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).
There is a basic principle that most people follow when it comes to their spending decisions. In essence, people generally try to either
(1) Get the most they can for the least amount of money, or
(2) Spend the least amount of money on the things they want (i.e. get the best deal)
In other words, rational utility maximizers try to be as efficient as possible when parting with their hard-earned dollars.
Strangely, many investors abandon this principle when it comes to their portfolios. With investing, what you get is return (hopefully more than less), and what you pay (other than fees) is risk. People often focus on return without any regard for the amount of risk they are taking. Alternately, many make the mistake of reducing risk at any cost, regardless of the magnitude of potential returns they leave on the table.
The foundation of successful investing necessitates achieving an optimal balance between return and risk. Different types of assets (volatile speculative stocks, stable dividend paying stocks, bonds, etc.) have very different risk and return characteristics. Relatedly, a portfolio’s level of exposure to different asset classes is the primary determinant of its risk and return profile, including how efficient the balance is between the two.
Offense, Defense, & Bobby Knight
Robert Montgomery “Bobby” Knight was an American men’s college basketball coach. Nicknamed “the General,”h e won 902 NCAA Division I men’s basketball games, a record at the time of his retirement. He is quoted as saying:
“As coaches we talk about two things: offense and defense. There is a third phase we neglect, which is more important. It’s conversion from offense to defense and defense to offense.”
Nobody can escape the fact that you can’t have your cake and eat it too. You can’t increase potential returns without taking greater risk. Similarly, you can’t reduce the possibility of losses without reducing the potential for returns.
Picking up Pennies in Front of a Steamroller vs. Shooting Fish in a Barrel
Notwithstanding this unfortunate tradeoff, there are times when investors should focus heavily on return on capital (i.e. being more aggressive), times when they should be more concerned with return of capital (i.e. being more defensive), and all points in between.
Sometimes, there is significantly more downside than upside from taking risk. Although it is still possible to reap decent returns in such environments, the odds aren’t in your favour. Reaching further out on the risk curve in such regimes is akin to picking up pennies in front of a steamroller: the potential rewards are small relative to the possible consequences. At the other end of the spectrum, there are environments in which the probability of gains dwarfs the probability of losses. Although there is a relatively small chance that you could lose money in such circumstances, the wind is clearly at your back. At these junctures, dialing up your risk exposure is akin to shooting fish in a barrel – the likelihood of success is high while the risk of an adverse event is small.
John F. Kennedy & the Chameleonic Nature of Markets
Former President John F. Kennedy asserted that “The one unchangeable certainty is that nothing is certain or unchangeable.” With regard to markets, the risk and return profiles of different asset classes are not stagnant. Rather, they change over time depending on a variety of factors, including interest rates, economic growth, inflation, valuations, etc.
Given this dynamic, it follows that determining your optimal asset mix is not a “one and done” treatise, but rather a dynamic process that takes into account changing conditions. Yesterday’s optimal portfolio may not look like today’s, which in turn may be significantly different than the one of the future.
It’s not just the risk vs. return profile of any given asset class that should inform its weight with portfolios, but also how it compares with those for other asset classes. As such, investors should use changing risk/return profiles among asset classes to “tilt” their portfolios, increasing the weights of certain types of investments while decreasing others.
In “normal” times, the expected return from stocks exceeds the yields offered by cash and high-grade bonds by roughly 3% per annum. However, this difference can expand or contract depending on economic conditions and relative valuations among asset classes.
In the decade plus era following the global financial crisis, not only did rates remain at historically low levels, but the prospective returns on equities were abnormally high given the positive impact that low rates have on spending, earnings growth, and multiples. Against this backdrop, the prospective returns from stocks far exceeded yields on safe harbour investments. Under these conditions, it is no surprise that investors who had outsized exposure to stocks vs. bonds were handsomely rewarded.
Expected Return on Stocks vs. Yield on High Grade Bonds: Post GFC Era
As things currently stand, the picture is markedly different. Following the most significant rate-hiking cycle in decades, bonds are once again “back in the game.” Moreover, lofty equity market valuations (at least in the U.S.) suggest that the S&P 500 Index will deliver below-average returns over the next several years. Continue Reading…
In his 2024 re-election campaign, U.S. President Donald Trump vowed to pursue an aggressive trade policy that aimed to reduce or altogether eliminate what he viewed as unacceptable deficits between adversaries and allies alike. Following his January inauguration, President Trump has put Canada and Mexico into his crosshairs. Tariffs continue to be one of his favourite tools, if his rhetoric is any indication.
A tariff is a tax that is imposed by a country on the goods imported from another country. It is typically collected by a country’s customs authority. Some economists have argued that this results in a larger burden being paid by consumers, as companies will pass on tariff costs to the consumer.
In this piece, we will look at how ongoing trade tensions could impact world economies and markets. After that, we will zero in on ETFs that can potentially provide protection against the current bout of volatility.
Trade policy volatility and Canada
Last month, we looked at the impact the new GOP administration could have on the industrials space. That piece explored the trade policy volatility that existed in the first Trump administration.
Baker, Bloom & Davis
US Categorical Economic Policy Uncertainty Index – Trade Policy
Source: Baker, Bloom & Davis. Bloomberg, Harvest ETFs, as of January 21, 2025.
On Monday, February 3, 2025, U.S. and global markets suffered sharp pullbacks in the morning hours. However, markets recovered after the Trump administration announced that tariffs on Mexico and Canada would be delayed for 30 days.
Canada finds itself at a crossroads as it contends with unprecedented pressure from a long-time ally, political uncertainty on the domestic front, and muted and decelerating economic data. The Bank of Canada must weigh these pressures as it determines how much it can slash interest rates to bolster economic activity..
That aside, Canada is home to many great companies with oligopolistic qualities. We detailed their strengths in a piece in October 2024. The Harvest Canadian Equity Leaders Income ETF (HLIF:TSX) invests in 30 of Canada’s most powerful and largest companies for their traits and growth potential. It overlays an active covered call strategy, which seeks to generate high monthly cash distributions.
Combat trade volatility with defence and diversification
Defensive sectors contain businesses that are stable, possess key barriers to entry, and are relatively immune to economic fluctuations.
Healthcare falls in this defensive category and is unique in its diversity. It includes companies that manufacture medical devices and equipment, as well as those that are involved in the making of diagnostic tools and lab equipment, companies involved in the ownership of doctors’ networks, as well as facilities and companies in the Managed Care segment.
The Harvest Healthcare Leaders Income ETF (HHL:TSX) is an equally weighted portfolio of 20 large-cap global healthcare companies. HHL aims to generate an attractive monthly distribution through an active covered call writing strategy. This ETF has paid out over $500 million in total monthly distributions to unit holders since its inception.
Utilities is a space that is often targeted by investors who are looking to shore up a defensive position in their portfolios. Companies in the utilities space possess enormous scale, significant barriers to entry, and dominance in their respective markets. The Harvest Equal Weight Global Utilities ETF (HUTL:TSX) offers access to a globally diversified portfolio of utilities equities. That global diversification offers benefits like reducing interest rate and natural disaster risk with exposure to different countries and regions. Continue Reading…
The following is an edited transcript of the podcast Two Way Traffic hosted by financial advisor Darren Coleman with his two guests: tax lawyer Trevor Parry and Kim Moody of Moodys Private Client which provides law, and cross-border tax and accounting services. Trevor Parry once told Stephen Harper that Canada has more auditors than infantry. Not to be outdone, Kim Moody says in the eyes of the Canada Revenue Agency a cocaine dealer can deduct expenses in this country, but not an Air bnb operator.
Click below for full link (interview conducted early January):
I’m joined today by Kim Moody of Moodys Private Client in Calgary, Alberta, and tax lawyer Trevor Perry, who is based in Ancaster. They are two of Canada’s most prolific tax fighters. We’re going to discuss where are we right now in terms of tax policy and what should Canadian investors be thinking about. Also, we have a new government in the United States.
Why don’t we begin with a little bit of kind of where are we right now? We just had the fall economic statement that was not delivered by your Finance Minister. But they came in at more than 50% higher than the fiscal guardrail that they set for themselves. So this is an astonishing amount of capital that they’ve spent, and not even remotely close to where they said they were going to be. Even $40 billion was a big number. So now that it’s 60 and there’s really no one to stand there and take accountability for it, and we had the Finance Minister resign just hours before she delivered that statement. So I’d want to focus on where does that leave taxpayers right now because there are a number of items. I’ll focus on the capital gains inclusion rate change as probably the most significant one. Where are we now? Is that going to go through? Not going to go through? What should investors be doing? What should taxpayers be doing with the state of change that we have in Ottawa?
Kim Moody
To your question on capital gains, where are we today? This is certainly one of the most unusual times in my career where we had proposed tax legislation that looks like it’s not going to get through. Trevor and I have been around a long time, and seen lots of tax legislation not get through. If I was a betting man, I’d say probably about 98% certainty that it’s not going to go through. And I’ve written about that in my Financial Post articles. So Trevor, do you know of any other, you know, broad based piece of legislation?
Trevor Perry
There was a lot of tumult when income trusts were attacked and all that kind of stuff. But the panic that was engineered this year to create some kind of revenue event because of forced selling, and it’s going to die because they prorogued Parliament. No, I’ve never seen anything like this before, and it’s just part and parcel of the worst in the history of this country, the worst tax policy from day one going on.
Darren Coleman
It’s really a quandary for investors and taxpayers, because the general rule has been, if I’m correct, that even though the legislation may not be enacted, one has to act as if it was going to pass, right? But as you guys have said, it’s very likely this will not pass. Should people, as they go into the tax year, be assuming that the new capital gains inclusion rate applies and act accordingly? Or should they act as if no, a betting man says it’s not going to happen, so I should just keep the old rates. What should you do?
Kim Moody
The CRA has a long-standing policy of encouraging taxpayers to act on proposed legislation. I think there’s a good reason for that, and I support them on that because 98% if not higher of tax legislation and proposed tax legislation gets passed even with retroactive applicability, which is very common in tax law. There were some recent statements attributed to the CRA saying they’re going to continue to administer the capital gains stuff on the basis that it’s law, even if an election is called. This stuff is not going to get passed if an election is called, and therefore you’re going to continue to administer it. Well, I can tell you, in my client base, I’m giving the exact opposite advice because I think there is a 98% chance this thing is not going through. So if you want to amend your tax returns for the two-thirds inclusion rate, go right ahead, but you’re going to do it without my blessing because I think it’s wrong, and you’re going to fight to get that money back. It’ll take a long time. So that that’s my approach.
Darren Coleman
How easy is it to fight to get your money back? Is that pretty standard? Like, no, don’t worry, they’ll refund it within five business days, or is it a big argument?
Kim Moody
No, it’s not usually a fight, per se, although there’s always exceptions to that, but it’s a matter of timing. You know when you amend your tax return? Number one, Have you filed your tax return? If so, then do you have the ability to amend it? Which, in most cases, you do, and then how long is it going to take for them to process it? Those are usually the pillars, and it’s that last one that takes a long time,
Trevor Perry
It’s part and parcel of a tax administration system that needs a complete overhaul. Given that they know everything you’re doing already we need some basic respect for the taxpayer, which is something we don’t have. I remember telling our last Prime Minister that there were more auditors in Canada than Canada has infantry. That’s the nature of the beast right now.
Kim Moody
And that’s increased by a lot. I think 29,000 CRA employees. So I think it’s almost 60,000 if I’m not mistaken.
Trevor Perry
And we have about 12,000 infantry, of which we cannot deploy them all at the same time.
Darren Coleman
Let’s go back over that greatest hits of outstanding tax policy that we’ve seen over the last year. Kim, you actually wrote about that in the Financial Post recently (late January). We’ve had the flipping tax. We’ve had the changes to AMT. We’ve had the unused, underused housing tax. We just had the move the date of which you can make a charitable contribution, because we had the postal strike.
Kim Moody
Kim Moody
Trevor knows I’m certainly no fan of the capital gains one, which I had ranked number one in the article as the worst policy. But number two is the prohibition of deductions on certain short-term rental owners. So if you happen to be an evil owner and operator of an Airbnb that operates in a jurisdiction that prohibits that, you’re denied all your expense deductions. A complete prohibition of deductions. So let’s pretend Trevor is a cocaine dealer. He’s out selling snow, but I’m just a lowly Airbnb operator. So Trevor makes 10 grand selling snow. But he’s got a bunch of people running around for him. He’s got burner cell phones. He’s got cost of his inventory, etc. So he makes net 2000 bucks, and he comes to me and says, Hey, Kim, I know I’m doing something illegal here. I’m selling drugs, but I don’t want to be a criminal twice. I want to make sure I file my tax returns because I don’t want to be a tax evader. So can you file my tax returns for me? So we go ahead and I file the tax returns. Do you think I’m claiming his deductions? His $8,000 of deductions? Sure, yeah. And there’s nothing in the Income Tax Act that prohibits that. But now I file the tax returns from my evil Airbnb operation that I’m operating illegally in a jurisdiction because I need to pay some bills, and I have the same $8,000 of expenses. Nope, I can’t deduct those, so I’m paying tax on $10,000. Now from a public-policy perspective, what does that say to the average Canadian? It tells me that the drug dealer in this fictional world, Trevor, is better off and should be treated better from a tax perspective, than me, the lowly Airbnb. That’s ridiculous policy. It’s dangerous policy, and it’s something that needs to go immediately.
Trevor Perry
For me as a lawyer and as a political junkie, I think our 1982 constitutional exercise needs to be reopened. Until we enshrine property rights in the Constitution, I believe, as a fundamental conservative that we do have property rights. Tax policy is horrible. But in terms of tax practice, having done lots of work for professional athletes, CRA running at baseball players and …
Darren Coleman
… The John Tavares situation.
Trevor Perry
If Tavares loses that you’re going to start seeing Canadian teams fold up and move again. It’s just absolutely stupid. And again, it goes to the whole issue of, why are we taxing people into oblivion at $245,000?
Darren Coleman
Darren Coleman
We did a podcast episode with Kevin Nightingale and Shlomi Levy talking about that. They don’t represent Mr. Tavares, so it was safe for them to comment. Listeners can go back and hear that podcast. We’ve also had some Toronto Blue Jays baseball players who had similar predicaments. They look like they’ve been resolved positively for the players. But those are not exactly the same situation as Mr. Tavares, so we’ll have to see what unfolds here. And as a big sports fan yourself, I know that one’s pretty close to your heart.
Darren Coleman
So now that we got into hockey, let me lure back our American listeners for a minute. Let’s pivot into what’s happening with our American cousins. They are going to go into a very interesting 2025. They have a new president. So the difference, I think, is going to be very significant between how the U.S. is going to adopt tax policy, and it’s a little concerning, I think, for many people that Canada doesn’t, apparently seem to have a functioning government at the moment. So what do you guys think Mr. Trump might do in his first year in terms of tax policy? What should investors be getting ready for?
Trevor Perry
I think you’re going to see them make the tax changes he brought in in his first term permanent. I think you’re going to get that lower corporate tax rate, which is going to cause great tumult in this country and in other countries, but particularly Canada. I think there’s going to be pressure here to have some kind of sensible corporate tax rate, the estate tax change. There won’t be any changes to estate taxation in the US for the foreseeable future. So there will be again, more reasons for, as Ross Perot called it, that great sucking sound of Canadian capital, both real and human, to leave the country.
Darren Coleman
But are they actually doing it? So gentlemen, have you actually seen evidence in your own practices of Canadians saying, I’m done, I’m out of here, and they’re actually making the steps they’re making, the move to leave, to lower tax jurisdiction. How many people are really doing it?
Kim Moody
Yeah, 1,000% and I’ve written about this a lot. I’ve spoken about it publicly. I’ve spoken at conferences about this. At one particular conference I spoke about this and there was an academic who was pro capital gains changes. So I showed the statistics but his rebuttal was, I don’t believe you. Here’s the statistics coming out of my office in Calgary. And we’re not a big office, but we’re about 85 people. We act for high net worth, ultra high net worth, private companies and individuals. In the first 23 years of my career — I’ve been practicing for roughly 31 years now — in the first roughly 23 years of my career, I did maybe a dozen departure tax files. It was really easy to leave Canada without incurring departure tax. That all changed. I want to say late 90s, am I right? Trevor, something like that, and and they made it a lot more difficult. And so in the last nine years, this increased with a new high personal tax rate. And then fast forward to the attack on small businesses in 2017 that caused a whole bunch of angst. COVID caused a whole bunch of out-of-control spending. And then the capital gains stuff was just kind of over the top. So all to say, in the last, especially five years, the number of files that I’ve worked on in the, you know, departure tax. You want to take a guess, Darren? Continue Reading…
A key concern many investors have at the moment is the impact of Trump’s tariffs on goods produced outside the U.S. on the markets. I’m hearing from those wondering if they should do something to protect their wealth; their primary question is: What should I do with my investments?
My answer (as it usually is when investors are concerned about the geopolitical impact on the markets): stick with the plan because, by the time the news is public and you become concerned, the markets have already accounted for it/priced it in, so any reaction you take is too late.
A useful historical reference on tariffs is President Trump’s first term. Starting in 2017, his administration targeted China, implementing tariffs on a broad range of products by 2018. The following years saw ongoing trade negotiations that led to an agreement, though many tariffs remained. Despite the uncertainty, both U.S. and Chinese markets outperformed the MSCI World ex USA Index over Trump’s four-year term. Have a look at the data from 2017 to 2020, as Dimensional compares China MSCI Index to US S&P 500 Index to MSCI World ex USA Index.
Markets are forward-looking, meaning that the potential economic effects of tariffs are likely already factored into current prices. As a result, when these anticipated changes materialize, their impact on markets may be limited.
Understanding how Market Pricing Works
Let’s talk about the price of stocks.
It stands to reason: To make money in the market, you need to sell your holdings for more than you paid. Of course, we’re all familiar with good old “buy low, sell high.” But despite its simplicity, many investors fall short. Instead, they end up doing just the opposite, or at least leaving returns on the table that could have been theirs to keep.
You can defend against these human foibles by understanding how stock pricing works and using that knowledge to your advantage.
Good News, Bad News, and Market Views
How do you know when a stock or stock fund is priced for buying or selling?
The short answer is, we don’t.
And yet, many investors still let current events dominate their decisions. They sell when they fear bad news means prices are going to fall. Or they buy when good news breaks. They invest in funds that do the same.
While this may seem logical, there’s a problem with it: You’re betting you or your fund manager can place winning trades before markets have already priced in the news.
To be blunt, that’s a losing bet.
You’re betting that you know more about what the price should be at any given point than what the formidable force of the market has already decided. Every so often, you might be right. But the preponderance of the evidence suggests any “wins” are more a matter of luck than skill.
Me and You against the World
Whenever you try to buy low or sell high, who is the force on the other side of the trading table?
It’s the market.
The market includes millions of individuals, institutions, banks, and brokerages trading hundreds of billions of dollars every moment of every day. It includes highly paid analysts continuously watching every move the markets make. It includes AI-driven engines seeking to get their trades in nanoseconds ahead of everyone else.
And you think you can beat that?
We believe it’s far more reasonable to assume, by the time you’ve heard the news, the collective market has too, and has already priced it in.
News of a recession, under way or avoided? It’s already priced in.
Inflation on the rise, or abating? It’s already priced in.
A company suffers a calamity or makes a major breakthrough? It’s already priced in.
The government passes critical legislation that helps or hinders global trading? It’s…
And so on. Here’s your best assumption:
If it’s public knowledge, it’s already priced in.(And if it’s insider information, it’s illegal to trade on it.)
What we don’t yet Know
As soon as an event is priced in, several things make it difficult to profitably trade on the news:
You’re Buying High, Selling Low: If you trade on news after it’s been priced in, odds are you’ll buy at a higher price (after good news) or sell at a lower price (based on bad news). Continue Reading…
The role of wealth in one’s life is a complex and multifaceted aspect that varies from person to person. Not everyone wants to become wealthy.
For some, wealth is a means to an end, a tool that facilitates the pursuit of their passions and goals; arts, leisure, family time. Others prioritize different aspects of life, such as love, beauty, sports, or creative expressions like dance and fashion. These individuals might view wealth as a secondary consideration, simply needed to sustain their chosen paths.
There are those who lack clear goals, accepting life as it comes without a distinct sense of direction, merely following societal trends.
On the other hand, some individuals place great importance on wealth, believing that it simplifies and enhances all other aspects of life.
The two tracks to wealth
The pursuit of wealth can be approached through two distinct tracks: the slow track and the fast track. Which track you take depends on your priorities, your ambitions, your self-confidence, and your willingness to put in the work.
What is the slow track to wealth?
The slow track involves accumulating wealth over time through consistent savings, often achieved through a regular job and disciplined investment strategies. This method, while reliable, requires patience and decades of dedicated effort. It’s a route that many can take, but societal conditioning to spend rather than save often hinders its widespread adoption. If you work a regular job, save every month and invest in low-cost index funds or ETFs, it is almost guaranteed that you will become wealthy.
Let’s do a quick example. For this example, let’s ignore the effects of inflation.
Let’s imagine that a person saves $5,000 per year and he/she gets an average return from the market of 8%. How long will it take this person to become a millionaire?
It will take 36 years to accumulate $1,000,000.
To save $5,000 per year is not that difficult — practically anyone can do it — but most people are conditioned to spend, not save; therefore, very few people will become wealthy even though it is within their reach.
With one million dollars, a person can spend about $80,000 per year for the rest of their lives without running out of money. The slow track is not bad at all.
What is the fast track to wealth?
Most people who become millionaires do so by creating businesses. They take risks and responsibilities that others are not willing to take. They have a vision of where they want to go, they eliminate all the excuses and work relentlessly toward their goals. A fast-track business should make you wealthy in 20 years or less.
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