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).

Why Canadian Small Caps should be a small part of your portfolio

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We think that small caps should not make up the bulk of your diversified portfolio — but you can benefit from making the best Canadian small cap stocks a smaller part of your holdings.

We generally feel that most investors should hold the bulk of their investment portfolios in conservative securities from well-established companies. This means holding a total of 15 to 25 well-established, dividend-paying stocks, chosen mainly from our “Average” or higher ratings, and spreading your holdings out across most if not all, of the five main economic sectors.

However, some investors choose to add more aggressive or speculative stocks to their holdings in their pursuit of bigger, faster gains. That can involve holding some of the best Canadian small stocks.

Understanding how we look at the best Canadian small cap stocks

We recommend a number of small-cap stocks in our Power Growth Investor newsletter, and we comment on others in our Inner Circle mailings, in response to questions by members. We also recommend some higher-risk investments in our Spinoffs & Takeovers publication.

Our Aggressive Growth Portfolio selections in The Successful Investor and Wall Street Stock Forecaster tend to be more highly leveraged and more volatile than our Conservative recommendations, and they can give you bigger gains and bigger losses. Their higher risk may be due to financial leverage, or to the risks facing their industry or particular situation. Still, our Aggressive Growth stocks are typically less aggressive than the picks in, say, our Power Growth Investor newsletter.

We can be wrong on any of our stock recommendations, of course. When we’re wrong on an aggressive stock, losses are likely to be larger than on a well-established stock.

Ultimately, the percentage of your portfolio that you should hold in either conservative or aggressive investments depends on your personal circumstances. An investor with a longer-time horizon or without the need for current income from a portfolio can afford to invest some money in aggressive stocks.

We look at many stocks before singling out our aggressive favourites, and we try to choose those with as much underlying value and as many hidden assets as possible. This is the best way to cut risk for conservative and aggressive investors, alike. Continue Reading…

Will Budget 2022’s proposed tax hurt Canadian financial services stocks?

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By Ian Duncan MacDonald

Special to the Findependence Hub

In the 2022 Federal budget a surtax of 1.5 per cent on bank profits over $100 million was proposed along with a one-time 15 per cent charge on income above $1 billion for the 2021 tax year.  Canadian banks are already among Canada’s largest taxpayers.

The six largest of Canada’s banks accounted for more than $12 billion in tax revenue and more than double that in dividend income.  They contribute 3.5%, or over $65 billion, to Canada’s gross domestic product. Over 280,000 are employed by these banks.

When Toronto-Dominion Bank’s chief executive, Bharat Masrani, recently stated that a proposed corporate tax rate increase that targeted financial institutions ““could lead to unintended consequences,” you could see the battle lines being drawn.

The pawns in this high-stake battle looming on the horizon are the millions of Canadian pensioners, charities, endowments, mutual fund investors, bank shareholders, pension funds, RRSP investors and others dependent on bank dividend payments.  The banks will do their best at every opportunity to frighten their 34,000,000 customers with dire predictions of the harmful, personal financial consequences these proposed taxes will cause.

The banks have your phone number, your e-mail address, and your street address.  Every time you deposit or withdraw funds, I would expect them to remind you of how you are being impacted by the proposed taxes. Every bank statement could carry their message their message that the tax is hurting you more than them. They are far better organized and motivated than the civil servants.

The stakes are huge.  The Royal Bank of Canada (RBC) would likely pay the most, an estimated additional $334.7 million. The Toronto-Dominion Bank would pay about $285.5 million, the Bank of Nova Scotia (Scotiabank), approximately $191.9 million, the Bank of Montreal would owe about $137.9 million, the Canadian Imperial Bank of Commerce around $120.2 million, and the National Bank around $42.0 million.

The Federal government is already anticipating the pushback. It has stated they will not tolerate “sophisticated tax planning or profit-sharing” by the financial institutions to dilute the new measures. As well, new “targeted anti-avoidance rules” will be put in place.  The federal Financial Consumer Agency of Canada will be policing any “excessive” fee passed on to customers to offset the cost of the new corporate tax measures.

One thing to propose this tax, another to implement it

It is one think to propose such a tax.  It is another thing to implement it.

Canadians tend to take their long-established, successful banks for granted. They have no idea that out of the thousands of banks in the world, their banks are in the top 35 of the safest. These are banks that dwarf any of the banks that rank ahead of them. In North America they are the top six safest banks.  As commercial banks, they are in the top 18 of the safest banks.

What impact will the battle over the taxes have upon your shares in financial service companies? The taxes are still too hypothetical to base investment decisions on. All we can do now is work with the current financial information that is available.

In a March, 2022 an article that appeared in the publication Investment Executive, by Daniel Calabretta, was  headlined, “Financial services firms in a good position to weather expected market volatility.”The article was not directed at investors’ main concern.  Investors want to know ”For the long term, which Canadian financial service companies should  you consider adding to your investment portfolio?”

Charts in the Investment Executive article showed a comparison between 2020 and 2021 of “Assets, Revenues, Net Incomes and Earnings Per Share” for 40 financial service firms.  However, whether these figures went up or down from one year to the next does not really address which of these companies are expected to provide share price gains and an increasing dividend income for investors. Thirty-seven of the forty stocks did pay dividends.

Speculators only control share prices.  The experienced executives of these 40 companies, through their revenue and expense decisions, control profits.  From profits come dividends.

There are many financially weak, marginally profitable companies who can motivate speculators to buy their shares based only on promoting the potential for eventual profits and skyrocketing share prices. There are also many financially strong, profitable companies that are ignored by speculators.

That constant debate between thousands of optimistic speculators who think a share price is going rocket up and the thousands of pessimistic speculators who think the same stock’s share price is going to crash makes accurate predictions of future share prices impossible. A stock can not be bought by a speculator until another speculator who owns the stock is prepared to sell it upon receiving an attractivebid from a buyer. To accommodate such investment uncertainties, wise investors, diversify their share ownership among the stocks of different sectors to account for unpredictable speculator bids.

The Great Canadian Financial Stock Challenge

Which of the shares of these 40 Financial Industry stocks would you confidently buy if you could review an Excel spreadsheet with the following additional eleven facts that go beyond assets, revenues, and net income?  Continue Reading…

How to practice Frugality: 11 simple ways to live more frugally

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 How do you practice frugality? 

To help you live more frugally, we asked finance professionals and business leaders this question for their best advice. From buying used or refurbished items to cutting down on food spending, there are several practical steps to help you adopt a more frugal lifestyle.

Here are eleven simple ways to practice frugality: 

  • Buy Used or Refurbished Items
  • Understand the Time Value of Money
  • Spend Cash
  • Eliminate Unnecessary Subscriptions
  • Adopt Eco-friendly Lifestyle
  • Understand the Time Value of Money
  • Sell Whatever you don’t Need
  • Invest in Things that Add Value to Your Life
  • Purchase Quality over Quantity
  • Live Within Budget
  • Develop a Habit of Prioritizing
  • Cut Down on Food Spending

Buy Used or Refurbished Items

You can pay a fraction of the price to buy used or refurbished items. From furniture to electronics, books, clothing, and more, you may be surprised how much treasure can be found online or in thrift stores.  A whole house or office could be furnished or decorated with used or refurbished items, and you’ll save hundreds or even thousands of dollars in the process.  Plus, the stock is always changing, so with each visit to a thrift store there’s always a chance to find something unique. You can also look out for neighborhood garage sales and online social media sales groups. –Brian Greenberg, Insurist

Spend Cash

I am a big fan of carrying cash. It’s easy to get into the habit of swiping your debit card for every purchase, but you can lose track of how much money you have if you’re not careful. That’s why I always prefer to withdraw fun money from the bank so I always know exactly how much I have to spend. This strategy really helps me to be more mindful of my purchases. Understanding frugality is a skill everyone should master. —Jae Pak, Jae Pak MD Medical

Eliminate Unnecessary Subscriptions

Try to limit your subscriptions. For instance, if you have both Netflix and Hulu, perhaps you can decide to commit to just one of these, since they both have plenty of movie and TV show options. Consider the things that you do not really need to be spending money on. Once you eliminate these things, the money saved will add up. –Jared Hines, Acre Gold

Adopt Eco-friendly Lifestyle

I have found that adopting an eco-friendly lifestyle can really reduce expenditures. LED bulbs generate the same amount of light while using much less energy, and setting my thermostat lower has reduced both gas and electric bills in winter. It also never hurts to turn off lights whenever you’re not using them. As energy prices go up, an eco-friendly life can help ease some of your financial burden. —Candie Guay, Envida

Continue Reading…

How Investors can respond to Ukraine Invasion

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By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Blog)

It has been almost two months since Russia invaded Ukraine. During this time, we have been witnessing the dramatic impact the war has had on global markets and economies. There is also concern with how these events will impact our portfolios and investments. 

Economic Impact

Inflation numbers are expected to continue rising higher and this war will put more upward pressure on inflation. Russia is a large global oil exporter. Increased sanctions on Russia will undoubtedly cause a supply squeeze in the oil market, which will lead to higher oil prices. In addition, Russia and Ukraine both account for about 25% of total wheat exports, which will now be limited. This can drive up food costs on a global scale. The war will also continue to restrict supply chains. For example, planes are being diverted because Russian air space is closed to more than 35 countries. Having to go around Russia leads to longer travel, resulting in increased fuel consumption and trip costs.  Continue Reading…

Can you retire using just your TFSA?

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Image Courtesy of Cashflows & Portfolios

By Mark and Joe

Special to the Financial Independence Hub

The opportunity for Canadians to save and invest tax-free over decades could be considered one of the greatest wonders of our modern financial world. This begs an important question:

If you start early enough – Can you retire using just your TFSA?

We believe so and in today’s post we’ll show you how!

Can you retire using just your TFSA? Why the TFSA is a gift for all Canadians!

Our Canadian government introduced TFSAs in 2009 as a way to encourage people to save money. Looking back, it was one of the best incentives ever created for Canadian savers …

Our Canada Revenue Agency has a HUGE library of TFSA links and resources to check out but we’ll help you cut to the chase along answering that leading question above:

Can you retire using just your TFSA?

Why the TFSA is just so good

Since the TFSA was introduced, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before. While the TFSA is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to your TFSA are with after-tax dollars and withdrawals are tax-free. You can carry forward any unused contributions from year to year. There is no lifetime contribution limit.

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account.  This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Here is a summary of many great TFSA benefits:

  • Capital gains and other investment income earned inside a TFSA are not taxed.
  • Withdrawals from the account are tax-free.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits (such as Old Age Security (OAS)). This is very important!!
  • Anything you withdraw from your TFSA can be re-contributed in the following year, in addition to that year’s contribution limit, although we don’t recommend that. More in a bit.
  • While you cannot contribute directly as you could with an RRSP, you can give your spouse or common-law partner money to put into their TFSA.
  • TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. This makes the TFSA an outstanding estate management account – leaving TFSA assets “until the end” can be very tax-smart.

Since you paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out. This feature combined with the ability to compound money, tax-free, over decades, can make the TFSA one of the best ways to build wealth for retirement.

RRSP vs. TFSA – which one is better?

There is no shortage of blog posts that highlight this debate and one of our favourites is from My Own Advisor. You can check out his post here. 

Without stealing too much of his thunder, the RRSP vs. TFSA debate essentially comes down to this: managing the RRSP-generated refund.

Let’s dive deeper with a quick example.

Contributions to the RRSP are excellent because the contribution you make today lowers your taxable income – and you may get a tax refund because of it – a pretty nice formula. The problem is, some Canadians might spend the RRSP-generated refund from their contribution. You’ll see why this is a major problem.

Consider working in the higher 40% tax bracket whereby RRSP contributions to lower your taxable income make great sense:

  • If you put $300 per month into the RRSP for the year, that’s a nice $3,600 contribution.
  • You’ll get a $1,440 refund (40% of $3,600).

When your $1,440 RRSP-generated refund comes in, and now you decide to spend it on a new iPhone, just know that your RRSP refund is effectively borrowed government money. Yup, a long-term loan from the government they are going to come back for. If you always spend your refund you are undermining the effectiveness of RRSPs because you are giving up your government loan that would otherwise be used for tax-deferred growth.  A refund associated with your RRSP contribution should not be considered a financial windfall but the present value of future tax payment you must make.

If you typically spend the RRSP-generated refund in our example then we think some Canadians are FAR better off prioritizing your TFSA over your RRSP because of the known benefits of that present-day contribution.  

TFSAs offer tax-free growth for any income earner

At some point, the money that comes out of your RRSP (or Registered Retirement Income Fund (RRIF)) will be taxed.

With TFSAs, the government has eliminated the guesswork about taxation. Because the TFSA is like the RRSP, but in reverse (you don’t get any tax break on the TFSA contribution), TFSA withdrawals are tax-free.

For far more details including answering dozens of questions about this account, read on about our comprehensive TFSA post below:

If you haven’t contributed much towards your retirement and/or you can’t possibly save enough with so many competing financial priorities – that’s OK – striving to max out your TFSA contributions each year, every year, is still very valuable and admirable goal. In fact, focusing diligently on just maxing out your TFSA (and ignoring the RRSP account entirely) will still serve your retirement plan well.

Regardless of your income, any Canadian who is 18 years of age or older with a valid social insurance number (SIN) can open a TFSA. All you need to do is reach out to a financial institution, credit union or insurance company that offers TFSAs and open an account.

Whether you set up your automatic savings plan to your TFSA weekly, monthly, or other – striving to make the maximum contributions to this account can be a significant wealth-building tool as part of the Four Keys to Investing Success. 

Let’s use a case study to demonstrate just how good this account can be for you too – and why you can retire just using your TFSA!

Can you retire using just your TFSA – A Case Study

The big question in his article is – given enough time (ie. if you start young enough), can someone retire using only their TFSA?  The answer may surprise you, at least it surprised us!

To help accurately model this scenario to account for government benefits, inflation, taxes, tax credits, and optimized withdrawal schedules, we dove into the software that we are using to manage our own early retirement plans.

Here are the assumptions we made: Continue Reading…