify, minimize fees – and you should end up more than OK after a few decades of this simple path to wealth-building.
Yet the rise of cryptocurrencies, the recent tech boom, and other investing alternatives has me thinking there is absolutely some room for some/a small bit of speculative plays in a portfolio. So, I have a few questions for you.
First, what is your stance on that? I mean, how much should retirees speculate in their portfolio if at all?
Jon: Some believe retirees shouldn’t speculate at all but any retiree counting on current GIC rates will need a much bigger portfolio for that than when interest rates provided a reasonable return. Personally, even as I near age 68, I still invest a lot in technology stocks and lately I have even dipped my toes into cryptocurrencies. Continue Reading…
By Jeffrey Schulze, CFA, Director, Investment Strategist with ClearBridge Investments, a Specialty Investment Manager of Franklin Templeton
(Sponsor Content)
There are times to follow the herd and there are times to stray away from the pack. Investors must learn this lesson. Sometimes, it can be beneficial to follow a larger group, but there are moments when it can make sense to chart one’s own course. In the early and middle stages of an economic expansion, running with the herd can be a beneficial and safe proposition.
As the U.S. recovery unfolds, some investors may be tempted to break off, worried about the formation of a bubble. Indeed, many investors are concerned that the market may be overheating, based on metrics such as the forward earnings of the S&P 500 Index.
Importantly, an increase in equity multiples is not uncommon during the early stages of an economic expansion. Following recessionary troughs, market returns tend to be driven by price-to-earnings (P/E) multiples during the initial market rally (approximately nine months) as investors anticipate an eventual earnings rebound. As the recovery matures over the subsequent two years, the opposite dynamic occurs, with multiple compressions on the back of stronger earnings growth. Put differently, earnings typically make a significant contribution toward stock returns during this second phase of the rally and declining P/Es become a modest drag on returns (see Exhibit 1 below).
Exhibit 1: Multiples vs. Earnings Data as of Dec. 31, 2020. Source: JP Morgan.
As we move through 2021 and eventually into 2022, we expect this same pattern to unfold; however, multiples may remain elevated.
Higher multiples not uncommon early in Expansion
Valuations are elevated in part because investors correctly sniffed out the budding U.S. economic recovery. Unprecedented stimulus actions (both monetary and fiscal) short-circuited the typical bottoming process, as policymakers formulated a response that rapidly ended the economic crisis and fueled an upturn in financial markets.
ClearBridge Investments has been tracking the scope of this improvement, and we see an overall expansionary green signal since the end of the second quarter of 2020. In our view, it has become clear that a durable U.S. economic and market bottom has formed, with the S&P 500 up 67.9% from the lows and a third-quarter GDP rebound of +33.4%, as of December 2020. Continue Reading…
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By Allan Small
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