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).
Small businesses play a sizeable role in shaping Canada’s economy, contributing significantly to national employment numbers and our country’s gross domestic product (GDP).
According to Statistics Canada, in 2022 businesses with 1 to 99 employees made up 98 per cent of all employer businesses in this country. But today’s economic environment has triggered new financial challenges for this cohort. Canadian entrepreneurs can help offset the cost of rising inflation, rising cost of inputs, and rising interest rates, and keep more money in their pockets, by adopting some or all of these key tax strategies.
Consider employing your immediate family
Income splitting, whereby the higher-earner transfers part of their income to a lower-earning family member, can reduce the tax owed by your household. Consider paying a reasonable salary to your spouse and/or children for the services they provide for your business to reduce your tax obligations.
Incorporate your business
If your business generates more profit than you need to live on, incorporation is a highly effective tax strategy. It could lead to a significant tax deferral by qualifying for the lower small business tax rate for active income – the longer the profits are left in the company, the larger the tax deferral. If shares of the business are ultimately sold and are eligible for the lifetime capital gains exemption, the tax deferral gained through incorporation can create a permanent tax saving.
Other potential advantages of incorporation include having family members own shares (so as to have access to multiple capital gains exemptions) and possibly paying out dividends to actively participating family members who are taxed at a lower rate.
Maximize tax breaks with registered plans
Consider your RRSP contribution room when setting and reporting remuneration for services provided by yourself and family members who also work in the business. Employment income creates RRSP contribution room for the following year which, for 2024, can represent up to $31,560 of room. RRSP contributions are tax deductible, provide tax deferral and allow for business owners to diversify their future retirement income. Contributing to a tax-free savings account (TFSA) can also work in your favor by allowing you to withdraw funds if needed without penalty. Continue Reading…
If you had told me in my early twenties that I’d be already planning for retirement before my first major job promotion, I might have laughed it off.
Like many young professionals, I was more concerned with navigating the beginnings of my adult life and my first ‘real’ job than retirement, far in the future.
However, a deep dive into the financial world revealed the concept of ‘Financial Independence’ or ‘Findependence,’ a state where you have sufficient personal wealth to live without having to work actively for basic necessities. Essentially, what it means is that you can retire way earlier than what society considers ‘retirement age’ and enjoy your retirement while you’re still relatively young.
Today, as I share my experiences and the strategies that I’ve learned along the way, I hope to inspire you to start thinking about retirement sooner rather than later. After all, achieving financial independence is not just a goal; it’s a journey that offers profound peace of mind.
Start Early and Embrace the Power of Compound Interest
Let’s talk about the first and most important strategy I adopted; harnessing the power of compound interest.
Compound interest is like a snowball rolling downhill; as it rolls, it picks up more snow, growing bigger and faster. When you save money, compound interest works by earning interest on both your initial amount and the interest already earned.
This means your money grows faster over time. For example, investing just $200 a month starting at age 25 could grow to more than $500,000 by age 65, assuming an average annual return of 7%.
Diversify your Investment Portfolio
Diversification is key to managing risk and maximizing returns over the long term.
I’m going to say it again … DO NOT invest all of your money in one single asset!
My approach has been to spread investments across a variety of asset classes including stocks, bonds, real estate, and even some alternative investments like cryptocurrencies.
But again, if you spread your investments into too many different assets, the profit you might obtain from each investment could become very small and not that significant. So, not too many but also not too few.
Take advantage of Tax-Efficient Accounts
In both Canada and the U.S., you can take full advantage of tax-advantaged retirement accounts. How? Let me elaborate.
In Canada, utilizing the RRSP (Registered Retirement Savings Plan) and the TFSA (Tax-Free Savings Account) can significantly enhance your savings growth by deferring taxes or allowing tax-free gains.
In the U.S., similar benefits are offered through IRAs (Individual Retirement Accounts) and 401(k)s.
The amazing thing about these accounts is that they not only reduce your tax liability but also allow your investments to grow unhindered by taxes, which can make a substantial difference over the decades.
Consider Real Estate Investments
When talking about investments, it’s impossible to leave out investing in Real Estate.
Real estate can be an excellent addition to any retirement strategy, offering both capital appreciation and potential rental income. Continue Reading…
The 12 variables used to forecast Recessions are currently “signalling caution,” says Jeffrey Schulze, CFA.
Speaking Wednesday in Toronto at Franklin Templeton’s mid-year outlook, Schulze — Managing Director, Head of Economic and Market Strategy for Clearbridge Investments — told financial advisors and media that as of May 2024, the 12 variables he tracks have “historically foreshadowed a looming recession … the overall dashboard [shown below] is currently signalling caution.”
Three indicators — Job Sentiment, Money Supply and Yield Curve — have been flashing red since the end of 2023 and continue to be, as you can see in the above chart taken from a presentation made available to attendees. The only green light is Credit Spreads, while the other eight — which include Housing Permits, Jobless Claims and Profit Margins — are all a cautionary yellow.
However, stock valuations do not appear to be too stretched at present. The composition of major stock indexes, such as the S&P500, support higher P/E ratios, Schulze said. “Less-volatile defensive and growthier sectors are typically rewarded with higher multiples. These groups make up a near-record share of the S&P 500 today.” As you can see in the chart below and in the higher purple line of the graph, these Defensive stocks include Tech, Consumer Staples, Utilities, and Health Care.
However, Schulze did note a “troubling” record-high concentration of the largest S&P500 names by market weight. As you can see in the chart below, the five largest-cap components now account for more than a quarter (25.3%) of the index, which is “the highest levels in recent history … While this dynamic can persist, history suggests that a reversion to the mean will eventually occur with the average stock outperforming in the coming years.”
In fact, the combined weight of the so-called Magnificent 7 tech stocks now exceeds the combined market weight of the stock markets of Japan, the U.K., Canada, France, and China!
However, “after behaving fairly monolithically in 2023, the performance of the Mag 7 members have diverged substantially so far in 2024,” Schulze said. A slide of the “Divergent 7” showed Tesla down 28.3% and Apple flat, while the others were higher, led by the 121.4% surge in the price of Nvidia this year.
A key driver of the Mag 7 outperformance has been superior earnings growth, Schulze said, but “this advantage is expected to dissipate in the coming year, which could be the catalyst for a sustained leadership rotation.”
Companies that grow their dividends are overdue to start outperforming. “Over the past year, dividend growers have trailed the broader market to a degree rarely seen over the past three decades … Past instances of similar underperformance have been followed with a strong bounce-back for dividend growers.”
A positive for markets is the “copious” amount of cash sitting on the sidelines and being readied to deploy on buying stocks. After the October 2022 lows, investors flocked into money market funds with a net increase of US$1.5 trillion, or 32%, Schulze said: “Should the Fed embark upon its widely anticipated cutting cycle later this year, investors may reallocate. This represents a potential source of upside for equities.” Continue Reading…
Inflation continues to be the biggest near-term driver for equity markets, given its influence on central bank decision-making regarding interest rates. Inflation rates have moderated from their peak levels; however, they remain above the 2% targets set by the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed).
U.S. and Canada Inflation
As of April 30, 2024
Equity markets entered 2024 with six to seven U.S. interest rate cuts priced in over the course of 2024, with the first cut expected in March. Clearly, that did not happen. Both central banks have remained on hold, which has contributed to higher rates across the yield curve. That number has since moderated to only three cuts, and the timing of the first cut has now been pushed out to June in Canada and even later in the United States.
The effect of “higher for longer” interest rates has been particularly painful for interest rate-sensitive market sectors such as utilities and communication services. Nonetheless, pockets of the market that were expected to continue to grow have continued to advance, undeterred by the yield curve shifts.
Buoyed by hopes for a pivot in monetary policy as inflation trended closer towards the central banks’ targets, Canadian equities had a strong start to the year, although they paled compared to the ongoing boom in U.S. equities, where a large portion of the gains were derived from mega-cap information technology and related names with less representation in Canadian markets.
Mind the lag
Although decelerating, the economy continues to show sufficient resilience, with customer spending remaining robust since the reopening of economies after the global pandemic-induced shutdowns. Fiscal stimulus has moderated since the immediate aftermath of the pandemic outbreak; however, fiscal policy continues to operate at odds with monetary policy. Labour strength and wage gains have further reinforced this view, fuelling fears of lingering inflation and the potential for a higher-for-longer rate environment. Continue Reading…
Investing advice when Putin’s at war against Ukraine. Plus, Putin and the Israel-Hamas War
Deposit Photos
Russia launched the war in 2014, during the second Obama term, when it invaded Ukraine’s Crimean Peninsula. At the time, the U.S. and NATO were still unsure about how to react to Russia’s aggression toward its former possessions. Many observers felt Russia was just trying to retrieve some of the stature it lost with the collapse of the Soviet Union in the early 1990s.
When Russia invaded Ukraine in 2022, it expected Ukraine to collapse right away (the way France collapsed under the 1940 German invasion, say). The U.S. and other observers feared/expected the same. They still began sending security aid to Ukraine before the invasion. They also used threats of trade and financial sanctions to try to scare Russia off. These steps failed. However, Ukraine fought back surprisingly well and attracted additional aid from the West.
Putin soon saw that he had guessed wrong. But he assumed the West would quickly lose interest. Instead, the West stepped up its aid. Russia then began a series of veiled threats of military escalation, all the way up to tactical nuclear weapons.
My sense is that after its initial stumble, Russia still hoped/believed that if it kept up the military pressure and escalation/nuclear threats long enough, Ukraine and its supporters would agree to a lengthy ceasefire that would work in Russia’s favour.
It seemed to me and many other people that this was unlikely. In April of that year, I wrote that “Russia could launch a nuclear war, but it would find itself fighting against most of the advanced countries of the world. Putin is vain and may be deranged, but he isn’t stupid.”
Later I voiced the off-the-cuff view that any nuclear attack on Ukraine would spark a much more lethal response from NATO forces, which vastly outnumber Russia’s.
Just recently I came across the actual NATO-versus-Russia figures (below) from veteran Toronto journalist Diane Francis, writing in her Substack.com publication. (Note: her chart refers to a Military Asset as a “Characteristic.”)
The numbers show an even greater numerical advantage for NATO than I imagined. That’s just the start.
The West is also way ahead of Russia in technology, sanctions, finances, morale, global support and pretty much anything else. Russia’s main advantage in war is its ruthlessness in throwing untrained soldiers — mostly from prisons or Russian-speaking racial/cultural minorities — onto the front lines, until the other side runs out of ammunition.
Putin can only hope that Biden or a successor loses his grip and abruptly pulls out of Ukraine the way the U.S. pulled out of Afghanistan in August 2021, after two decades of hostilities.
As the sarcastic one-liner goes, that’s not likely.
Nobody can predict these things, of course. My sense is that we are seeing the last gasps of Europe’s last empire. I’d guess the outcome won’t be pretty or quick, but it may turn out to be a historical milestone. A worldwide swing back toward democracy and away from authoritarianism just might follow.
Putin and the Israel-Hamas War
My guess is that the Israel-Hamas war is just getting started and will last a long time. I also suspect that Putin had something to do with getting it started, and will do what he can to keep it going. After all, when it comes to running his country, Putin takes a grasping-at-straws approach.
Putin may think that bringing the longstanding Mideast conflict back into the headlines is going to improve his chances of conquering Ukraine and bringing the Soviet Union back from the dead.
He thinks taking a long shot is better than no shot at all. Who knows? He might get lucky.
Early on in his war on Ukraine, Putin seemed to think that Chinese dictator Xi Jinping was going to take pity on him and his country, and offer free money and/or weapons to shore up Russia’s Ukraine invasion. Instead, Xi insists on staying out of the war, while paying discount prices for Russian oil. He takes special care not to let his country get caught up in the economic sanctions that the U.S. and NATO countries and allies are directing against the Russians.
It’s not that Putin is stupid. If a war between Israel and Hamas turns out to be a big drain on the U.S. budget, the U.S. might have less money available to arm Ukraine.
Up until lately, however, Israel has had little to say about Russia’s treatment of Ukraine. Israel may soon take a more active role in helping Ukraine defend itself.
Any war is a terrible thing, and this one is no different. Meanwhile, the stock market seems to be creeping upward. Maybe it knows something that Putin hasn’t figured out. If you’re looking for investing advice related to the wars around us, spend more time learning about the wars themselves.
Meantime, if your stock portfolio made sense to you a week or two ago, we advise against selling due to Mideast fears
No matter what the state of the world, here are three rules you can follow for maximum portfolio success:
Our first rule will help you stay out of high-risk, low-quality investments. These investments are always available, in good and bad markets. They come with hidden risks due to conflicts of interest and other negatives. Every year, they lead many inexperienced investors to substantial losses. Continue Reading…
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