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).

Timeless Financial Tips #3: Tax-Planning as a Lifetime Pursuit

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Lowrie Financial: Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

I would be remiss if I didn’t dedicate at least one post in my “Play It Again, Steve” series to everyone’s least favourite, but still significant topic: taxes.

It’s a good thing there’s no tax on writing about tax planning; if there were, I would surely owe a lot.

Here are six timeless techniques for reducing your lifetime tax load:

1. Fill up your tax-sheltered investment accounts.

Taxes primarily exist to raise money for government operations, but they also are often structured to encourage us to spend and save in particular ways. For example, there are:

If you’re saving anyway, you might as well take advantage of any available tax breaks for doing so. Each tax-sheltered, or “registered” account comes with different rules on whether the money goes in pre- or post-tax, and whether it comes back out as taxable or tax-free income. But all of them share a powerful, often overlooked advantage: Investments in all registered accounts grow tax-free.

So, fill up those registered accounts. Also, be sure to invest any of it you’re not going to need for a decade or more. The snowball effect of tax-sheltered investing should help you accumulate significantly more after-tax wealth than if it’s just sitting in cash.

2. Invest tax efficiently in and among your registered and taxable accounts.

There are endless ways to invest more tax-efficiently; here are a few of the greatest hits:

How you invest: Since you only incur taxes when you sell a holding, an obvious rule of thumb is to avoid unnecessary taxable trading. Build a durable portfolio you can stick with through thick and thin, and avoid chasing hot and cold stock picks and market conditions.

With whom you invest: Especially in your taxable accounts, avoid funds whose managers are actively picking stocks or timing the market. You won’t directly see their extra, unnecessary trades. But they’ll show up at tax time in the form of taxable capital gain distributions to unit holders: i.e., you. Worse, you could end up owing taxes on those invisible gains, whether the fund goes up or down in value. There are few more unpleasant surprises for an investor than a big, year-end tax bill on a fund that’s lost value.

Where you invest (asset location): Hold your relatively tax-inefficient assets (such as bonds and REITs) in tax-sheltered accounts, where the inefficiencies don’t matter as much. Hold your relatively tax-efficient assets (such as broad stock funds) in taxable accounts.

3. Remember, not all tax rates are the same. Aim for the less costly ones.

For personal taxable accounts and investment holdcos, some taxes cost less than others. Your most tax-efficient investing income comes in the form of capital gains, since they are taxed at lower rates than other sources such as interest or dividends. This, combined with asset location considerations, is another reason to avoid loading up on dividend stocks as a strategy for generating an income stream in retirement.

Don’t believe me? Consider these 2023 combined tax rates for Ontario:

Taxable Income Source 2023 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 – Personal Tax Card – updated January 15, 2023
It’s also worth keeping an eye on whether your annual income is approaching marginal tax rate thresholds. For example, in Ontario, if you make over $235,675 in 2023, you’ll be in the top bracket. If your annual income is approaching that figure, you and your accountant can look for sensible ways to avoid reaching it. Investment holdco owners have additional tax-planning tools available to help manage the income earned from corporation investments.

Continue Reading…

The Balanced Portfolio journey after a terrible 2022

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

The balanced portfolio had a terrible 2022. In fact, it was just about the worst ever. Stocks were down and bonds had a rough ride delivering negative returns thanks to the rising yield environment. As rates go up, bond prices go down. Inflation was the culprit. Central bankers created a rising rate environment to cool the economy in the attempt to tame inflation. It was almost a year ago that I asked ‘what’s up with balanced portfolios in 2022’. Looking back on that post, things have played out as suggested in the post. And as a recession looks likely in 2023, bonds and the classic 60/40 balanced portfolio might be back in business. It’s the balanced portfolio journey on the Sunday Reads.

Here’s the post from April of 2022 – what’s up with balanced portfolios in 2022. At that point in time …

The stock and bond scorecard for 2022

  • Canadian stocks are up 1.8%
  • U.S. stocks are down 9.9%
  • International developed markets are down 11.4%
  • International emerging markets are down 13.9%

And when we looked at asset allocation ETFs, we saw that the more bond-heavy portfolios (top of that list) were down more than equity-heavy portfolios …

Here’s the year-to-date performance to April 21, 2022.

  • XINC down 8.9%
  • XCNS down 8.5%
  • XBAL down 8%
  • XGRO down 7.4%
  • XEQT down 7.0%

And while this post covering the returns of the core ETF portfolios shows that the balanced portfolio model has worked quite well over the last several years, 2022 was a down year. A typical 60/40 portfolio was down about 11% in 2022.

The all-weather model was performing well, as I wrote …

There was nowhere to hide in the traditional balanced portfolio. That said if one took more of an all-weather portfolio approach the results would be far superior. In fact the portfolios I run for myself and my wife are very near all-time highs. An all-weather portfolio will include dedicated inflation protection by way of commodities, energy and commodity stocks, plus gold.

A key to managing a balanced portfolio is rebalancing on schedule, or rebalance when certain assets perform well as other assets floudner. We move monies from the winners to the losers. In the 2022 post I suggested …

The key with any balanced portfolio approach is to rebalance on schedule. Take your gains and move the assets to the asset that’s stinking the joint out. These days, that may mean taking profits from your inflation-fighters and Canadian stocks and moving them to the underperforming assets. Yes, even moving those profits to your bonds.

In anticipation of a recession, bonds have started to work again from late 2022, with more robust gains in the last 3 months.

Bonds? Well ya!

If you need to manage the portfolio volatility, you need to manage the portfolio volatility. Meaning, your risk tolerance did not change just because bonds are getting hurt. You still need to manage the risks.

During a stock market correction (and/or recession) bonds will be there to do their thing. That is, go up when stocks get crushed. Continue Reading…

Inverted Yield Curves & Recession: How smart are Markets?

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Image Outcome/Creative Commons

By Noah Solomon

Special to Financial Independence Hub

Today’s Special: An Inverted Yield Curve with a Side Order of (Possible) Recession

In our discussions with clients over the past several months, the two frequent topics of conversation have been:

  1. The inversion of the U.S. Treasury curve, and
  2. The possibility of a recession occurring within the next few quarters.

In the following missive, I use a data-based, historical approach to explore the possible investment implications of these concerns.

How Smart is the Yield Curve?

The U.S. Treasury market has an impressive track record in terms of forecasting recessions. Going back to the late 1980s, every time the yield on 10-year U.S. Treasury bonds has remained below that of its two-year counterpart for at least six months, a recession has followed. Such was the case with the recession of the early 1990s, of the early 2000s, and of the global financial crisis.

When it comes to investing (as with many things), timing is critical. Given that yield curves do occasionally invert and that recessions do happen from time to time, it follows that every recession has been preceded by an inverted curve, and vice-versa. What makes the historical prescience of inverted yield curves so impressive is that the recessions which followed them did so within a relatively short period.

United States – Months from Yield Curve Inversion to Onset of Recession: 1989-Present

The table above covers the past three U.S. recessions, excluding the Covid-induced contraction of 2020, which I have omitted since it had nothing to do with macroeconomic factors, monetary policy, etc. As the table demonstrates, the time lag between yield curve inversions and economic contractions has ranged between 12 and 18 months, with an average of 15 months.

However, the yield curve’s impeccable record of predicting recessions has not been matched by its market timing abilities. As summarized in the following table, the S&P 500 Index has produced mixed results following past inversions in the Treasury curve.

S&P 500 Performance Following Yield Curve Inversions: 1989-Present

When the Treasury curve inverted at the beginning of 1989, stocks proceeded to perform well, returning 24.1% over the following two years. Conversely, when the curve became inverted in March 2000, the S&P 500 fared poorly, losing 21.5% over the same timeframe. The index suffered a similarly undesirable fate following the Treasury curve inversion in September 2006, when stocks suffered a two-year decline of 9.1%.

How Smart is the Stock Market?

In the past, the economy and equity markets have not been correlated. Stock prices are forward looking. Historically, equities have started to decline prior to peaks in economic growth and have tended to rebound in advance of economic recoveries.

The trillion-dollar question is not whether the market is smart, but whether it is smart enough. Do prices bake in a sufficient amount of bad news ahead of time so that they avoid further losses following the onset of recessions? Or do they lack sufficient pessimism to avoid this fate? Frustratingly, the answer depends on the recession!

S&P 500 Performance Following Start of Recessions: 1990-Present

Stocks managed to skate through the recession of the early 1990s unscathed. Following the peak of the economy in mid-1990, the S&P 500 Index went on to produce a total return of 27.2% over the next two years. Unfortunately, investors were not so lucky during the recession of the early 2000s, with stocks losing 24.6% in the two years after the recession began. Similarly, the recession of 2008 was no walk in the park for markets, with the S&P 500 falling 20.3% after the economy began contracting at the end of 2007. Continue Reading…

Franklin Bissett overweights defensive stocks over traditional Canadian sectors like Energy & Financials

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Despite a looming recession acknowledged by most of the financial industry, Franklin Templeton Canada is relatively upbeat about the prospects for both Canadian stocks and fixed income over the short- to medium-term. In a Toronto event on Wednesday aimed at financial advisors and the press, Garey J. Aitken, MBA, CFA — Calgary-based Chief Investment Officer for Franklin Bissett Investment Management — described how he has been positioning his Franklin Bissett Canadian Equity Fund somewhat defensively. (There was also a webinar version of the event.)

As you can see from the above breakdown of the fund, Aitken is way overweight defensive sectors like Consumer Staples relative to the index: the S&P/TSX composite. In Canada, consumer staples amounts to the major grocery stores like Loblaw and Metro: there’s little along the lines of such American staples giants as Proctor & Gamble or Colgate Palmolive. Aitken said his fund has owned Saputo Inc. since its IPO in the late 90s, and has long owned Alimentation Couche-Tard Inc.

The fund has been overweight consumer staples for more than a year: as the chart shows, he was overweight this defensive sector by a whopping 730 basis points a year ago and this year is even more overweight by 770 bps. He is also overweight the other big defensive sector, Utilities, by 210 bps, compared to overweight by 110 bps a year ago. The third major defensive sector globally is Health Care, but the Canadian stock market has only minimal exposure to that sector.

Aitken has moved from a small underweight position in industrials a year ago to a modest overweight in 2023 of 170 bps. And he is slightly overweight Information Technology by 140 bps, compared to a small underweight of 20 bps a year ago.

Underweight Energy, Financials & Materials

On the flip side, the fund has been and continues to be underweight in the three big sectors for which the Canadian stock market is famous: Energy, Financials & Materials. Financials (chiefly the big Canadian banks) were underweight 330 bps a year ago and Aitken has moved that to an even bigger 730 bps underweight this year. In Materials he has stayed largely pat, with a 530 underweighting today compared to a 550 bps underweighting a year ago.

The chart below shows the fund’s holding in Canadian financials. You can see that among the big Canadian banks, the fund is over the index weighting only for the Bank of Nova Scotia, and is slightly overweight Brookfield Corp. and Brookfield Asset Management:

 

However, Aitken has moved Energy (Canadian oil & gas stocks, pipelines etc.) from a small 20 bps overweight position last year to a 370 bps underweighting in 2023. The chart below shows the major Energy holdings relative to the index, with overweights in certain less well-known names: 

 

Aitken remains slightly underweight Consumer Discretionary stocks, moving from a 100 bps underweight last year to 150 bps underweight currently. Real estate is almost flat: from a slight 10 bps underweighting a year ago to a small 70 bps underweight today.  Continue Reading…

Investing in your financial future: how 4 stages of life align with your journey

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By Brian Shinmar

Special to Financial Independence Hub

If there’s truth to the statement that “change is the only constant in life,” your savings goals, habits and risk tolerance should follow closely. The topic of financial planning can be uncomfortable and intimidating for many people, but it doesn’t have to be that way. Having a sound investment strategy that evolves with your stage of life can set your mind at ease, so let’s break it down into four stages and purposefully account for some general changes you should expect along your financial journey.

Early 20s & 30s: Starting your financial journey

In this stage, many clients are just starting their careers, gaining a sense of financial independence and likely have higher risk tolerance. At this early stage of life, we don’t want clients to just invest it and forget it, we want them to build key (healthy) financial habits. The key habits that I stress are:

1.) Finding a balance between paying off debt and saving for your future: A financial advisor can help young clients establish goals and determine the balance between how much and how often contributions to debts and savings should be made.

2.) Goals with a plan: Setting attainable goals, with a clear plan to help meet them, will keep your bank account growing, and debt lowering.

3.) Saving a portion of your monthly income: A general rule is to save 10-15 per cent of your income each month, but given the higher inflation and interest rates in today’s market, that might not be realistic for everyone. The bottom line is to get into the practice of saving a portion of your monthly income. This helps build your nest egg for long-term goals, like retirement or purchasing a home. Continue Reading…