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).

The Permanent Portfolio

By Dale Roberts

Special to the Financial Independence Hub

The traditional balanced portfolio is built for the current economic environment. It is built upon the premise, or guess, that we will remain in a disinflationary environment. It is all that today’s investor has known. In a disinflationary environment US and Canadian stocks and other developed markets perform well. US and Canadian bonds perform well. As you will have noticed, if you have a sensible balanced portfolio or even a portfolio that is heavily weighted to stocks – you’ve done very well. But things could change. The economic conditions could change. For that possibility you might consider a portfolio that is built for any economic condition – the Permanent Portfolio.

The portfolio blind spot

I “got” the portfolio blind spot framing from a Canadian financial planner. The planner stated that for them, inflation was a blind spot. It was not something that the planner understood or knew how to address.

So if many portfolio managers and financial planners don’t consider serious inflation or the possibility for a change in economic conditions (economic regimes) it’s not surprising that the everyday retail investor would not ‘get it’.

And by the way, I am told that advisors and planners are not trained ‘on this.’ They are not trained to protect your wealth in all economic conditions. The word “stagflation” does not show up in their training materials.

And for the record, here are the economic possibilities and what works best in each regime. The chart is courtesy of ReSolve Asset Management.

When you have a blind spot you could get side swiped.

As I detailed in the lost decade for US stocks, there are periods (long periods) when stocks simply don’t work. They deliver no returns, or no real returns (when we factor in inflation) for extended periods – even a decade or more.

For example, US stocks delivered no real returns for a 15 year period from 1968 through 1982. You can thank inflation for that.

Each stock market is different (that is US vs Canada vs other International) but that trend and fact remains. Stocks don’t always work.

All positive US stock gains over the last 130 years have occurred in disinflationary periods.

Not only that, the traditional balanced portfolio can also deliver no real returns for extended periods. The chart is for US stocks and bonds, but the conditions would not change change materially when we substitute or add in other developed market stocks and bonds.

ReSolve Asset Management

Where stock diversification would have helped (marginally) is in the early 2000’s period. Canadian and International developed markets did not suffer to the same degree, as did US stocks in the dotcom crash. It was the US stock market that suffered from greater euphoria and greater over-valuation “issues”. You mean, like today? You might ask.

So how do you build a simple portfolio to protect and prosper through all economic conditions?

The Permanent Portfolio

There are four economic conditions that can exist. The economy can grow or the economy can shrink – economic contraction. We can have inflation and we can have deflation.

And yes we can have periods of stagnation or muted movements for each of the above.

With inflation prices are increasing and so is your cost of living.

With deflation prices are falling and the cost of living is decreasing.

Putting it all together, we can have four quadrants or economic conditions.

  • Inflation in a period of economic growth.
  • Inflation in a period of economic contraction.
  • Deflation in a period of economic growth.
  • Deflation in a period of economic contraction.

Have another look that chart from ReSolve and you’ll see the economic conditions of the last 120 years and more.

Something is always working

The Permanent Portfolio is designed to hold assets that will perform in each economic environment. Something is always working. Continue Reading…

What the CRA already knows or may learn about your crypto portfolio

Image via Unsplash: Bermix Studio

By Anna Malazhavaya

Special to the Financial Independence Hub

For better or for worse, cryptocurrencies have gained popularity, at least in part, due to their anonymity. As the industry develops and tries to shake the “crypto-is-for-criminals” reputation from its early days, the anonymity in certain areas fades.

Know Your Client requirements at crypto exchanges have become quite sophisticated. News reports keep appearing about popular crypto exchanges, such as Coinsquare in Canada and Coinbase in the United States, handing information about their account holders to local tax authorities.

The price of Bitcoin has more than tripled in the last four months. As lucky crypto investors consider whether to HODL (Hold On for Dear Life) or sell, they can be certain the taxman is watching. When can information about your crypto investments and earnings become available to the Canada Revenue Agency? Here are a few examples.

1.) If you are audited, the CRA auditor can get access to your crypto exchange account

 If you are audited by the CRA for any reason, the auditor may come across a crypto exchange purchase on your bank or credit card statement. If so,  expect follow-up questions from the auditor. If the auditor asks about your assets, you must disclose all your assets, including your crypto portfolio. Lying to the CRA is never a good idea and can lead to criminal charges.

The CRA has the power to compel third parties, including currency exchanges, to disclose information related to your crypto account activity through a so-called Requirement for Information (“RFI”). If a crypto exchange receives such RFI, they must either comply with it, dispute it at the Federal Court, or face criminal charges. Most Canadian-based exchanges will promptly release your information to the CRA.

2.) Even if you are not currently audited, the CRA may get access to your crypto exchange account as part of a so-called “unnamed persons” RFI

In some cases, the CRA can ask the Federal Court for an order to compel third parties to disclose information on a group of “unnamed persons” if the group is “ascertainable” and the purpose of the request is to verify the tax compliance of these taxpayers. A recent example of the CRA successfully exercising this power was a Federal Court order compelling Home Depot to disclose information about the accounts of its commercial customers. It appears that the CRA won’t hesitate to use this power when dealing with crypto exchanges.

In September of last year the CRA filed an application in Federal Court seeking an order to compel Coinsquare Ltd., a popular Toronto-based digital asset exchange, to disclose activity of  its clients. All its clients. And all the way back to 2013, no less. Coinsquare disputed the application arguing that the group was not “ascertainable” and that the CRA engaged in a “fishing expedition” invading the taxpayers’ privacy.

On March 23, 2021, in its blog post, Coinsquare announced that it reached an agreement with the CRA for an order, whereby only a portion of accounts would be disclosed to the CRA on or before April 6, 2021. Coinsquare would produce to the CRA information on accounts valued at  $20,000 CDN or more on December 31 in the years 2014 through 2020, along with 16,500 of the largest client accounts by trading volume during those periods.

3.) Proceeds of Sale of Cryptocurrency can be visible to the CRA

Whether or not you used a popular crypto exchange platform to sell or spend your cryptocurrency, the CRA may question the source of proceeds (traditional currency or assets purchased with cryptocurrency) you received in exchange. If you are audited, your reported taxable income should be consistent with that large deposit in your bank account or that late-model Tesla parked in your driveway. If the CRA finds a discrepancy, the consequences can be very serious.

4.) Crypto investments are only anonymous while your crypto address is not linked to your name. But if the CRA makes the connection, look out

Using the same crypto address for sending and receiving some types of cryptocurrency is like writing under the same pseudonym. If anyone ever connects your real identity to the pseudonym, all you ever published under the pseudonym will then be linked to you. Continue Reading…

Behavioural Finance: We have met the Enemy and it is Us

By Noah Solomon

Special to the Financial Independence Hub

Behavioural finance is the study of the influence of psychology on the behaviour of investors. Its central theme is that investors are not always rational, have limits to their self-control, and are influenced by cognitive biases. People harbour a multitude of self-defeating behaviours that lead to self-defeating results.


In The Laws of Wealth: Psychology and the Secret to Investing Success, author Daniel Crosby states: “The fact that people are fallible is your biggest enduring advantage in the accumulation of greater wealth. The fact that you are just as fallible is the biggest impediment to that very same goal.”

Confirmation Bias: Letting the Tail wag the Dog

Confirmation bias is the tendency of people to pay close attention to information that confirms their beliefs and ignore information that contradicts it.

Most of us have a really bad habit of only paying attention to information that agrees with our existing beliefs. Our natural tendency is to listen to people who agree with us because it feels good to hear our opinions reflected to us. We also tend to let the proverbial tail wag the dog: to draw conclusions before objectively weighing the facts. We first construct hypotheses, and then subsequently look for information that supports them.

Even some of the greatest investors have fallen prey to the confirmation bias trap. In December 2012, Bill Ackman, Chief Investment Officer of Pershing Square, launched a crusade against Herbalife, a nutritional supplements company, referring to the company as a pyramid scheme and stating that its stock was worthless. After taking a $1 billion short position in Herbalife, he continued to seek supporting evidence for his original hypothesis from Herbalife customers who had poor experiences with the company.

Activist investor Carl Icahn, who had an opposing view, acquired a 26% ownership stake in the company. The epic battle that ensued between two of Wall Street’s biggest titans resulted in a major loss for Ackman. Had Ackman attempted to find potential flaws in his thesis by seeking out customers who had positive Herbalife experiences, he might have either avoided or mitigated the losses which his fund suffered.

Loss Aversion/Disposition Effect: The Pain of Losses is (Myopically) larger than the Pleasure of Gains

Loss aversion does not describe the tendency of people to try and avoid losses, which is completely rational. Rather, it refers to having an economically unbalanced desire to avoid losses at the expense of foregoing commensurate or greater gains, which can cause them to win battles yet lose wars.

Loss aversion can cause investors to refrain from selling losing positions in the hope of making their money back, thereby allowing run of the mill losses to metastasise into “there goes my house” losses.  Loss aversion can also lead to significant opportunity costs, as money gets “trapped” in underperforming investments at the expense of foregoing better opportunities.

Closely related to loss aversion is the disposition effect, which refers to a cognitive bias that causes investors to sell winning positions prematurely and irrationally stick with losing positions. When a position is rising, we get anxious to lock in our gains and sell prematurely. At the same time, people are often too slow to cut their losses on holdings which are losing money and hold on to them in the hopes that they will recover. These behaviours tend to diminish gains and exaggerate losses, thereby leading to poor overall performance.

Fear of Missing Out: There’s nothing more annoying than watching your neighbour get rich

Fear of Missing Out (FOMO) refers to feelings of anxiety or insecurity over the possibility of missing out on an event or opportunity. What is most interesting is that FOMO is an emotional reaction that pushes us to trade or invest in a less disciplined way. Rather than buy stocks when they offer the most attractive risk-to-return ratio, investors are driven to buy them to an even greater degree the less attractive they look technically. Our fear of missing out becomes greater the more the market continues to act in an irrational way.

FOMO is frustrating because it occurs when the market is doing the unexpected and we are sticking to a solid plan. From 1996 to 2000, the NASDAQ stock index exploded from 1,058 to 4,131 points. Many of these technology stocks had little or no earnings yet still commanded steep prices. Investors feared that if they didn’t get in now they would miss out. Millionaires were minted overnight until it all went wrong. The dotcom bubble burst, and trillions of dollars of investor wealth vanished as the NASDAQ plunged to under 2,000 points by the end of 2001. Few did their due diligence on these hot tech stocks to make sure they were the best long-term investments for their personal portfolio and goals. It took many years for the average investor to recover.

In his characteristically folksy yet caustic manner, Warren Buffett used the following analogy to illustrate the absurdity of FOMO:

“Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball. They know that overstaying the festivities will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem: They are dancing in a room in which the clocks have no hands.”

The Bandwagon Effect: Making sheep look like independent thinkers

The bandwagon effect describes the tendency of investors to gain comfort doing something simply because many other people are doing it. The tendency of people to prefer doing ill-advised things that others are doing rather than act rationally in isolation is best summarized by John Maynard Keynes:

“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

Whereas using the performance of others as a reference point for measuring your results mitigates the risk of underperforming your peers, it can expose you to severe losses. The widespread abandonment of reason and rationality associated with a herd mentality has historically resulted in speculative bubbles in which the crowd joins hands and runs off the cliff together. Continue Reading…

Wealthsimple Trade review: Canada’s only Zero-commission trading platform

Wealthsimple Trade is Canada’s first and only zero-commission trading platform. In this Wealthsimple Trade review I’ll explain how you can buy AND sell from among the thousands of stocks and ETFs listed on North American exchanges without paying any fees.

I first heard about Wealthsimple Trade in 2018 when it was announced as a new self-directed investing platform that lets investors buy and sell stocks and ETFs with no trading commissions. They invited users to join a wait list and, once they attained a critical mass (130,000 participants), rolled out a beta version for users to test the platform and offer feedback.

Wealthsimple Trade officially launched in March 2019 and at that time only supported non-registered trading accounts. Later that year, the platform added RRSP and TFSA account types to its lineup. That’s when I became interested in the platform for my own self-directed investing needs.

Get a $10 cash bonus and commission-free trades when you open a Wealthsimple Trade account and deposit and trade at least $100 worth of stock.

Why I switched to Wealthsimple Trade

I’ve held my investments at TD Direct Investing since 2009. It was out of convenience, more than anything, since I had banked with TD since I was a teenager. Back then trades disgustingly cost $29 per transaction. Today, they’re still a painful $9.99 per trade. I had enough when I noticed I paid a total of $190 in trading commissions with TD last year. No more.

I opened a Wealthsimple Trade account on January 13 2020, with the goal to bring my trading commissions down to zero. That same day, I initiated the transfer of my entire RRSP and TFSA account balances. Both of these accounts were invested in Vanguard’s all-equity balanced portfolio – VEQT – and so I requested an in-kind transfer which simply transferred the shares from TD to Wealthsimple Trade without first having to sell them.

An email from Wealthsimple suggested an expected wait time of up to five weeks to complete a transfer request with TD. But to my surprise I noticed the funds in my Wealthsimple Trade account on January 21 2020: just seven business days later.

Now that you have the back story, let’s take a look at the platform.

About Wealthsimple Trade

As mentioned, Wealthsimple Trade launched in March 2019 as Canada’s first and only zero-commission trading platform. It’s a separate, yet complementary service to Wealthsimple’s main business as Canada’s top robo advisor. With offices in Canada, the U.S., and the U.K., Wealthsimple manages more than $5 billion in assets worldwide.

Related: How to transfer your RRSP to Wealthsimple

Automated investing through a robo-advisor isn’t for everyone. Some investors want to take the reins themselves, build their own custom portfolio, and make trades in their own self-directed account. Enter Wealthsimple Trade.

While most online brokerages charge $9.99 per trade, Wealthsimple Trade doesn’t charge anything to buy and sell stocks or ETFs. It doesn’t charge account fees or have any account minimums to get started.

To get the costs down to the bare minimum (zero) the platform strips out all of the expensive bells and whistles. You won’t find cutting edge research or real-time quotes (there’s a 15-minute lag). Wealthsimple Trade also started out as a mobile app – on your smart-phone or tablet – with no desktop platform access. That, thankfully, has changed and Wealthsimple Trade now offers desktop access (January 2021):

But for self-directed investors who want to build a simple low-cost portfolio of index ETFs, and who want to contribute frequently without getting dinged each time they buy or sell, Wealthsimple Trade is the perfect platform.

Signing up and opening an account

How do you open an account? Easy. Download the Wealthsimple Trade app on your Apple or Android device and select ‘Get Started’. From there, follow the prompts to enter your information and agree to your account documents.

Note that even though the Wealthsimple Trade app is NOT connected at all to the Wealthsimple robo advisor platform: existing Wealthsimple clients can skip some of the preliminary questions.

Here’s what you’ll need to get started:

  • Full Name, Email, Mailing Address, Phone number, Date of Birth
  • Social Insurance Number
  • Employment information

There are no account minimums or fees associated with opening the account. To fund it, though, you’ll need to link a chequing or savings account.

Transferring investments to Wealthsimple Trade

Transferring my existing investments to Wealthsimple Trade couldn’t have been easier. As mentioned, I initiated the transfer on January 13, 2020. I entered a few details about the accounts I was transferring, selected the institution (TD) from a list of choices, and snapped a picture of my account statements.

WS Trade covers transfer fees

WS Trade Uploading your Account Statement

Next, I indicated how I wanted the transfer to take place. Typically, you can choose to transfer funds in cash, meaning your institution sells your current holdings and then moves the money. If you go this route, you may incur DSC or trading fees. Note that your contribution room or taxes won’t be affected when you transfer a non-taxable account like an RRSP or TFSA.

Instead, I chose to transfer my account in-kind or “as-is.” This means your institution transfers your entire account. Note that Wealthsimple Trade only accepts the transfer of stocks and ETFs. You’ll have the option to sell non-eligible assets like mutual funds, bonds, or options, or leave them with your institution.

As I said earlier, the entire transfer process took just seven business days. Your mileage may vary.

Using Wealthsimple Trade

Wealthsimple Trade works like any other online brokerage, with the exception that it’s a mobile-only platform. There’s no desktop support. Continue Reading…

The great thing about managing Other People’s Money

By Michael J. Wiener

Special to the Financial Independence Hub

 

The great thing about managing other people’s money is that you can dip into it to pay yourself.  This might sound unethical or illegal, but it’s perfectly legal if the owners of the money agree to it.

I use the word “agree” in a technical sense here; you really just have to get people to sign a document that points to other documents that bury the details of how you pay yourself from their investments.  You might think that once people notice some of their money is missing, they would become wise to your scheme, but most people don’t notice.  You might think that once such schemes are exposed in the media, people will see that they’ve been had, but most people who read essays like this one just don’t believe it applies to them.  The sad truth is that millions of Canadians allow others to take their money this way.

How to consume 25 to 50% of your savings over a quarter century

Average Canadians invest much of their savings in mutual funds, segregated funds, and pooled funds offered by banks, insurance companies, and independent mutual fund companies.  The bulk of these savings are invested in funds whose managers dip into the funds to pay themselves and their helpers at a rate that will consume between one-quarter and half of investors’ savings and investment returns over 25 years.  This fact seems so incredible that most people will feel sure that it is wrong or at least that it doesn’t apply to them.  But this draining of Canadians’ savings is real.

There are laws that require sellers of funds to disclose how much they take out of people’s savings each year.  For example, when you first bought into a fund, you might remember receiving a large document called a prospectus that you found to be incomprehensible.  Don’t feel bad; it’s designed to be incomprehensible because it contains news you wouldn’t like that might stop you from buying the fund.  At least once a year your account statements have to include information about fees that get deducted from your savings, but these disclosures are often confusing, and they don’t have to include everything you pay. Continue Reading…