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FINANCIAL FACELIFT: How one woman is trying to make the most of her investments to meet her travel goals

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Below you will find a real life case study of an individual who is looking for financial advice on how best to arrange her financial affairs. Her name and details of her personal life have been changed to protect her identity. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

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Written by: DIANNE MALEY
Special to The Globe and Mail
Published February 9, 2018

Nancy is 74, a widow with two daughters. Last year, she sold her modest house in a small Ontario city to free up enough money to travel while her health is good. She has no work pension.

Now, Nancy would like to squeeze more out of her investments to give her a bigger travel budget for the next five years. Her goal is to be able to spend a total of $36,000 a year. Longer term, she wants to preserve enough money to cover home care or other health-care needs that might arise.

“Realizing monthly rent and health care may likely increase substantially beyond five years, my goal is to have sufficient projected income to age 95, and have some remaining asset balance as a contingency,” Nancy writes in an e-mail.

“Can my existing RRIF [registered retirement income fund] and financial holdings as structured contribute the monthly income to meet my goals?” she asks.

As with many people, Nancy made the big decisions first and then wrote to Financial Facelift for advice.

Awhile ago, Nancy took her concerns to her daughter, revealing how she had invested proceeds from the sale of her house at her local bank branch. The daughter says shes suspects “the planning and product selection might not have been in her mother’s best interest.”

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Nancy’s situation.

What the expert says

Nancy is receiving combined Canada Pension Plan and Quebec Pension Plan benefits of $8,577 a year and Old Age Security benefits of $6,996, Mr. Ardrey notes. In addition, she has a small survivor pension of $3,961, which is not indexed to inflation. The balance comes from her RRIF.

Nancy is spending about $2,200 a month today. She would like to travel more and enjoy life now that she has some additional savings, the planner says. Her goal is to spend $3,000 a month during the remainder of her retirement, adjusted for inflation. Nancy feels that this same $3,000 a month would be sufficient to cover off any nursing-home costs she may face in future.

In drawing up his plan, Mr. Ardrey assumes Nancy will live to be 95 and that the inflation rate will average 2 per cent a year. The plan assumes Nancy continues to transfer $5,500 a year from her taxable investment account to her tax-free savings account.

“Reviewing her current portfolio, she has almost three-quarters in bank mutual funds, one-sixth in a GIC [guaranteed investment certificate] and one-tenth in index-linked GICs,” the planner notes. “So just over a quarter of her portfolio is locked in and thus could create a liquidity issue if the stock market were to drop and Nancy needed to draw on her portfolio to cover living expenses,” he says.

“If 40 per cent of her cash and fixed-income allocation cannot be redeemed on demand, it may cause her to have to [sell and thereby] crystallize her equity losses.” To note, the five-year GIC does have a once-a-year redemption on the anniversary date of up to 25 per cent of the initial value.

Nancy’s asset mix is 19 per cent cash equivalents (which includes the GIC, but not the index-linked GICs), 25 per cent Canadian bonds, 5 per cent global bonds, 27 per cent Canadian equities, 15 per cent U.S. equities and 9 per cent international equities. “So she has about a 50/50 mix between equities and the fixed income and cash-equivalent allocation,” Mr. Ardrey says.

This mix seems reasonable for a 74-year-old widow looking for income, he says. “But when we look at the long-term historical rate of return on this portfolio’s underlying asset classes, it is 4.06 per cent.” That’s before deducting the average investment cost of 1.75 per cent a year on the almost three-quarters of her portfolio that is in bank mutual funds.

If past returns continue in the future, Nancy will fall short of her goal, Mr. Ardrey says. She will exhaust all of her savings just after she turns 91.

“To make this scenario feasible, Nancy would have to reduce her spending target by $200 a month (to $2,800), which is about 7 per cent of her overall budget,” the planner says.

Alternatively, she could take steps to improve her asset mix and investment strategy, he says. By replacing the cash assets with low-risk, conservative income investments that act as alternatives to bonds and GICs, for example, and balancing the geographic exposure of her equities, he estimates Nancy would be able to achieve a return of 6.5 per cent a year. Her new asset mix would be 20 per cent alternative income investments, 30 per cent fixed income and 50 per cent equities with an equal distribution among Canadian, U.S. and international markets. “This return, after estimated investment costs of 1.5 per cent a year, would net her 5 per cent a year before inflation.” With this higher rate of return, she would be able to meet her retirement spending goal.

Nancy is not an experienced investor, so she needs help. To get the type of portfolio Mr. Ardrey recommends, she could turn to an investment counsellor, or the investment counsel arm of a financial planning firm. Nancy and her daughter could begin by looking at the website of the Portfolio Management Association on Canada. Investment counsellors charge an annual fee and have a fiduciary duty to act in the best interests of their clients.

Alternatively, because her portfolio may not meet the minimums of some investment counsellors, Nancy could switch gradually to low-fee, balanced mutual funds with solid track records. (Two of the more popular low-fee funds can be bought directly from the fund company with an initial investment of $50,000.)

Even with the higher return, Nancy will have very little cushion, Mr. Ardrey says. “This leaves very little room for error in her budgeting.” He suggests she review her budget now to ensure she will have the money she needs in future.

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The person: Nancy, age 74

The problem: How to generate a little more return from her investments.

The plan: Shift gradually from bank funds and GICs to a lower-cost fund company or investment counsel.

The payoff: A return high enough to allow her to travel more, at least for awhile.

Monthly net income: $2,945

Assets: Term deposits $10,630; income portfolio $99,055; GICs $50,000; RRIF $98,805; TFSA $52,230. Total: $310,720

Monthly outlays: Rent $1,000; utilities $100; insurance $10; transportation $160; groceries $250; clothing $10; gifts, charity $50; travel $250; dining, drinks, entertainment $85; personal care $40; club membership $30; medical, drugstore $75; phones, TV, internet $140. Total: $2,200

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com. Some details may be changed to protect the privacy of the persons profiled.

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

Lorne Zeiler on BNN’s Market Call, February 7, 2018

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Financial, was the guest on Market Call last night (February 7, 2018).

Below is a link to Lorne’s top picks, market commentary and past picks

Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Tips for helping your kids buy a house

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TriDelta President Ted Rechtshaffen joins House Money on BNN with advice for parents possibly looking to help their kids buy a home.

Ted Rechtshaffen
Posted By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Lorne Zeiler on BNN’s ‘The Street’, Jan.12, 2018 – TriDelta Fixed Income Fund

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Friday January 12th discussing the following:

TriDelta Fixed Income Fund Generates 6.5% Return in 2017 (vs. Index return of 2.5%)

The TriDelta Fixed Income Fund generated a 6.5% Return in 2017 (vs. 2.5% for the index). Lorne Zeiler, Portfolio Manager, discussed the benefits of active management in fixed income investing and income alternatives on BNN’s the Street this morning.
Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Lorne Zeiler on BNN’s ‘The Street’, Jan.12, 2018 – TriDelta Financial’s 2018 Market Outlook

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Friday January 12th discussing the following:

TriDelta Financial’s 2018 Market Outlook.

While Equity valuations are quite high (particularly in the United States), we still feel there is more room for the Bull market to run in the short-term, but that the best opportunities may be in Emerging Markets, Europe and Japan. Lorne Zeiler, Portfolio Manager, discusses our views this morning on BNN.
Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Q4 TriDelta Investment Review – From Great to OK – Moving from 2017 to 2018

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2017 – the year without a stock market correction

The Ebola Virus, Greek Crisis, Debt Ceiling, Refugee Crisis, Global Warming, Brexit, Trump, North Korea…there is always something scary for the media to report and make us nervous. Usually, these headlines frighten investment markets. For some reason, 2017 didn’t see this. In many major markets, there was not one decline of 5% during the year, and outside of Canada’s 6% stock market growth (which was among the weakest in the World), most stock markets saw returns well in excess of 12%.

Like a sports team that makes it through a season with no major injuries, 2017 was one of those years. To count on that happening again is to bet against history. The question isn’t so much what will cause greater volatility, as much as when. The next question is whether we should really fear volatility, especially if markets end up alright in the end?

How Did TriDelta do in 2017?

While those holding individual stocks and bonds would see bigger differences in portfolio returns, our TriDelta funds provide a good overall picture of our investment performance. These returns are before fees:

TriDelta Growth Equity Fund 13.3%
TriDelta Pension Equity Fund 12.5%
TriDelta High Income Balanced Fund 10.0% (the four year return on the fund is 9.2%)
TriDelta Fixed Income Fund 6.5% (this was among the top 1% of Canadian Bond Funds)

Our lower exposure to Canada helped the funds meaningfully outperform the TSX return of 6.0%.

The 6% yield on the High Income Balanced Fund, along with some stock exposure provided solid returns.

The outperformance on the Fixed Income Fund was largely due to strong active management. Our portfolio manager anticipated when to shift from shorter dated to longer dated bonds and from corporate to government exposure. Returns were also helped by some small Preferred Share exposure and opportunistic currency decisions.

Without further ado…

Our Investment View for 2018

Valuations are high, particularly in the U.S., which often indicates low or negative equity market returns, but we have searched for signs and signals of a market pullback, and we are not seeing it in the near term.

This doesn’t mean that it won’t happen during the course of the year, it most surely will. Yet, for the early part of 2018, we remain bullish on stocks.

We believe the following:

*Stocks will remain positive but returns will be better outside of North America. Geographically, the U.S. market appears to be further along the cycle than markets in Europe and Japan and much further along than Emerging Markets. This is based on higher valuations, Central Banks’ raising interest rates, and Consumer Confidence Indices.

As a result, we see Non-North American markets benefiting more in 2018, due to the same low interest rates and quantitative easing that helped the U.S. in 2017.

*Interest rates will not rise as much as expected. While it looks very likely that Canada will raise interest rates this month, and the U.S. will likely raise rates in March, both central banks will be cautious about further rate hikes. Of interest, if the market is expecting 3 rate hikes, and there are only 1 or 2, the bond market is likely to perform better than expected. In Europe and Emerging Markets, some decrease in quantitative easing is expected, but little in the way of actual rate increases will be seen in 2018.

*Marijuana stocks and cryptocurrencies will see major declines in 2018 (from January 9th). This is based on the simple fact that Marijuana stocks are at valuations today that are priced beyond perfection for most companies and cryptocurrencies have yet to see the wrath of the IRS or other major Government agencies. In addition, they use an enormous amount of energy and often originate from poorly regulated countries. Government actions will be coming very soon under the guise of regulatory stability and countering tax evasion, and we expect most cryptocurrencies to see a bubble burst during the year.

*The Canadian Dollar will continue to surprise, but should decrease overall. The difficulty in predicting currency is that there are many important moving parts globally and locally. In the case of Canada and the U.S., NAFTA, the price of Oil, interest rates, and US$ repatriation will all be key drivers of currency changes and will result in several shifts during the year. We believe that interest rates will start to play a lesser role in the currency than it has in the past few years, as the other factors mentioned increase in relative importance.

We expect that the lowering of U.S. Corporate tax rates will drive some Corporate M&A activity. This may result in more Head Offices moving back to the U.S. and shifting dollars and taxes along with it. This will be an important strength contributor for the U.S. dollar in 2018.

*Toronto and Vancouver Real Estate Markets will be more stable….but still grow. Despite changes to mortgage rules, China’s flow of foreign funds, and Canadians comfort with high debt, the main thing that will truly pull back residential house prices is meaningfully higher interest rates. Increases in rates and tighter mortgage rules will help to restrain rapid growth, but until we start to see 5%+ five year fixed mortgage rates (you can still find low 3% rates), we won’t see a significant pullback. We may be a couple of years away (or longer) from seeing those rates.

*Alternative Income Investments should boost returns in 2018. We continue to look at and occasionally add investment options that we believe will provide returns of 6% to 10% most years, have a very low volatility, and little connection to stock market returns. These investments are similar to those that are a key part of portfolios that make up the Canada Pension Plan, Ontario Teachers’ Pension Plan and the Harvard Endowment Plan.

Compared to a world of only stocks and bonds, these alternative investments can help lower overall portfolio risk, add to returns and generate income. The downside is that these are Private Investments, not fully available to all investors, and liquidity is lower than for public investments (stocks and bonds).

One TriDelta advantage is that due to our strength in this area we have been able to negotiate institutional rates, resulting in lower costs for our clients from certain providers.

*Preferred Shares will see more normalized returns but remain an important part of the mix. After a year which saw Preferred Shares gain 13%, we see more typical 4% to 7% returns out of this asset class in 2018. The advantages of Preferred Shares are the tax benefit of Canadian Dividends (many retirees and middle income Canadians pay a tax rate of 10% or less), as well as the ability to benefit from both rising and falling interest rates – depending on whether you own fixed rate or rate reset preferred shares. This flexibility provides an important distinction from bonds.

As a result of these beliefs, we enter 2018 with the following tactical asset allocation.

Based on these factors, we are increasing our exposure outside North America – both to Developed and Emerging Markets. We are decreasing our exposure to the U.S. market, and maintaining an underweight to Canadian markets.

SUMMARY

Early 2018 will likely see the continuation of the strong stock markets that we saw in 2017. At some point, however, we expect to see the U.S. market buckle a little. The catalyst could come from increased pressure of a mid-term U.S. election that may shift control of the House and Senate from Republican to Democrat hands. Traditionally, a Republican President and Democrat House and Senate have not been ideal for stock markets.

When technical market indicators suggest reducing risk, we will ease back on stock weightings. By maintaining strong portfolio diversification from Alternative Investments, Preferred Shares and active Bond management, we will aim to reduce volatility for clients. Our best guess is that most clients will see positive, but lower returns in 2018 than 2017.

Lower volatility, a long term plan, tax efficiency and financial peace of mind are the hallmarks of TriDelta.

We will do our best to continue to deliver that to our clients in 2018 and for the long term.

All the best to our readers for a healthy and prosperous year ahead.

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor

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